UAE Seeks to Boost Foreign Direct Investment Through Changes to Companies Law
Date Posted: Thu, 04 Feb, 2021
In November last year, the UAE Government issued Federal Decree No (26) of 2020 (Decree) amending several provisions of the UAE Commercial Companies Law No (2) of 2015 (Companies Law). These amendments, which are applicable to privately-owned companies, significantly alter the landscape of foreign direct investment in the UAE by repealing the FDI Law and eliminating the legal requirement for UAE participation in ‘onshore’ companies and foreign branches
Despite this, foreign ownership restrictions have not been abolished entirely. Instead, the default position is that UAE companies may be 100% foreign owned unless stipulated otherwise.
Pursuant to the Decree, companies which carry on ‘activities of strategic effect’ will continue to be subject to foreign ownership restrictions. As to which activities this will relate to and/or the level of UAE participation required remains to be seen, but this should be clarified shortly by virtue of a Cabinet Resolution.
Subject to any stipulations contained in the Cabinet Resolution, the power to determine the level of foreign ownership in a UAE company will be empowered to the Government of each Emirate. This raises the question as to whether the same approach will be adopted by each Emirate and will be of particular relevance to companies with a legal presence in more than one Emirate.
Other key changes relate to the nature and scope of directors’ duties, increased corporate governance obligations, changes to the mechanism of general assemblies and managing disputes between directors and shareholders. In this article, we focus on the key changes applicable to limited liability companies (LLCs).
Scope of directors’ duties
While some welcome clarity to the scope of director’s liability which has seen the removal of liability for ‘errors of judgment’, the duties have been extended to include ‘members of the Executive Committee’, namely a General Manager, CEO or anyone occupying a senior level executive position. Companies should therefore consider implementing guidelines to ensure that its senior managers are fully aware of the extent of their authorities to ensure that these are not exceeded or result in misuse of power or violation of the Companies Law or MOA which has potential criminal sanctions.
In an effort to stimulate transparency and tackle harmful tax practices, in the last year the UAE has introduced the Economic Substance Regulations and Ultimate Beneficial Owner Regulations which is applicable to businesses in the UAE whether they are operating ‘onshore’ on in a Free Zone.
We have already seen the practical effect of non-compliance of these regulations, including financial penalties and a block on annual licence renewal or amendments until these legal requirements have been fulfilled.
In addition to these heightened corporate governance obligations, LLCs are now required to submit a copy of the General Assembly meeting notice to the competent authority prior to sending to the shareholders. This places an even greater burden on LLCs to ensure timely compliance to avoid the risk of business interruption.
Amendment of constitution
Existing companies have until 1 January 2022 to amend their memorandum of association to reflect the changes imposed by the Companies Law, including:
Reducing the threshold for shareholder(s) to request a general assembly to 10%
Amending the minimum notice period for calling a general assembly to 21 days;
Amending the minimum quorum for a general assembly to shareholders holding at least 50% of the capital;
Enabling shareholders and directors to attend a general assembly remotely using ‘modern technology’
Allowing for service of General Assembly meeting notices through electronic means; and
Providing a forum for resolving shareholder and director disputes.
It is interesting to note that companies carrying on ‘activities of strategic effect’ will be prohibited from amending their MOA in a manner which prejudices UAE national ownership without the consent of the competent licensing authority. This would indicate that the competent authorities are likely to consider each application on a case-by-case basis.
While the Decree provides for some of these changes to take effect from the end of March, it is likely that it will take longer to implement these changes given that it is the responsibility of each Emirate to determine how they are to be applied.
There are also still many questions surrounding key operational issues affected by these impending changes, particularly as employee visas are generated through the labour account of the Emirati partner or national service agent.
Once further clarity is provided by the UAE Government as to which activities have ‘strategic effect’ and what level of UAE shareholding is required to carry these out, CBD can provide guidance on how to regularize your UAE business. Until such time, CBD is able to provide a full range of corporate services to ensure UAE companies meet their increased corporate governance responsibilities under the new Companies Law and avoid penalties or and/or business interruption.