Legislative Environment – Onshore Dubai

  • UAE Commercial Companies Law (Federal Law No.2 of 2015(CCl))
  • Came into force on 1 July 2015
  • Application:
    • Applies to “commercial companies established in the state. The provisions concerning foreign companies set forth….shall apply to foreign companies that have in the State a place to conduct any activity therein or establish a branch or representative office in the State.” (Article3)
  • Definition of the company:
    • “is a contract under which two or more persons are committed to participate in an economic enterprise aimed at profit by contributing a share of capital or work and dividing between themselves the profit or loss from the enterprise.” (Article8)(1))
    • However, a company may be incorporated or held by a single person (Article8(3))
  • Various provisions of the Commercial Code (Federal law No.18 of 1993) apply to CCL companies (e.g. bankruptcy regime)
  • Dubai Law No. 13 of 2011 (as amended)

Types of Entity

  • There are five main entity expressly contemplated in the CCL:
    • Public Joint stock Company (PJSC)
    • Private Joint Stock Company (PJSC)
    • Limited Liability Company (LLC)
    • Partnership Companies
    • Limited Partnership Companies
    • Note: single shareholder companies, holding companies and common investment companies
    • Branches of Foreign Company and Representative Offices
    • Companies which do not take one of the corporate forms in the CCL are deemed null and void (article 9)
    • Other forms of entity:
      • Free zone entities
      • Decree companies
      • Civil companies (distinct from commercial companies)

Key Features - Public Joint Stock Company

  • Constitutional documents – Memorandum and articles of association (NB. New standard forms accounting for new CCL are yet to be issued)
  • Minimum share capital – AED 30 million (increased from the previous figure of AED 10 million) (Article 193)
  • Public Joint Stock Companies must be listed on a lcal stock exchangewith a free float requirement of between 30% to 70% (former requirements were 55% to 80%) (Article 117)
  • Shareholders – at least five founder members (reduced from ten) (Article 107)
  • Directors – between three and 11 and total number must be odd (Chairman and majority of the board must be UAE national and at least two thirds of directors must hold shares in the company) ( Article 143)
  • Listed Public Joint Stock Companies are subject t the securities and commodities authority’s Corporate Governance Regulations

Key features – Private Joint Stock Company

  • Secondary market listing regime – trading platform only
  • Constitutional documents – Memorandum and Articles of Association
  • Shareholders – generally at least two founder shareholders – up to 200 (looked up for one year, Reduced from tw years) (Article 255)
  • Can be incorporated with a single corporate shareholder (Article 255(3)0
  • Minimum share capital – AED 5 million (increased from AED 2 million) (Article 256)
  • Otherwise, all provisions of the CCL relating t Public Joint Stock Companies apply to Private Joint Stock Companies (with the exception of the rules relating to public subscriptions) (Article 265)

Key Features – Limited Liability Company (LLC)

  • Note that Article 104 of CCL that the provisions concerning joint stock companies will apply to LLCs
  • Constitutional documents – Memorandum of Association only
  • LLCs may not:
    • Carry on the business of Insurance, banking and Investment management
    • Make offer to the public(shares or debt)
  • No prescriptive minimum share capital requirement but must be sufficient for objectives (Article 76)
  • Partners – between two and 50 (although single shareholder entities are permitted)(Article 71)(1)
  • Managers – there is no maximum number (previously there was a maximum of five)(Article 83(1))
  • Multiple classes of shares not possible
  • Statutory pre-emption rights apply on shares (Article 80)
  • A mechanism to take a mortgage over shares in an LLC is now specifically provided for and the mechanism for attachment f shares has been clarified (Article 79)
  • Preparation of audited accounts by a locally registered auditor

Branches of Foreign Companies

  • Generally registered for professional/service based activities rather than commercial trading
  • National service agent or sponsor
  • Representative office – marketing and administration
  • Not separate legal entities (parent company liability)

Commonly seen LLC, and Branch Corporate Documents

Free Zone – Types of License and entity

  • Branch of foreign company
  • Free Zone establishment (FZE)
  • Free Zone companies, e.g.
    • JAFZ-FZCO /Limited (Offshore Companies)
    • Creative Clusters (formerly DTMFZ) – FZ-LLC
    • DIFC – Limited (companies limiled by shares )/LLC/SPC
    • DAFZ-FZCO

Free Zone Entities – Key Features (Free Zone Establishment (FZE) and Free Zone Company (FzCo)

  • Precise rules differ from Free Zone to Free Zone
  • Constitutional documents – generally Memorandum and articles of association (some differences – for example, JAFZA FZEs for which there is technically no provision for any constitutional documents)
  • Minimum share capital – differs but can be up to AED 1 million depending on the activities being licensed (e.g. DMCC, general trading license)
  • Shareholders – generally one only (for FZEs) and at least two (for FZCOs)
  • Directors - generally at least two and general manager(no restrictions as to nationality but residency restrictions still apply to managers)
  • Share transfers, director appointments and taking security are generally subject to the approval of the relevant Free Zone Authority

Key Features – DIFC Companies Limited by Shares

  • DIFC has a company law regime, based on the UK Companies Act 1985
  • There are other forms of DIFC company (special purpose, LLC, etc)
  • DIFC Companies Law ( law 2 of 2009) and DIFC Companies Regulations
  • Constitutional documents – Memorandum and Articles of Association (deviations from the DIFC’s standard form must be accompanied by an ‘opinion’ from the law firm)
  • Minimum share capital – US $ 50,000(Article 2.7 of the DIFC Companies Regulations)
  • Shareholders – at least one(article 31 of the DIFC Companies Law)
  • Directors – at least two (no restrictions as to nationality) (Article 51 of the DIFC Companies Law)
  • Multiple classes of shares are permitted (Article35(5) of the DIFC companies Law)
  • No statutory pre-emption rights on issue or transfer of shares
  • Share transfers are not technically subject to the approval of the DIFC but there is a notification requirement

Free Zones – advantages and Disadvantages

  • Advantages:
    • 100% foreign ownership permitted
    • Guaranteed’ freedom from taxation 50 years
    • Speed/ease of set up
    • Dedicated infrastructure (e.g.DAFZA,JAFZA)
  • Disadvantages:
    • Cannot trade/do business outside the free Zone in the UAE
    • High(er) cost of real estate and other services

Foreign Investment

  • Foreign Ownership Restriction
    • ‘No one other than UAE nationals may practice business in the country, unless he has a UAE partner, subject to the conditions and limits provided in the CCL’ (Article 23 of the CTL)
    • “With the exception of Partnership Companies and simple Limited Partnership Companies where all joint partners of any of such companies shall be UAE nationals any company established in the State shall have one or more UAE partners holding at least 51% of the share capital of the company” (Article 10 of the CCL)
    • Transfer of shares in violation of 51% rule null and void
    • Practical Impact of UAE Federal Law No.17 of 2004 Regarding Commercial Concealment
    • Article 29(3)
  • Certain Activities require 100% UAE Ownership:
    • Registered Commercial agents
    • In Dubai, ownership of freehold and long leasehold property outside areas designated for foreign ownership (unless a public Joint stock company) (Article 4 of Dubai Law 7 of 2006, as amended)

Foreign Ownership Restrictions – Common Agreements

  • Profit sharing can be in a different ratio to capital contribution (to a maximum of 80:20 in Dubai)
  • Management rights can be entrenched in one share holder
  • Thresholds for passing shareholder resolutions can be changed to give the partners mutual blocking rights
  • Thin capitalization

Foreign ownership Restrictions – ‘Schemes of arrangements’

  • Contractual and economic matrix
  • Memorandum of association
  • Security over shares
  • Power of attorney
  • Services agreement
  • Management agreement
  • Loan agreement
  • Shareholders’ agreement

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