Tim Elliot: Welcome to another edition of Lawgical, the U.A.E.’s first legal podcast coming to you courtesy of the Dubai-based law firm, HPL Yamalova & Plewka. My name’s Tim Elliot, socially distanced as always these days in Dubai’s JLT, Jumeirah Lakes Towers, high up in the firm’s offices. As ever, I’m with the Managing Partner, Ludmila Yamalova. Great to see you.
Ludmila Yamalova: Great to see you too, Tim.
Tim Elliot: In this edition of Lawgical, we’re considering, and I hope in as methodical a fashion as possible, the recent changes to the U.A.E. Companies Law. There is a lot to consider. Ludmila, amendments to the U.A.E. Companies Law, Federal Law Number 2 of 2015 were made virtue of Federal Decree, Law Number 26 of 2020 published in September of last year. There is much to get through. This is a decree that either amends or repeals over 50 articles in the Companies Law. In other words, there have been quite a few changes. However, before we begin, it’s worth pointing out that most of the amendments have been in effect since January 2, 2021 this year. However, provisions relating to changes in foreign ownership are in effect as of March 30, 2021. In addition, the decree provides a transition period of a year until January 2, 2022 for companies to make the necessary changes to that practices. I believe that’s the case as we talk today.
Ludmila Yamalova: Yes, indeed. You’ve very succinctly summarized all the relevant regulations, or almost, related to the changes in the Companies Laws, and these changes are quite fundamental and groundbreaking, but at the same time quite welcomed and long overdue. The decree that you are referring to is Decree Law Number 26 of 2020 which in fact was actually published, signed, or issued in September of 2020, but most of the provisions related to Companies Laws came into effect on January 2, 2021 with the exception of a few other specific provisions which have a longer grace period, such as the ownership in local companies in particular which is supposed to come into effect as per the law on March 31, 2021, and as you rightfully pointed out, there are a massive changes and quite a large number of changes in terms of provisions in the Companies Laws that are being affected by this particular decree. Yes, there are about 50 different provisions in the Companies Law that was Federal Law Number 2 of 2015 and that was amended by the recent decree. Obviously, we cannot talk about all 50 provisions in this particular podcast, but there are a few specific changes that perhaps affect most of the businesses and are of most interest to the general public that we will try to succinctly summarize in this particular podcast.
Tim Elliot: Let’s see if we can cover the most relevant and/or I guess significant amendments. Let’s start with local partnerships. What’s changed there?
Ludmila Yamalova: Yes. Local partnerships in the past, and that’s under Article 10 which has been significantly amended, perhaps not in the number of words, but in its effect, so Article 10 previously had a requirement that any local partnerships had to be owned at least 51% by U.A.E. nationals. Now that requirement of a U.A.E. national is no more, and the article now says that basically anyone can own a local partnership. Therefore, the conclusion is that it can be 100% owned by non locals or foreigners which is obviously a groundbreaking development. This is the default rule, and that is the overarching approach now of the Companies Laws is that businesses can be owned by foreigners unless. . . unless, and there could be some exceptions. The overall premise or the overarching premise is that yes, businesses can be owned by foreigners to whatever extent without any requirement of a local partner, unless they are of strategic significance or have a strategic impact to the U.A.E.
With regard to what constitutes strategic impact, we do not at present yet know that, what those activities will be. As per the law, (1) there will be a committee formed that will determine activities that have strategic impact to the U.A.E. economy, and (2) with regard to those strategic activities, what percentage of U.A.E. national ownership will be required. It is not necessarily evident that it will be 51%. It could be 10%. It could be 5%. For certain activities, there will still be a requirement of local ownership.
Then once the committee proposes this list, it will ultimately be confirmed or verified and then published through the Ministerial Decision the list of all the strategic activities. As of today, March 2021, we have yet to hear whether the committee has been formed. I guess we will presume that it has, but we have not heard of any draft list of activities. But I will tell you that in the past and as part of the amendments of this particular law as well as the decree, there was another law that came in between the Companies Law that was introduced in 2015, and this current degree of 2020 there was another set of laws which were referred to as FDI laws or Foreign Direct Investment Laws, and as per those laws, because there are a few of them, in relevant terms, there was a list of activities, a positive list and a negative list, so to speak, of activities that was published with regard to the exceptions of activities that were at the time allowed to be owned 100% be foreign investors. As per that FDI law, and this is important to highlight because there has been a lot of misunderstanding, the Companies Law and the requirement of 51% ownership remained and that was the default approach and the default law, and the exception was unless it’s of a specific activity that is on the positive list that does not require local ownership. It was more of an exception. Now it is the rule, and the exception is the strategic importance activity. But as part of this FDI list there were some lists published that were the so-called negative list that outlined some of the activities that will still in one way or another require or carry with them a requirement of local ownership to one extent or another.
If we were to extrapolate from that the FDI list, we can perhaps reasonably at least speculate as to some of the activities on that last may be the activities that the now committee will add to its list as part of a strategic importance list. By way of a few examples, at that time there were 13 different categories of activities, but some of these categories are, for example, petroleum materials, anything related to security or military sectors, banking and financial activities, insurance, water and electricity, fisheries, telecommunications services, land and transport services, the commercial agent services, and a few others. Perhaps this can be our guiding data point for now in terms of what we can expect from this committee to include on its list in terms of the activities of strategic importance or strategic significance that will carry with them the requirement of having local ownership to some extent.
While we are talking about this FDI law and that the positive and negative lists, it is important to highlight that one of the other changes of this latest decree, and this is again Decree Number 26 of 2020 was under Article 3 of this decree, that the FDI law has been specifically repealed. This is important to highlight because there is still a lot of presumptions of activities that are exempt from the local ownership requirement are those that are on this positive list, but this specific decree, the latest decree specifically repeals the previous FDI list so in legal terms that list is no longer effective. I was only using it for the purposes of this discussion as perhaps some of the activities that we may speculate and anticipate seeing on the list of the committee for activities that are considered to be of strategic significance. But right now, that list is no more and in legal terms it can no longer be relied on.
In practical terms, it remains to be seen how prepared the authorities are to start opening up companies without the requirement of a local agent or a local sponsor and away from this FDI positive list. So, those are some of the other changes.
Then another change as well under Article 3 of this decree is the removal of the requirement of a local agent.
Tim Elliot: I was going to ask you about that because that interested me. That’s, again, another major change.
Ludmila Yamalova: Indeed. Because in the past, there were a lot of companies that could be set up by foreigners and fully owned by foreign interests, but there was always a requirement of having a local agent that was listed on the trade license. Now, a local agent was not a shareholder and was not really an officer of the company, but it was a nominal figure that was listed on the license for the purpose of at least service of process and perhaps contact details, but it was a concept that wasn’t really very applicable to today’s day and age. It was more of an outdated concept that wasn’t much utility, if you will. Now that requirement of local agent has now been lifted or removed. Therefore, for example, if you have a foreign branch or a foreign company that sets up a branch here, in the past they would have had the requirement of a local agent. Now they do not. That too has been lifted.
Tim Elliot: In other changes, Ludmila, when it comes to public joint stock companies, there is no longer a requirement for chairman of boards of directors in public companies to be nationals of the United Arab Emirates.
Ludmila Yamalova: Indeed. That is another notable change to the Companies Laws. This was done by Article 151 of the decree that specifically removed the requirement for a chairman or for the board in public joint stock companies to be a U.A.E. national. Once again, it is perhaps moving in the direction of liberalizing the market and giving companies and businesses the freedom to appoint whoever they deem fit to appoint away from some other formal requirements of having certain nationalities be present on their boards.
Tim Elliot: It’s a major change. But I guess the change that really stands in the changes to the Companies Law is the formation of LLCs has been amended but been amended in a really major way.
Ludmila Yamalova: Yes, for sure. The LLC is in some way similar to the local partnerships we had talked about earlier and historically most of the businesses, a very large number of businesses in the U.A.E., they were set up on the mainland away from free zones were set up as LLCs or limited liability companies. Now as for the previously existing laws, all limited liability companies had to have at least 51% ownership by a U.A.E. national, an individual or a U.A.E. entity. That was the minimum requirement, and there was nothing you could do about it, although a lot of companies were set up on that basis with also side agreements moving away the control and authority of a local owner by contract, but in legal terms those contracts were never enforceable and the company was officially and formally owned at least 51% be a local sponsor. Now, this decree introduced or amended that provision altogether, and that is Article 71. It now states that any individual can own a limited liability company. Before there was a requirement of a local national, an Emirati national owning 51% and now the language is quite broad and says, “any individual can own.” That is a significant change.
Furthermore, of much interest maybe to some because it’s a limited liability company, an LLC can be owned by a single shareholder, so there is no requirement for it to be owned at least by two partners, for example. These are quite significant changes, and perhaps I sound so much in disbelief in terms of what it means, but I do want to highlight. It is quite important that this new law does come into effect as of April 2021, which is next month, but it doesn’t necessarily automatically apply to existing LLCs or partnerships. It’s not like all those LLCs that have been in existence, that have had the local partner only because of the requirement in the law, or they are often called silent partners and not an actual active partners, those LLCs don’t go away by virtue of this new resolution. This law really applies prospectively and not retrospectively, so all those who are excited about this new law need to manage their expectations with regard to what they can do with their existing entities because for any existing entities to make amendments to their shareholding structure or to their management structure, that will require signatures and consent of all the relevant parties, including the shareholders and the board of directors and whoever other officeholders and decisionmakers are at the company.
Tim Elliot: It’s an important distinction to make. Let’s move onto dispute resolution, something you have probably too much experience of in your role as a lawyer here in the U.A.E., but what’s changed in terms of dispute resolution?
Ludmila Yamalova: Yes. This was another change as part of the 50 articles that have been changed. Article 73 requires that all companies must include in their Memorandums of Associations, or otherwise known as MOAs a very specific provision about dispute resolution, and that is where the partners want their disputes to be resolved. In the past, there was no such requirement at all and in many ways and cases there have been a lot of conflicting provisions and much confusion because of the absence of a dispute resolution clause in the previous Companies Law, and therefore company documents. So, now there is a specific requirement for companies ahead of time to decide and agree and spell out where they want their disputes to be resolved.
Tim Elliot: Article 101 of the Companies Law has also been amended, and that relates specifically to share capital. What can you tell us?
Ludmila Yamalova: Yes. Article 101 of the Companies Law previously stated that the MOAs cannot be amended, and the company share capital cannot be changed unless with the approval of three-fourths of the partners. Now, Article 101 states that if an increase in share capital is necessary to save the company from liquidation or to settle its debts, for example, then a shareholder can seek an expedited order from the court to increase the share capital to the extent necessary. So, if a shareholder fails to pay the obligations resulting from the share increase, another shareholder can settle this payment on their behalf, and their number of shares shall be amended accordingly. That is a new provision that did not exist in the past and ultimately gives owners of companies or shareholders of companies more control over the business and over the company in the event one or another shareholder defaults on their obligations.
Tim Elliot: The core and full general assembly meetings has been reduced from 75% previously to 50% as per the amendment to Article 96. What I thought was interesting here as well, there is a new clause and it allows for general assembly meetings at the same place virtually. The phrase is “via modern technology means” which of course at a time like now is extremely important.
Ludmila Yamalova: It is extremely important, but it’s also extremely relevant and extremely necessary. And that’s Article 93 which definitely and specifically allows for general assemblies now to take place through digital means and obviously that is video conferences, Zoom, and so on and so forth. This is quite interesting because in the past, a lot of these meetings were actually required to take place physically here in the U.A.E. and where all the stakeholders were present at the same time. In many cases it was impossible to do so, and therefore the actual general assemblies never took place. Now, keeping up with the modern technology and the evolution of society in general, these meetings, the general assembly will now be allowed to be conducted through much more flexible means which is a much welcomed change, but not unpredictable or unforeseen given that most of the court hearings now and government authorities operate almost exclusively through the digital means which is a lot more efficient for the society in general and a lot more economical for the parties involved.
Tim Elliot: The final point to run over, Article 166 has been amended. Now, just correct me if I’m wrong here once again, but am I right in saying that shareholders can now file court cases against a company’s board of directors, but also, it’s executive management as well?
Ludmila Yamalova: Yes, indeed. That is also another example of affording companies more flexibility in terms of their company management. Previously Article 166 stated that shareholders could only file a claim against the board if the company did not do so already. Now the shareholders have a lot more control and immediate timing, if you will, to file these cases when they deem necessary without all the previous formalities that existed for them to do so.
Tim Elliot: That’s another episode of Lawgical, hopefully examining in a methodical fashion the changes to some of the more pertinent and relevant sections of the Companies Law here in the United Arab Emirates. Our legal expert, I put you through the mill with that one. That’s a lot of information, Ludmila, Yamalova, the Managing Partner her at Yamalova & Plewka, once again, thank you.
Ludmila Yamalova: Thank you. You were so well prepared. I was pleasantly surprised and impressed. Much respect to you, Tim, for being so well informed.
Tim Elliot: Ah, I’m trying. If you have a legal question you need answered or would like answered in a future episode of Lawgical, get in touch. Or if you’d like a consultation, get in touch as well, with a qualified U.A.E. experienced legal professional. Very simple to get in touch with us. Head to LYLawy
