Impact of new Commercial Companies Law on LLCs

Federal Law No. 2 of 2015 Concerning Commercial Companies (CCL) came into force on 1 July 2015, replacing the previous Commercial Companies Law (Federal Law No. 8 of 1984). The CCL contains a number of incremental improvements and modifications to the old law, but the practical application of some of these changes is still being studied.

Article 104 of the CCL provides that “Unless otherwise provided by this law, the provisions concerning joint stock companies shall apply to the limited liability company [LLC]. The expression ‘competent authority’ shall substitute for the term ‘authority’ wherever it appears.” This article will have a material impact on LLCs as they will become subject, to a large extent, to the regulations and rules of public joint stock companies (PJSCs). The authors will highlight the key provisions of the rules of PJSCs that could potentially apply to LLCs.

Shareholders’ compliance. Article 111 of the CCL provides that the constitutional documents of the company must be binding on all of its shareholders. The amounts due from a shareholder to the company as per the constitutional documents must also be a debt payable by the shareholder to the company. While article 111 has specific application to PJSCs, article 104 extends its application to LLCs. Consequently, partners in the LLCs will be bound by the provisions of the constitutional documents of the company.

Management of the company. As per article 83 of the CCL, the management of the LLCs must be undertaken by one or more managers as determined by the partners in the memorandum of association (MOA). If there is more than one manager, the partners in the LLCs may appoint a board of directors.

The CCL does not provide more detail on what happens in the event that a board of directors has been formed, which raises questions about whether the LLCs should apply the relevant provisions that apply to PJSCs. The answer is not clear, but some of the following may be applicable.

Article 143 of the CCL addresses the issue of the formation of the board of directors, including the number of board members, the term of the board, and the election process of the chairman and deputy chairman. Applying this to LLCs will impose a limit on the number of members, i.e. there should be not less than three and not more than 11, provided that the number of members is odd. The term of membership also must not exceed three years from the date of election or appointment.

Consequently, there will be an impact on presently established LLCs that have a board of directors and those to be established with a board, because such boards must comply with article 143, resulting in any board of an LLC that does not comply with article 143 being in conflict with the CCL.

Articles 147 and 149-151 of the CCL are concerned with the requirements of board membership. These articles may also apply, and, accordingly, to members of the board of directors in the LLCs:

1. Must acknowledge in writing his or her acceptance of the nomination, provided that such acknowledgement must include a disclosure of any activity conducted directly or indirectly by such person in competition with the business of the company, and of the names of the companies and establishments where such person works or is a member of the board.
2. Must not, in his or her personal capacity or in the capacity of a representative of a corporate person, be a member of the board of more than five LLCs based in the UAE, or be a chairman or deputy chairman of more than two companies based in the UAE. Such person may also not be a managing director of more than one company based in the UAE.
3. Must notify the board of directors of any common interest or a conflicting interest in a transaction referred to the board of directors for approval, and his or her acknowledgement must be entered in the minutes of the meeting. The member should not vote on the decision concerning any such transaction.
4. Along with the chairman, the majority of the board must be UAE nationals. If the percentage of UAE members falls below the applicable percentage under this article, the deficiency must be rectified within three months, failing which the decisions of the board of directors shall be void.

Article 148 of the CCL also provides that the federal government or the local government may, if it holds 5% or more of the capital of the company, appoint its representatives to the board of directors pro rata to such percentage from the number of the board members, but at least one member if the required percentage to appoint a member exceeds such percentage, and it shall forfeit its right in the voting in the percentage of its appointment. If the government holds any balance percentage not qualifying to appoint another member, the government may use such percentage in voting.

Pre-emption rights. The provisions of PJSCs permit the issue of new shares in two cases without triggering the application of pre-emption rights. However, the CCL has only introduced this concept, and has left the provisions that regulate its implementation to future regulation.

Articles 223 and 224 of the CCL addressed the issue of the contribution by the strategic partner. According to these articles, the company may, under a special resolution, increase its capital by the entry of a strategic partner. Accordingly, the board of directors may, within three months from the date of the resolution to increase the capital of the company to enter a strategic partner as a shareholder, offer all or any of the new shares for subscription by the strategic partner without offering such shares to the shareholders.

The other case is to encourage the personnel of the company to hold shares. The company may under a special resolution increase its capital by the application of an employees incentive scheme to encourage employees to hold shares.

In both scenarios companies may issue new shares by a special resolution and the shareholders will not be entitled to practise their pre-emption rights, notwithstanding the provision of article 195 that gives them such a right.

Provisions still unclear

The application of these provisions is still unclear and arguable, as it will depend largely on the actual practise of implementation and enforcement of the CCL, and subsequent legislation and regulations by relevant authorities. This will be an ongoing process requiring heavy involvement and interaction between corporate lawyers and relevant authorities to reach a market consensus.