Pledging the shares of a limited liability company in the UAE

By Cherry Ann Turcal, Al Tamimi & Company
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At present Federal Law No. 8 of 1984 – the Commercial Companies Law – does not provide for a mechanism for pledging the shares of a limited liability company in the UAE, and there is accordingly no official register on which to record the share pledges to perfect such security. One of the concerns about pledging the shares of a limited liability company is that a limited liability company does not have shares or share certificates to be pledged. The partners’ percentages of allocated ownership in a limited liability company are typically referred to as quotas, as opposed to shares. Such quotas are similar to shares, however no certificates of ownership are issued to the partners.

Cherry Ann Turcal Al Tamimi & Company 银行金融部律师 Associate in the Banking & Finance Department Al Tamimi & Company
Cherry Ann Turcal
Associate in the Banking & Finance Department
Al Tamimi & Company

The Commercial Companies Law Amendment Law – which has been approved by the UAE Federal National Council and is pending approval from the Federal Supreme Council – is expected to resolve this issue.

The Amendment Law

Article 79 of the Amendment Law states that:

  1. A partner may transfer or pledge its shares in the company to another party, or to a third party. Such transfer or pledge shall be made in accordance with the terms of the memorandum of association of the company under an official document, in accordance with the provisions of this law. Such a transfer or pledge will not be valid against the company or third parties until the date of its entry in the commercial register with the competent authority.
  2. The company may not reject to enter such transfer or pledge in the register unless the transfer or pledge violates the provisions of the memorandum of association, or this law.

    The above provision of the Amendment Law appears to indicate the following requirements for a valid pledge over shares in a limited liability company:

    1. A pledge must be in accordance with the terms of the memorandum of association of the company. The Amendment Law appears to make it a requirement for limited liability companies to specifically authorise the pledging of shares by the partners in their memorandum of association (similar to provisions commonly included in the articles of free-zone companies in the UAE). What is not clear is whether the memorandum of association would have to contain such an express provision, or whether the lack of any prohibition would suffice. Assuming an express provision is required to facilitate registration of the pledge with the competent authority, this new requirement would force most, if not all, limited liability companies in the UAE to amend their existing memoranda of association to incorporate provisions on the authority, requirements and procedures of pledging a partner’s shares in favour of another party, or a third party.
    2. A pledge must be under an official document. Reference to an “official document” suggests that an agreement in relation to a share pledge would need to be executed before a competent authority (i.e. a notary public in the UAE) prior to actual registration in the commercial register. This requirement reflects the existing practice of the Dubai Economic Department and many of the free-zone authorities in other emirates of the UAE.
    3. A pledge must be made in accordance with the provisions of the Commercial Companies Law as amended by the Amendment Law. Under the proposed Amendment Law, in order to register a pledge over shares in a UAE limited liability company, a pledge must not violate any provision of the Commercial Companies Law, or any UAE law. Parties to the share pledge must ensure that the pledge does not conflict with any statutory provision that would render the security void and unenforceable.
    4. The pledge must be registered with a competent authority and its details entered in the commercial register. Article 79 intends to provide a solution to the historic problem regarding the absence of a formal register on which to record the share pledges. The proposed amendment presumes that the commercial register maintained by the competent authority – i.e. the relevant economic department – will accept and record share pledges in respect of shares/quotas of limited liability companies.

While the Amendment Law specifically mentions that a partner in a limited liability company may pledge its shares, article 79 of the Amendment Law does not refer to any share certificate that should be presented to the competent authority to complete the pledging of the shares. At present, the Dubai Economic Department does not require physical share certificates when filing a share pledge over a limited liability company, and it is likely this would be the approach taken by relevant authorities in the other emirates.

Enforceability of share pledge

Article 81 of the Amendment Law provides a mechanism of enforcement against a partner’s share in a limited liability company, noting that a creditor may agree with the partner, as pledger, and the company on the method and terms of sale (by way of private arrangement), otherwise the subject shares shall be offered for sale at a public auction. Article 81 further states that the company may, within 15 days from the date when the auction is awarded, recover the shares on the same terms as awarded at the auction, effectively giving the company a pre-emptive right.

It is interesting to note that article 81 of the Amendment Law has not addressed the issue of the local ownership requirement and the restrictions that should be imposed on a share pledge – or any sale of shares following enforcement – to maintain the 51% local ownership over a limited liability company.

The Amendment Law should bring to an end the prolonged uncertainties that have existed regarding the ability to take, and the validity of taking, security over shares/quotas in limited liability companies. However as article 79 intends to implement a new system that does not currently exist – outside of, arguably, Dubai – it will remain subject to implementation of formal procedures by each relevant commercial register, and of course the enactment of the Amendment Law.

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