U.A.E amends Law to attract FDI

U.A.E amends Company Law to attract more Foreign Direct Investment

In a significant development in corporate law legislation since the original Commercial Companies Law came into force in 1984, the much awaited law relating to amendments in the Commercial Companies Law, 1984 (“CCL”) was signed by the Council of Ministers on 4 December 2011 (the “New CCL”). Although there is no specific timeframe for enforcement of the New CCL, it is expected to be published in the UAE Official Gazette in the first quarter of 2012. If the New CCL is promulgated as expected, it will surely reinforce the government’s vision to put the UAE at the top of the list of preferred jurisdictions to establish business in the Middle East.

Exclusion of Right of First Refusal

The New CCL is said to permit exclusion of a right of first refusal in favour of existing shareholders over new issue of shares (pre-emption rights) in certain circumstances, including: 

(a) shares issued when debt is capitalised; 

(b) shares issued as part of an employee share scheme; and

(b) shares issued to a strategic partner.

The above is likely to facilitate:

• The process of share transfer, which in any event should be a simple straight forward process between the transferor and transferee;

• Creative corporate finance solutions, such as debt capitalization and issuance of convertible debt instruments ; and

• More efficient employee share option schemes.

Right of Founders of a Public Joint Stock Company to a majority Stake

Under the existing CCL, founders of a public joint stock company can subscribe for not less than 20% and not more than 45% of the capital of a public joint stock company. Under the New CCL, it is expected that the founders of a public joint stock company will be allowed to subscribe for not less than 30% and not more than 70% of the capital of the company. Although the 70% threshold existed in relation to family companies under the CCL, extending the same to non family companies will provide founders the comfort of management control not available this far.

Establishment of a LLC with one shareholder only 

The New CCL is said to allow limited liability companies to be set up in the UAE mainland by one shareholder, in the same way as being done in the free zones in the UAE. This will address a longstanding demand of foreign investors especially those who want to set up companies for investment and management purposes.

Space for foreign investors to own more than 49% shares in strategic businesses

It has been a longstanding desire of foreign investors to be able to hold registered interest in shares of a limited liability company, which presently is restricted to 49%. The New CCL is expected to authorize the UAE Cabinet to issue further legislation which will allow companies that carry out certain activities to have a foreign shareholding exceeding the current limit of 49%. 

This can act as a catalyst for further foreign investment in sectors approved by the Cabinet. Thus far there are no indications as to the business activities that may benefit from this however given the discretion to Cabinet is hoped that there will be gradual shift in opening up major business sectors to a greater level of direct foreign investment. 

Abolition of minimum share capital

Although the requirement was practically removed by virtue of an amendment in the Federal law No 1 of 2009 it is likely that the New CCL unequivocally do away with the requirement for minimum share capital.

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It is expected that in conformity with steps taken in the past, the government will once more be the first to take innovative and bold measures to reduce barriers, achieve greater competition and ensure that the UAE remains the most favored destination for foreign investment in the region, and beyond.

UAE needs FDI to continue building the country in a green and sustainable way.

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