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The New Commercial Companies’ Law in the UAE Report


Introduction

The law of business (or commercial law) stands for the specific set of laws that are designed to govern commercial transactions and business interactions; this law is characterized as civil law and covers the regulations of both private and public sectors of business (Commercial Law in UAE, 2015). In the United Ara b Emirates, there is a substantial body of legal frameworks that regulate the sphere of business and commerce according to the perspective of the state leadership and following the international norms; together, these components contribute to the creation of a strong and prosperous country economy.

Over the recent years, several new regulations as to corporate and business law were issued in the UAE; in addition, there is an intention to improve some of the most important legislation related to such issues as the investment in business and the economic infrastructure (Commercial Law in UAE, 2015). Foreign investment law is one of the major business laws; its primary purpose is to facilitate the inflow of direct investment (from both domestic and foreign investors) to the businesses in the UAE.

Foreign investment law serves to enable the regulations related to the investment procedures, registration, and licensing, it also deals with the taxation of business operations, and protects the set of rights, freedoms, and obligations for the investors (Commercial Law in UAE, 2015). Another important basic law is competition law – it regulates the business practices in order to detect and eliminate the wrongful ones that produce a negative impact on the productivity of the economy. This law is aligned with the recommendations of the WTO (World Trade Organization).

The law is aimed at the preservation of safe and fair competition, consumer rights and welfare, and the development of the country’s economy (Commercial Law in UAE, 2015). In addition, there are basic laws that concern all the businesses operating in the territory of Dubai. They require that all the professional activities are performed by the licensed individuals, and the owners of certificates allowing such practices, and by the organizations that are officially enabled to deliver them. Licenses differ based on the industries in which they are to be used. Accordingly, the authorities and institutions issuing them are also different.

Some licenses may be granted by the Economic Department of Dubai; others are given by the respective organizations such as the Ministry of Finance, Ministry of Economy, Central Bank of the UAE, and Health Ministry to name a few. Another basic law related to business and commerce in the UAE is the law on certificate origin that offers the body of regulations as to the authenticity of the official certificates, licenses, documents, and data. The business and individuals using fake documents are eligible for fines and punishments under this law.

One more commercial law refers to the companies and obliges all of the commercial organizations operating in the UAE to establish frameworks as to their corporate governance. These regulations are critical when it comes to the protection of the rights of versatile stakeholders such as the employees, the employers, the shareholders, and customers. The rules also help to achieve better efficiency and transparency of practices. Finally, one more law, the law on commercial arbitration, exists to mediate commercial disputes. The law regulates the procedures according to which the conflicts and court cases are handled in the United Arab Emirates, which agencies are involved, and what principles are followed. The law was modeled after that proposed by the United Nations Commission on International Trade Law (Commercial Law in UAE, 2015).

Background

As specified by Ibrahim (2015), the new commercial companies’ law was introduced in the United Arab Emirates (also known as the “New Law”); it presented a set of important reforms concerning some fundamental regulations in the spheres of business and commerce. Apart from establishing several additions and amendments, the New Law majorly preserved the old features and provisions that are essential to the old set of regulations.

Companies the Law Does not Apply to

Some of the major categories of business organization in the UAE that the New Law applied to are public joint stock companies, private joint stock companies, and limited liability companies. Also, there was a type of company that the law did not affect. Issued on the 1st of April in 2015, the New Law for the commercial companies did not apply to the following companies:

  • The companies that function within the oil and gas industry or the power, water, and energy sectors that are directly or indirectly owned by the government (at least by 25%)
  • The companies owned by the UAE government fully or those whose ownership belongs to the government of one of the Emirate
  • The entities that operate in the free zone because the free zone has a regulation that excludes the relation of the New Law to such companies. At the same time, the applicability of the New Law is functional in the spheres were the free zone entities are allowed to conduct business operations onshore
  • Finally, the companies that are exempted from the applicability of the New Law by the cabinet resolution or federal law (Waft, Lovesy, Lemp, & Momany, 2015).

Public Joint Stock Companies

First of all, Article 107 of the New Law outlines the number of founders for public JSCs. According to the Law, a public JSC can be founded by ten establishers minimum (it used to be five in the old law); also, article 117 states that the founders of a company are permitted to own 30 to 70% of its capital, in the previous regulation the percentage limits used to be lower – 20 and 45% accordingly (Ibrahim, 2015).

In that way, the New Law is focused on encouraging the business owners to proceed with the initial public offering (IPO) under the circumstances safe for their ownership of the business since they are allowed to control a large percentage of it. Moreover, in the Article 129, the New Law focuses on the book-building practices of IPOs specifying that the pricing is decided by the issuers and the banks in agreement with the investors and the selling shareholders (Ibrahim, 2015). All of these changes are directed to promote the IPOs and encourage the growth of businesses in the UAE and an elevated inflow of capitals and investment.

Also, it is important to mention that according to the Article 151 of the New Law, the regulations of the old law concerning the nationality of the board members remain without changes; namely, the majority of the board members, as well as the chairperson, are to be the UAE natives (Ibrahim, 2015). In addition, the Article 225 of the New Law specifies that now the conversion of a company debt to equity is an option (this option was not mentioned in the previous regulation). Moreover, the employee share scheme had been made available by the New Law as well; to be more precise, the scheme is to be issued and regulated by the Securities and Commodities Authority (this issues is not a part of the old law as well).

To sum up, it is easy to notice that the New Law offers more flexibility to the public JSCs; with the help of the new book-building practices, they are now able to establish the pricing at the time of IPO without the pre-establishment procedures and offer their shares to the public. The New Law emphasizes investment and the inflow of capitals into the businesses from all the sources available legally, that way, the UAE authorities attempt to encourage growth and development of the public sector of the economy.

Limited Liability Companies

According to the Article 71, the LLCs can now be owned by sole owners (natural or corporate persons), previously, the minimal number of founders was set on two; besides, when it comes to the managers, the New Law rules that the minimum of managers assigned in a company may now be one (it used to be two in the old law); the maximum limit was changed as well – the number of managers used to be limited to five, whereas the New Law does not provide any limit at all (Ibrahim, 2015). In that way, the LLCs, just like public JSCs are given more freedom and flexibility.

In addition, the Article 86 provides a regulation that was not present in the old law; it states that the persons employed as managers in one company are prohibited from operating another business that competes with the former organization. In addition, the New Law specifies that the matters that are not covered in the sections related to the limited liability companies can be transferred from that of the joint stock companies – this rule is also new and was not addressed in the previous law.

Private Joint Stock Companies

The concept of a sole founder was added to the regulation related to the private JSCs; practically, the New Law states that two founding members fully subscribed to the capital of at least 5 million Dirhams (the old law regulated that the minimal number of founders was three and their capital had to exceed 2 million Dirhams) (Ibrahim, 2015). One may state that the impact of the economic crisis and the fluctuation of the currency value is the reason why the basic capital limit is higher in the New companies Law.

Regardless of this limitation, the Law invites the sole founders and the groups of two to establish companies should they possess the required minimum in terms of capital. In addition, the article 264 outlines the length of the lockup period for the private JSCs that, according to the New Law, equals one financial year (in the old law, this period was assigned as twice as long) (Ibrahim, 2015). Moreover, when it comes to the private JSCs, the New Law mentions a new set of regulations related to the corporate legal structures (subsidiaries and holding companies) and the investment funds – these rules are new to the companies’ law of the UAE and were not a part of the previous regulation. Finally, the set of regulations that applies to penalties and fines is also renewed and is more elaborate and detailed that that of the previous law.

To sum up, it is possible to notice that the New CC Law offers more freedom when it comes to the establishment and financing the companies; however, the rules concerning their governance have become much stricter and more precise. In that way, the UAE legal authorities attempt to ensure more flexibility in the sphere of business but also create very clear boundaries in order to keep the practices related to business ownership under control.

Conclusion and Recommendations

As stated by PwC (2015), the primary goal of the New companies’ Law is to facilitate the development of the UAE’s business sector into an environment that is regulated by the worldwide standards, improve the quality and thoroughness of the corporate governance, promote social responsibility of the businesses, and ensure that protection of the shareholders (Chartered Accountants Group, 2015). Apart from the issues that were discussed in the background section, some of the most outstanding aspects of the New Law involve the expert valuation of shares in kind, the addition of the notion of the holding companies, the operations designed for pledging shares, as well as the regulation to change the auditors once in every three years for the public joint stock companies (PwC, 2015; Anders et al., 2016).

In that way, the amendments provided by the New Law contain the additions and corrections necessary for the rapidly developing and globalizing business sector in the UAE. Logically, the growth of the country’s economy, its expansion, diversification, and attraction of foreign direct investment require regular adjustments that would enable the industries and businesses to function efficiently in the changing environment. As a result, the newly established regulations equip the businesses with the necessary tools for better development – flexibility and opportunities for growth.

The New Law is rather focused on the establishment of the domination of the UAE natives among the owners and shareholders of the companies, its regulations majorly follow those of the old law; PwC (2015) mentions that the UAE authorities have expressed the desire to change this condition at some point in the future, however, currently, this perspective remains rather vague, and the maximal permitted percentage of the foreign ownership still stands at 49%. Besides, remembering the fact that the sole ownership is now permitted under the New Law, it is possible to make a conclusion that the sole ownership will be only possible for the UAE natives and the GCC citizens thus benefiting them as the potential entrepreneurs.

In addition, one of the new concepts added to the companies’ Law was that of a holding company that is now permitted for JSCs and LLCs. Enabling the business owners to establish holding companies, the UAE authorities attract the large foreign corporations to expand to their country. It is unfortunate that the New companies Law does not allow sell-downs made by the current shareholders; this option is open in the business markets of multiple countries around the globe.

Since the reforms of the companies’ Law are aimed at the promotion of the initial public offerings, the addition of a sell-down option could be very attractive to the businesses considering IPOs and related transitions. This is the first recommendation. The second one concerns the detailed new regulations for the corporate rules and structures, it is recommended that the business leaders review them and adjust their corporate rules accordingly in order to avoid the unintentional breach of the established lawful practices because the New Law implies that the existing LLCs would have to make significant adjustments to their regulations and structures within one year (Silver, 2015).

References

Anders, I., Eiler, P., Mauel, C., Lemmerz, A., Campbell, A., & Friz, C. (2016). .

Chartered Accountants Group. (2015). .

. (2015).

Ibrahim, A. (2015). The new UAE Commercial Companies Law: A comparative view.

PwC. (2015). .

Silver, J. (2015). The impact of the new UAE Companies Law on existing LLCs.

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IvyPanda. (2020, August 26). The New Commercial Companies’ Law in the UAE. Retrieved from https://ivypanda.com/essays/the-new-commercial-companies-law-in-the-uae/

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"The New Commercial Companies’ Law in the UAE." IvyPanda, 26 Aug. 2020, ivypanda.com/essays/the-new-commercial-companies-law-in-the-uae/.

1. IvyPanda. "The New Commercial Companies’ Law in the UAE." August 26, 2020. https://ivypanda.com/essays/the-new-commercial-companies-law-in-the-uae/.


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IvyPanda. "The New Commercial Companies’ Law in the UAE." August 26, 2020. https://ivypanda.com/essays/the-new-commercial-companies-law-in-the-uae/.

References

IvyPanda. 2020. "The New Commercial Companies’ Law in the UAE." August 26, 2020. https://ivypanda.com/essays/the-new-commercial-companies-law-in-the-uae/.

References

IvyPanda. (2020) 'The New Commercial Companies’ Law in the UAE'. 26 August.

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