Eric Milne examines how the UAE has weathered the financial storm through legislative changes to ensure a dynamic economy.
The United Arab Emirates (UAE) continues to develop its financial services sector and regulated company laws and regulation. Detailed in this article are various recent statutory developments, including details of the new draft UAE Commercial Companies Law, proposed changes to the funds regulations in the Dubai International Financial Centre (the DIFC), and details of the new Covered Warrants Regulation issued by the Emirates Securities Commodities Authority (SCA).
UAE Commercial Companies Law
The Minister of Economy in the UAE has recently reported that the President of the UAE, H.H. Sheikh Khalifa bin Zayed Al Nahyan, is expected to approve the new Commercial Companies Law (the Draft CCL) in the near future.
The Draft CCL has been on the drawing board since 2006, (and for a time looked set to amend current restrictions which limit foreign ownership of UAE companies to 49 per cent), however the Federal National Council has recently rejected plans to make such amendments, which are now expected to be addressed in a new foreign investment law. The Draft CCL, once fully implemented, is likely to introduce some welcome changes to the companies law regime in the UAE, including introducing the concept of holding companies that can be incorporated as either joint stock companies (JSCs) or limited liability companies (LLCs). Among other things, such holding companies would be permitted to hold shares or stocks in a JSC or LLC as well as manage those companies, provide finance to their subsidiaries, and acquire assets for the instigation of group activities.
Set out below are some of the more salient provisions of the Draft CCL applicable to LLCs and Public and Private JSCs contrasted with current position under the UAE Companies Law, Law No 8 of 1984 (as amended) (the Current Law).
Limited Liability Companies
Whilst the Draft CCL is likely to retain the status quo of no minimum share capital requirement for LLCs, it would introduce several changes to the way they may be incorporated. The previous requirement that LLCs must be established by at least two founders would go, and sole ownership would be allowed. The maximum number of shareholders in a LLC would also be increased from 50 to 75, and the limit on the number of managers of a LLC would be removed.
The Current Law requires that at least 21 days’ notice be given for invitations to general assemblies. Under the Draft CCL, this notice period would be reduced to 15 days before the date of the meeting, or less than 15 days if all relevant parties agree. A new requirement that shareholders representing at least 75 per cent of the capital of the company be present for a general assembly to be quorate will also be introduced.
The Draft CCL also makes provision for a security interest to be created over shares in a LLC. This development will provide more options for raising debt finance and improve the financing structures available in the UAE, clarification on the procedure for granting and enforcing such a security interest will be required in the Draft CCL's implementing regulation relating to the Draft CCL, which has yet to be published.
Public Joint Stock Companies
Whilst the Draft CCL does not allow Public JSCs to be incorporated by a sole founder, it would generally allow a Public JSC to be incorporated by five founder members. This would reduce the current requirement that Public JSCs are incorporated by at least 10 founders. The composition of the founders committee has also been relaxed so that the minimum number of members is now three and there is no maximum number. This is in contrast to the Current Law, under which the founders committee must comprise a minimum of three and a maximum of five members.
The rules on constitutional general assemblies would also be eased. The Current Law requires shareholders owning at least 75 per cent of the capital of the company to attend a constitutional general assembly for it to be valid, the Draft CCL would only require 50 per cent. Similar to the changes relating to LLCs, the notice period for general assemblies would be reduced to 15 days, or less than 15 days if 95 per cent of the shareholders agree. As with LLCs, under the Current Law, a strict 21 day notice period is currently required.
The minimum share capital of Public JSCs would be increased from AED10million (US$2.7million) to AED30million (US$8.2million) and the concept of authorised share capital would be introduced. The latter would be determined in the company's articles of association and under the Draft CCL authorised share capital could be increased by up to two times the value of the company's issued share capital.
Under the Draft CCL, founders would be able to own a minimum of 30 per cent and a maximum of 70 per cent of the capital of the Public JSC. This is a significant change from the current position under which founders may currently own a minimum of 20 per cent and a maximum of 70 per cent of the capital of the Public JSC.
The minimum free float requirement on IPO would be reduced from 55 per cent to 30 per cent, so that founders can retain up to 70 per cent of the business, and the maximum decreased from 80 per cent to 70 per cent. Whilst the concept of sell-down IPOs are not provided for under the Draft CCL, underwriters and book building would be recognised for the first time, neither of which are addressed by the Current Law. Relevant implementing regulations are eagerly awaited by market participants for such activities.
Interestingly, the Draft CCL would also introduce the concept of employee share schemes regulated by the SCA, something that is not addressed under the Current Law. As an extension to the right of pre-emption already enjoyed by shareholders, the Draft CCL would also allow shareholders to sell their pre-emption rights in Public JSCs to existing shareholders or third parties for material consideration.
Private Joint Stock Companies
The Current Law requires a minimum of three founding members to establish a Private JSC, and as with LLCs, the Draft CCL would allow Private JSCs to be incorporated by a sole founder. The minimum number of shareholders that a Private JSC can have would also be reduced from three to two whilst the maximum number would be 200. The minimum number of shareholders to form a founders committee would also be reduced from three to two.
Further salient provisions to note under the Draft CCL regarding Private JSCs include the following. The period during which the transfer of shares is prohibited post-incorporation would be reduced from two years to one year and the minimum share capital of new Private JSCs would be increased under the Draft CCL from AED2million (US$500,000) to AED5million (US$1million).
Which Companies Would Be Affected?
The Draft CCL would not apply to all companies incorporated in the UAE. Companies already exempt from the provisions of the Current Law (for example companies established in any of the free zones in the UAE, certain oil, electricity and gas companies, and any companies exempted by a resolution of the Council of Ministers) will continue to be exempt.
The Draft CCL would also exempt two other categories of company. First, companies with at least 25 per cent, of their share capital owned (directly or indirectly) by the federal or local government, with special exemption provisions in their articles and which operate in: (i) oil exploration, drilling, refining, manufacturing, marketing and transmission; (ii) power generation; (iii) gas production; or (iv) water desalination, transmission or distribution. Second, those companies wholly owned by the federal or local government and with special exemption provisions in their articles. We await implementing regulations clarifying the requirement of such 'special exemption provisions'.
Funds Regulations in Dubai International Financial Centre
In an attempt to compete with fund friendly jurisdictions, the Dubai Financial Services Authority (DFSA) has proposed a new class of fund in the DIFC.
Currently, the DFSA rules permit two types of funds: public funds and exempt funds. Public funds are open to retail investors and can be marketed by way of a public offer. They are extensively regulated in accordance with the International Organisation of Securities Commissions standards. In contrast, exempt funds are open only to professional clients. Regulation is comparatively less stringent but the minimum subscription for exempt funds is US$50,000. Exempt funds are also restricted to a maximum of 100 or fewer unit holders and cannot be offered to the public.
To make the funds regime in the DIFC more competitive and accessible, the DFSA has now proposed a third type of fund: qualified investor exempt funds (QIEFs). In comparison to the other funds available in the DIFC, rules for QIEFs would provide fund managers with more flexibility in the appointment of custodians and the filing of periodic reports in relation to the fund.
Whilst the changes will be welcome because they offer a less restrictive funds regime, some concern has been raised that a minimum subscription for QIEFs of US$1million might be too high for some fund managers. Critics have highlighted the regulations in Ireland and Luxembourg, which set the minimum subscription at US$500,000, suggesting that this might be a more appropriate level for QIEFs.
Concern has also been voiced that some of the other requirements for QIEFs could prove burdensome. For example, while private equity funds do not have to appoint custodians for certain assets in certain circumstances, they would need to appoint independent oversight committees.
Covered Warrants Regulation
Pursuant to the recent Covered Warrants Regulation issued by the SCA, issuers of Covered Warrants in the UAE must now obtain a licence from the SCA to do so.
‘Covered Warrants’ are defined by the SCA as: "Tradeable securities of equal value giving their holder the right, without commitment, to purchase or sell a specified number of underlying assets at a specified price during a fixed period of time."
To qualify for a licence, applicants must fulfil a number of conditions, including the requirement that they are: a commercial or investment bank, financial institution or branch of a foreign bank licensed by the Central Bank and holding the approval of the Central Bank; or a body or company established at the State according to the Commercial Companies' Law and licensed by the SCA to work in the securities market. Applicants must also have capital of AED100million (US$27million) or more, be sufficiently solvent to meet their financial obligations and have internal procedures in place for issuing Covered Warrants.
The SCA also requires applicants to disclose certain information, including the names of their board of directors and executive management and proof that the licence fees have been paid. Once it has received an application, the SCA will issue its decision within 30 days.
To maintain their licence, licence holders must reapply for renewal before the end of November each year. They must also comply with certain ongoing obligations that include: regularly disclosing certain financial information such as yearly and quarterly audited financial statements; allowing the SCA access to inspect relevant data and documents; appointing a market maker licensed by the SCA; and submitting a monthly report to the SCA, which discloses the total volume of Covered Warrants issued, the number of purchased or sold Covered Warrants issued during the month and the average purchase price.
A number of continuing disclosure requirements also apply to licence holders. These include disclosing any substantial developments that may affect the price of Covered Warrants, the licence holder's ability to meet its obligations, or any amendments to how the price of Covered Warrants is calculated.
The UAE remains a dynamic economy that is showing increased and rapid signs of recovery. The continued pace of growth and development is not limited to infrastructure and real estate, but also embraces the rapid development of new legislation aimed at increasing the level of foreign investment in the UAE and updating existing legislation to enhance the business environment across the seven Emirates. The new federal foreign investment law mentioned in this article and the much anticipated new federal restructuring and bankruptcy law are eagerly awaited as part of the ongoing development of the UAE legal landscape.
 ‘Managers’ are considered equivalent to directors of a company.
 Article 1, Authority's Board Decision No. 2
Eric Milne, Partner, Jones Day