Abstract

Commercial laws are the exposition of laws administrating business as well as commercial transactions. It is one of those divisions of civil laws that has an approach towards both public as well as private laws. The vital scheme of these laws is to maintain order, settle disputes, provide institution for generally accepted standards, safeguard rights and liberties as far as business activities are concerned along with the relationship it shares with other businesses, its customers as well as the governmental authorities.

UAE bestows an auxiliary and efficacious legal structure for commercial activities aligned with the style of governance of the country that try to keep up with international standard which is requisite for an ambitious and booming economy. The government has introduced considerable regulations in reference to economy, investment as well as trade and has been continuously working towards enhancing some of the important laws in force, specially the ones involving economical and investment aspects.

Amendments in Commercial Laws

A notification was published in the official gazette dating 30^th September, 2020 through which the government established cogent amendments (Decree No.26 of 2020) in the UAE Commercial Companies Law. The transitions had the major impact on transactional subjects as well as the foreign ownership structure. The amendments under this amending act is explained as under:

• Foreign Ownership:

The law passed recently has repealed not only the foreign direct investment law but has also replaced the provisions concerning foreign ownership of business under the commercial laws.

Among such laws, the first is Article 10. It enumerated that 51% shares of the company shall be with the local nationals. But now, owing to the amendment, the current article 10 requires the formation of a committee through the process of cabinet resolution passed by the members of the economic department of the Emirates. The primary work of the committee involves the creation of the list of all such activities which will have a critical impact on the country’s economy. Cabinet resolution will carry out such list along with the licensing requirements for carrying out such activities. Eventually, this list will be pessimistic in nature, i.e. the business activities in these lists will be the ones requiring 100% national ownership. In addition this the local authorities, namely, the local economic authorities will also be vested with powers such as the power to decide the degree of the shareholding of a company in hand of the UAE nationals along with the application and fees for establishing such companies.

Moreover, Article 329 has been struck out which earlier made sure that the branches of foreign companies shall be backed with the UAE national service agents. The government has even open gates for the foreign investors to establish one person LLC in UAE.

• Corporate Governance

The prerequisite for some of the changes introduced through the amendment is that in order to come into effect, they require the enhancing of the constitutional documents of the company which will eventually modify the governance and administrative style of the company. The type of companies that primarily require the alteration of the documents are Limited liability company (LLC) and Joint Stock Companies (JSC).

1984. Shareholder Meeting (LLC and JSC): The shareholder’s meeting requirements for calling and holding the meeting are the first set of alterations under corporate governance. The notice period with respect to calling of the shareholder’s meeting has been again increased from 15 to 21 days which was earlier mentioned in the commercial laws of 1984. In addition to this, there are other requirements which have to be fulfilled along with the above mentioned requirement, i.e. firstly, the copy of invitation notice shall be filed with competent authorities such as Department of Economic development, Securities and Commodities Authority and Ministry of Economics and secondly, proxies shall be appointed by ways of Power of Attorney. “Modern Technological Means” are also introduced for providing flexibility to the shareholders for attending and holding meeting which will be governed under the rules established by Securities and Commodities Authority for this purpose. But practically, it is not a new concept for the local JSCs, since the COVID-19 guidelines by the government allowed the companies to hold virtual shareholder’s meeting along with the facility of virtual voting. Lastly, Article 151 is also repealed, which required the presence of the UAE nationals in the board of Joint Stock companies.
1985. Quorum Requirements of Limited Liability Companies: Earlier the quorum requirement for the Annual General Meetings of the company was 75% which is now reduced to 50% which will be eventually subjected to any provision in this regard mentioned in the Article of the company. But, in cases where the Quorum is not met in the first meeting, which resulted in the calling of second meeting, the quorum is said to be reset according to the article such that it is considered to be valid irrespective of the number of attendees. As a result, the need to call the third meeting is eliminated in cases where the second meeting turns out to be inquorate. The second meeting’s notice can also be given from 5-15 days following the first meeting which was earlier set out to be 14 days.
1986. Rotation of auditors in LLC and JSC: The auditor’s rotation was earlier meant to be done in every 3 years, but now the criteria has changed to 6 fiscal years. But it does not mean that there is an increase in time period for rotation of partners who are responsible to take the charge of rotation, they have to still be rotated in every 3 years. The provision with respect to the reappointment of the auditor is that he may be reappointed after 2 years of his retirement from the original time period of his appointment as auditor.
1987. Dispute Resolution Mechanism of LLC: The new amendment administers that the LLC type of businesses in particular shall constitute in their fundamental documents, the mechanism for dispute resolution that may arise owing to the activities of the company and any of its managers or shareholders.

• Capital Markets of Public JSC:

The UAE government has gloriously established the Amendment Laws aiming to ease the capital formation and issuance of debt in Public JSCs.

1. IPO: The liability owing to the accuracy of the prospectus was on the third party advisors before the amendment which has now been shifted to the company issuing the prospectus. But the obligation to act with due care is still resting upon the third party. In addition to this the earlier set up of maximum free float requirement that is 70% will be enhanced with the acknowledgment of the Securities and Commodities Authority. On the other hand there has been a reduction in the lock out period for the shareholders from two years to six months.
2. Strategic Investors: A series of affirmative changes have been unveiled in the area of Strategic Investors Regime in the Public PSJs under which shares can be issued to the investors on the pre-emptive bases with respect to certain criteria. Moreover, there have been some reductions in order to provide 2 year financial reporting history as well as to liberate the investors in terms of operating in similar business activities as that of Public PSJs.
3. Bonds and Sukuk: The law provides that these preemption rights will not be applicable on the issuance of bonds and sukuk. In addition to this based on the terms of issuance of bonds and sukuk, the permission is granted for the right to pro-rated dividend in the same financial year as that of the conversion of these bonds and Sukuk into the shares. The limitation of acting upon the special resolution by the shareholders within 1 year with respect to the issuance of bonds and sukuk has also been removed.

• Consideration for Transaction structuring:

A clarification has been provided in the Amendment law which has a direct jolt on the transaction structuring.

1. Investment Management: The exclusiveness of the Investment Management with the Public PSJs have now been removed, as a result, an opportunity has been established for the LLCs and the Private PSJs
2. Related Party Transactions of the Limited Liability Companies and the Joint Stock Companies: In the previous enactment there were no related parted transaction prohibitions for the LLCs. But now, the amendment serves for the dissemination of cabinet resolution which will eventually led to the creation of a specific related party transaction regime. This regime was already available for the JSCs and has been expanded further which involves the addition of certain disclosure requirements.
3. Financial Assistance for Joint Stock Companies: There are two pivotal changes to the system of financial assistance prohibition in way of exemptions. Firstly, the underwriters act to purchase the unsubscribed shares of any UAE undertaking, now falls outside the purview of the prohibitions of financial assistance. Secondly, there is a carve out for businesses licensed under the central bank which give loans for the primary activity of such businesses without preferential conditions.
4. Loans to directors of Joint Stock Companies: With the introduction of the amendment law, the loans to directors are exempted for the companies under the central bank.

• Minority Shareholders Protection:

The new laws have resulted in reducing the threshold which was earlier required for the minorities to call the Annual General Meeting from 25% in case of the LLPs and 20% in case of the JSCs to only 10%. Previously, only those minority shareholders could add the agenda in the general list who had shares equivalent to 10%, but now, this percentage is reduced to 5%.

• Director’s Duty:

The commercial laws of 2015 did not expressly provide for the “executive management” but there was just considered to be implied that it consist of the general managers, the ones appointed directly by the board of directors, the CEO, their deputies and every one in the high executive position. But, with the advent of the Amendment Law, now it is expressly provided for. In addition, a new concept has been introduced of striking off the director. Under this concept, the director is prohibited to act as one for three years based on the judgment of the court depicting the breach of his duty.

• Bankruptcy Position

1. Companies in financial distress: A new provision has been brought up as a savior for the companies who are unable to settle their debts. It provides that a shareholder of such a company may apply to the court for urgently increasing the capital of the company based on the report of the financial manager or his assistant.
2. Losses: In case the company is suffering unbearable losses, which eventually reaches 50% of its share capital, the board of directors are said to have an obligation to call a general meeting for the purpose of winding up of the company.

Conclusion

The following amendments came into force on 2^nd January,2021 with an optimism to attract more investment in the company and thereby enhance its economy. This Amendment Law bears with it a considerable amount of clarification. The dynamism with respect to the capital market is exceptionally benign for investors. However, the relaxation of foreign ownership restriction is the one which offers the uttermost prestige to the investors for investing in the UAE.

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