The new commercial companies law, UAE Federal Law No. 2 of 2015 Concerning Commercial Companies (the Companies Law) came into effect on 1 July 2015. The Companies Law represents a significant overhaul of the rules regulating private and public companies in the UAE. In the most part, it has sought to modernise outdated rules which were drafted to meet the needs of different era, and it has certainly addressed a number of pressing needs, for example, it expressly allows the pledging of shares. However, it has also introduced some controversial provisions; these include Article 104 which provides that the Companies Law provisions applicable to joint stock companies (JSCs) will also apply to limited liability companies (LLCs), save where the matter is otherwise regulated under the LLC section of the Companies Law.
This Article has caused significant market uncertainty and its meaning has ignited debate among lawyers, commentators and shareholders. This is largely because of the considerable differences between JSCs and LLCs. A number of the regulations applicable to JSCs are designed to protect public shareholders, and would be unnecessarily onerous for companies owned by a limited number of private shareholders, many of whom would be active in the management of the LLC.
In response to market debate and to provide much needed clarity, the UAE Ministry of Economy issued Ministerial Resolution No. 272 of 2016 concerning the Implementation of the Provisions of the Joint Stock Companies to Limited Liability Companies (Resolution), which came into force on 29 April 2016.
The Resolution clarifies that under the Companies Law, directors of LLCs will be held liable to the LLC and/or its shareholders and third parties for, among other things, the mismanagement of an LLC, in the same way that the directors of JSCs are.
The Resolution also clarifies that under the Companies Law (i) minority shareholders, auditors and the Department of Economic Development of the relevant Emirate each has the right to convene a general assembly; and (ii) there are procedures to be adopted when an LLC fails to appoint its directors and/or auditors.
The Resolution clarifies that the prohibition on financial assistance does not apply to LLCs. This exemption has resolved one of the most hotly debated issues since the Companies Law was issued. However, it is clear that the parameters of this exemption need to be further examined. The Resolution also clarifies that a number of JSC provisions relating to the formation, election, composition, number, nationality and remuneration of the board of directors do not apply to LLCs. This clarification helps maintain the flexibility of board formation which is one of the attractive features of an LLC.
The Resolution clarifies that additional regulations relating to LLCs’ day to day corporate governance do apply. In particular, in relation to their management, finance, accounting, auditing and general assembly. The shareholders, general managers and officers of LLCs should familiarise themselves with these additional regulations.
While the Resolution provides greater clarity on a number of issues, there still remains a level of ambiguity on the application of a number of provisions to LLCs. For example, the prohibition on granting loans to directors and their family members. The Resolution also includes a sweep-up provision which contemplates that JSC provisions will not apply to LLCs where a JSC provision is inconsistent with the nature of an LLC. Further guidance is needed from the UAE Ministry of Economy on the application of this provision.
Finally, there is general concern regarding the legal status of the Resolution and whether a ministerial resolution can take precedence over a federal law. However, irrespective of this legal debate, it is fair to say that the Resolution provides helpful guidance on how the competent authorities in the UAE will interpret certain provisions of the Companies Law.