A presidential decree was passed in the United Arab Emirates on November 23rd, 2020, under which some imperative changes were made in the federal law no. 2 of 2015, namely the companies law. Among other changes, the most influential change is the one that 100% foreign ownership of a company is announced in the mainland, thereby efficaciously eliminating the requisite for an Emirati shareholder, subject to the terms and conditions of the law discussed by Commercial Lawyers & in this article.
Earlier, the foreign companies had to follow the 49-51 rule. According to this rule, a foreign company established on the mainland is required to have 49% expatriate shareholders and 51% of resident shareholders or the entities which are wholly led by Emiratis. With respect to this foreign direct investment or the FDI law was proclaimed through the federal law no 19 of 2028. Under this a positive list was issued through a cabinet resolution no.16 of 2020, that is almost one and a half year later which allowed the 100% ownership of the companies by the expatriates. This rule was accompanied by the condition that they should have an enormous amount of “ Minimum Share Capital”.
The changes made, are characterized by a wide scope as the only industries excluded are the ones with strategical important sectors such as oil and gas exploration, utilities, transport and state owned entities.
This recent amendment by the way of presidential decree is said to effect 51 articles in total and introduce three new articles in the Commercial Company Law. These key changes in shareholding patterns are:
- The elimination of the requirement for the companies of UAE to have a majority in Emarati Shareholders and Agents of the company.
- The allowance of full foreign ownership of companies located on the Mainland of the UAE i.e the onshore companies, with subjection of the policies laid down by the UAE cabinet in form of cabinet resolution.
- Giving power to the local authorities with respect to the recognition of the required capitalization, shareholding percentages and approval for establishments of the onshore companies which are the subjected to the policies set in cabinet resolution. Earlier these powers were limited to either the ministry of economy or Economic Departments of each Emirate.
- By the ways of IPO, a joint stock company can now sell 70% of the shares. Earlier this percentage was as low as just 30 %.
- In case the company working through its directors and general managers, undertakes an activity resulting in the loss of the company, the shareholders have the power to file an application against the company in the court
In addition to this, there are other amendments such as:
- The meetings of the companies are no more required to be chaired by an Emirati, it is now open to even the Expatriates.
- Similarly, the prohibition of Expatriates to be a part of the board of the company is also removed.
- In case of abuse of power by the executive officers or the chairs of the company, there is a provision to remove them.
- Owing to this global pandemic, the annual general meetings are now allowed to hold electronic voting also.
Execution Of Law
These amendments came into effect on 1st December, 2020. But the major amendments pertaining to the ownership of the company or the agency and the board of directors is likely to take another six months to come into effect. These provisions are said to come into effect with the publication of an official decree in the official gazette. The law after coming into effect will provide the company with one year of the grace period in order to make necessary changes in the fundamental documents of the company as well as in the administration of the company.
Owing to the amendment, under article 10, a cabinet resolution will be passed by the Economic Departments of the Emirates. This cabinet resolution will be responsible for the creation of a committee. The paramount responsibility of the committee is inclusive of the act of creation of a list of all those activities which will lead to a critical impact on the economy of the country. 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.
Also, 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.
The amendments mentioned above are benign to not only the existing investors but also the new ones. In order to enjoy the advantages connected with the new amendments, the existing investors are required to restructure their companies. On the other hand the new investors in the market of the UAE have an advantageous position, with respect to the ease of setting up of business. While waiting for other details related to the amendment, the companies are advised to undertake the following activities. Firstly, to revaluate the already existing contracts, not only with local Emirati Partners but also with their service agents. Secondly, the company shall have an effective revision of its structure in order to comply with these modifications. Lastly, the company shall modify the fundamental documents of the company, i.e. Memorandum and Article.