The United Arab Emirates (the "UAE") is in the
midst of a set of legal reforms that are intended to greatly
strengthen the legal and regulatory landscape of doing business in
the country.
The draft Companies Law (the "Draft Commercial Companies
Law") is due to replace the existing Commercial Companies
Law, which has been in place since 1984.
A Long-Awaited New Companies Law
The Draft Commercial Companies Law is highly anticipated by the
UAE business community and foreign investors and has been in
gestation for almost 10 years.
The progress of the Draft Commercial Companies Law reached a major
milestone at the end of May 2013 when it was finally passed by the
Federal National Council (the "FNC") following a
record 28 sessions of debate. Although not yet at the end of the
legislative process, this is one of the final steps before
enactment. The Draft Commercial Companies Law will now be referred
to the President of the UAE for final approval and promulgation.
Officials hope that it will be enacted in its final form within a
matter of months.
The Draft Commercial Companies Law, when enacted, should provide a
stronger, more modern, and more certain basis of companies
regulation in the UAE.
Majority Local Ownership Rules Remain (For
Now)
Foreign investors in the UAE have eagerly awaited a revision to
the existing Commercial Companies Law in the hope that any such
revision would introduce a relaxation, in certain industry sectors,
of the general requirement (outside of designated free zones) that
companies established in the UAE must be majority-owned by Emirati
nationals or corporates owned by Emirati nationals.
The draft provisions that would have paved the way for this
relaxation to occur were proposed in an earlier version of the
Draft Commercial Companies Law but have been rejected by the FNC on
a number of grounds, including a possible threat to national
security. A spokesperson has stated that this highly awaited topic
will be addressed in a forthcoming separate draft
"Investment Law." It is not yet known when this
draft law will be considered and what provisions it might contain
(although some officials have expressed hope that the issue will be
addressed as early as next year).
As things stand, foreign investors must continue to rely on one of
the existing legal structures available if they wish to achieve
majority or complete ownership of a presence in the UAE. These
include setting up operations in one of the UAE's many
free zones (which allow for 100 percent foreign ownership of
companies) or the establishment of a branch or representative
office of a foreign company (instead of a subsidiary).
A Strengthening of Corporate Governance and Investor
Protection
The Draft Commercial Companies Law should, when enacted,
substantially strengthen the existing corporate governance regime
in the UAE and provide greater protection and peace of mind for
investors.
Examples of areas in which existing regulation is set to be
strengthened include:
- Closer scrutiny and accountability of publicly held companies;
- Strengthening of the directors' duties regime and the responsibilities of managers and auditors;
- Stiffer penalties for offenses such as misrepresentation of a company's financial position and illegal distribution of profits; and
- Possible adoption of unified accounting standards.
The Draft Commercial Companies Law is also likely to provide for
the ability for companies to make voluntary financial contributions
(of up to two percent of profits averaged over the two previous
fiscal years) in furtherance of corporate social responsibility
goals and leaves the door open for further corporate social
responsibility regulation to be issued by the UAE government in the
future.
The Draft Commercial Companies Law may also impose requirements
for a minimum number of Emirati nationals to be appointed to board
positions in certain companies incorporated within the UAE.
The Bigger Picture
The Draft Commercial Companies Law is part of a set of modernizing
business laws in the UAE, which are at various stages of coming
into effect. These also include:
- A draft Bankruptcy Law, currently making its way through the legislative process;
- The anticipated draft Investment Law referred to above, which is due to address foreign ownership restrictions of companies incorporated in the UAE; and
- The already enacted Competition Law (which is the subject of our February 2013 Jones Day Commentary "UAE Competition Law: A New Beginning").
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