Tag: Corporate and Commercial

The new Commercial Companies Law was enacted as Federal Law No. 2 of 2015. It gave existing companies until 1 July 2016 to achieve compliance with its terms. Article 374 provides that a further one-year extension could be granted by Resolution of the Cabinet, and such an extension was in fact granted. Article 374 also provides that a company that fails to achieve compliance shall be deemed dissolved.

 

 

Many companies set about amending their constitutive documents (Contracts of Establishment for limited liability companies and Memoranda and Articles of Association for joint stock companies) to achieve compliance with the new requirements. Shareholders of limited liability companies were assisted somewhat by Ministerial Resolution No. 272 of 2016, which specified which provisions of the Commercial Companies Law on joint stock companies would also apply to limited liability companies.

 

 

A new resolution of the Minister of Economy, Ministerial Resolution No. 694 of 2016, now provides further relief. It states that Contracts of Establishment of existing limited liability companies that are not amended by the deadline shall be deemed amended to the extent necessary to achieve compliance. One could question whether the Commercial Companies Law gave the Ministry the power to grant this relief from compliance. Executive measures cannot modify legislative measures absent enabling legislation. Nevertheless, the practical result is that such companies no longer face the prospect of dissolution, fines or other sanctions for failure to comply.

 

 

The new measure applies to general partnerships and limited partnerships as well as limited liability companies. It does not apply to the other forms of companies that exist under the Commercial Companies Law, the private joint stock company and the public joint stock company.

 

 

Although sanctions relief is welcome, some uncertainty remains, and not only because of the inherent limitations on executive power noted above. The parties to a Contract of Establishment that is deemed amended could still be unsure of where they stand. The Contract of Establishment will no longer mean what it says, and an authoritative determination of its actual meaning may be elusive. Although major substantive problems would seem unlikely, it is not ideal for a corporate document not to mean what it says.

 

 

In contrast, the companies that have amended their Contracts of Establishment do not face this ambiguity. Their amended documents would have been notarized and filed with the authorities, making it unlikely that the new Resolution would impose further amendments.

 

 

To illustrate the issues that might arise, the new Commercial Companies Law requires that a register of shareholders be maintained by the company, including such particulars as the full name, nationality, date of birth and place of residence of each shareholder. The date of birth was not previously required. Even a company that does not amend its constitutive documents should amend its register of shareholders so as to include this new information.

 

 

As a further example, the new law slightly changes the requirements for exercise of preemption rights when a share transfer is contemplated. When a shareholder in an LLC wishes to sell its shares, it must first make an offer on the same terms to the other shareholders, or alternatively obtain a waiver of the preemption right from the other shareholders. In the event of a dispute over the price, the new Commercial Companies Law requires that the price be determined by one or more experts nominated by the Competent Authority in the relevant Emirate. The previous Commercial Companies Law (and many constitutive documents of companies formed in the UAE) provided that this value would be determined by the company auditor. An expert appointed by the Competent Authority will now play that role, whether or not the underlying constitutive documents are amended.

 

 

The new Commercial Companies Law contains an express prohibition against a manager of a limited liability company acting as manager of a competing enterprise without the consent of the company. This exposes a manager to liability even if the prohibition is not stated in the constitutive documents of the company.

 

 

As a final example, a shareholder in a limited liability company is now able to pledge its shares. However, this is possible to the extent that the constitutive documents enable the same. It is unlikely that a provision to this effect would be deemed included in the company’s constitutive documents by virtue of the new Resolution.

 

 

The new Resolution was published in Issue No. 612 of the UAE Federal Official Gazette dated 28 February 2017, and it took effect on 1 March 2017. ■

The UAE has embarked on an ambitious undertaking by introducing new business friendly mutual funds regulations to stimulate the UAE funds industry and provide the foundation for a more developed regional funds regime in the Gulf Cooperation Council (the “GCC”). The mutual funds industry can facilitate the gathering of monies for investment in various sectors across the UAE and Middle Eastern economies through funds that are established in the UAE, as well as foreign funds that are registered and promoted in the jurisdiction.

 

The Emirates Securities and Commodities Authority (“SCA”) has recently issued the following new regulations governing the registration, licensing, and promotion of mutual funds in the UAE (the “Fund Regulations”):

 

1. SCA Board Decision No. 9 of 2016 regulating mutual funds;

 

2. SCA Board Decision No. 10 of 2016 setting out fees related to mutual funds;

 

3. SCA Administrative Decision No. 49 of 2016 regulating exchange traded funds (“ETFs”);

 

4. SCA Administrative Decision No. 52 of 2016 regulating cash investment funds;

 

5. SCA Administrative Decision No. 1 of 2017 regulating real estate investment trusts (“REITs”);

 

6. SCA Administrative Decision No. 2 of 2017 regulating private ownership funds;

 

7. SCA Administrative Decision No. 3 of 2017 regulating venture capital funds; and

 

8. SCA Board Decision No. 3 of 2017 regulating promotion and arranging activities.

 

The Fund Regulations constitute the new UAE fund regime regarding onshore local funds and foreign funds that are marketed in the UAE (outside of its financial free zones).  Such regulations replace SCA Board of Directors Decision No. 37 of 2012 concerning the regulations on mutual funds (the “2012 Regulations”).

 

In addition to revamping the primary mutual fund law that applies to all UAE funds, the Fund Regulations set out additional obligations and key exemptions for certain funds, including REITs, ETFs, private equity funds, and venture capital funds.  This marks a significant change from the 2012 Regulations, which failed to differentiate between varying types of local funds, and should encourage fund managers and other sponsors to establish funds in the UAE.

 

Mutual Funds

 

As with the 2012 Regulations, the Fund Regulations apply to all mutual funds and parties that are “related” to mutual funds.

 

A “mutual fund” is defined as a financial pool engaged in the activity of accumulating investors’ assets for the purpose of investment against the issue of fund units of equal value. SCA interprets this definition broadly.

 

Corporate Structure

 

A local mutual fund must be established by an eligible sponsor, which includes companies licensed by SCA “in the area of securities” or to manage funds, local and foreign banks licensed by the UAE Central Bank, and UAE branches of foreign companies licensed by an International Organization of Securities Commissions regulator and having an operating history of at least five years.  The sponsor must contribute a minimum share capital of AED 5,000,000 and cannot own more than 30% of the fund units.

 

While UAE Law No. 2 of 2015 (the “Companies Law”) contemplates local funds having corporate personality, it does not prescribe a specific form for funds.  As with the previous regime, a UAE fund is established through the contractual relationship between the sponsor and its investors, and each investor will have a balance sheet entry in the accounts of the fund administrator (which must meet comparable eligibility requirements as those of the sponsor).

 

The Fund Regulations provide that the contractual relationship will benefit from limited liability (i.e. up to the amount invested) and impose certain conditions related to the fund units (e.g. preventing pledging assets of the fund to satisfy third party debts and allocation of units by heirs or creditors).  Furthermore, a fund sponsor is only required to obtain SCA approval to establish a local fund; accordingly, there is no need to obtain a separate operating license for the fund with any economic department in accordance with the Companies Law.

 

Types of Local Funds

 

The Fund Regulations provide for (or otherwise contemplate) the following types of funds:

 

• public and private funds;

 

• master/feeder funds and umbrella fund/sub-funds;

 

• open ended and closed ended funds; and

 

• specialty funds, including Islamic funds, REITs, venture capital funds, private equity funds, ETFs, and cash investment/money market funds.

 

The provisions related to these funds are based on the Undertakings for Collective Investment in Transferable Securities (UCITS) model, which creates a harmonized regulatory regime that permits funds to be sold to any investor in the European Union.  While the GCC states have not adopted a comparable framework, it appears that the Fund Regulations have been prepared with this possibility in mind. ■

 

* * *

 

The new Fund Regulations mark the beginning of a new chapter in the UAE funds regime and should contribute to the growth of the UAE and the broader region by fostering more efficient and transparent investment structures.

Changes to the UAE Penal Code (Federal Law No. 3 of 1987) (the “Penal Code”) at the end of 2016 have (i) extended the current bribery provisions to include bribery involving a foreign public official or an official of an international organisation, (ii) increased the penalties for committing a bribery-related offence and (iii) criminalised the offering of a bribe in the private sector.

 

General Overview of Anti-Corruption Regulation

 

Since 1987, the Penal Code has contained prohibitions against bribery, making it an offence to bribe a public official in consideration for an act on the part of that official. A bribe could be anything of value. Offering or promising a bribe was also prohibited, as was the solicitation or acceptance of a bribe on the part of a public official. A public official could be an employee of the government or a person tasked with an official duty. An offence would be committed even if the official’s act was not part of his or her official duties, and even if the official did not actually intend to commit the act. In December 2005, the solicitation or acceptance of a bribe on the part of an employee in the private sector was also prohibited.

 

Changes to the Penal Code

 

The recent amendments to the Penal Code have brought anti-corruption regulation in the UAE more in line with other jurisdictions by the inclusion of “foreign public officials”.

 

Foreign public official is defined as “any person in a legislative, executive, administrative or judicial position [in] another country, whether permanently or temporarily, be elected or appointed, and whether with or without pay and any person entrusted with a public service”.

 

Both individuals and companies can be found to be liable for bribery of a foreign public official, as the relevant provisions of the Penal Code apply to anyone (whether a natural or legal body).

 

Crucially, the Penal Code provisions also now apply outside the territory of the UAE to any person who commits any of the bribery offences set out in the Penal Code, if the criminal or victim is a UAE citizen or if the crime is committed by an employee of the public or private sector of the UAE or if it involves public property. (Public property is defined as “(i) property that is fully or partially owned by any of the federal or local authorities, federal or local public establishments or institutions or companies owned, either wholly or partially, by the federal Government, local governments, societies and associations of public welfare and (ii) any property that is subject to the management or supervision of any of the entities set forth in paragraph (i) or of which it has the right to use or exploit”).

 

In addition, bribery involving an official of an international organisation has been prohibited.

 

Finally, the prohibition against bribery in the private sector has been expanded.  Previously, the offence of private sector bribery was limited to the solicitation or acceptance of a bribe by a private sector individual. Now, it is also a criminal offence to offer a bribe to a person working in the private sector.

 

Consequence of Committing an Offence

 

There are various punishments for committing an offence under the bribery provisions, as follows:

 

• Imprisonment for any public official, foreign public official or official of an international organisation who demands or accepts a bribe. This now means that the relevant bribery provisions apply to non-UAE nationals and entities engaging in acts of bribery.

 

• Up to five years imprisonment for (i) anyone who offers a bribe to a public official, a private sector manager, a foreign public official or an employee of an international organisation and (ii) any person that has acted as a mediator between the briber and the receiver.

 

• A fine equal to the amount of the bribe (but which shall not be less than AED 5,000) for any of the above offences.

 

• Any gifts accepted or offered as a bribe will be confiscated.

 

The briber or mediator can be exempt from the above punishments if he informs the relevant judicial or administrative authorities of the crime, but only so long as he does so before the crime is discovered.

 

There is no time restriction on a civil or criminal lawsuit being taken against any individual or company having been found to have committed bribery offences.

 

Conclusion

 

The changes to the bribery provisions of the Penal Code are a significant change to anti-corruption regulation in the UAE. The Penal Code is now more wide ranging than before, extending to foreign as well as domestic bribery, and covering the public sector, international organisations and the private sector. ■

Federal Law No.2 of 2015 on Commercial Companies (the “New Law”) came into force on 1 July 2015, replacing Federal Law No.8 of 1984. The New Law, similar to its predecessor, contains sections relating to various forms of companies, including public and private joint stock companies (“PJSCs”) and limited liability companies (“LLCs”).

 

While the New Law is divided into sections which expressly apply to a particular type of company, Article 104 of the New Law relates specifically to LLCs and states that “the provisions concerning Joint Stock Companies shall apply to Limited Liability Companies”.

 

The recently enacted Ministerial Decision No. (272) of 2016 (the “Decision”) addresses the scope of Article 104 by stating which articles relating to PSJCs apply to LLCs.

 

Article 3 of the Decision sets forth the articles of the New Law relating to PJSCs which also apply to LLCs. The articles listed are:

 

• Article 162 – This article states, inter alia, that members of the board shall be liable to the PJSC, its shareholders and third parties for acts of fraud, violations of law or the PJSC’s articles or for errors in management. As applied to an LLC, this would mean that the manager or manager(s) of an LLC would also be so liable to the LLC and its partners for fraud, violations of law, breach of the articles and mismanagement.

 

• Article 163 – This article states that a PJSC will be bound by acts of a director vis-à-vis a third party, even if it is later found that the director was not properly elected or appointed. Again, with respect to LLCs this would apply to acts of its manager(s).

 

• Article 167 – This article relates to a waiver by the general assembly of a PJSC of the liability of its directors. A general waiver will not prevent a claim against the directors. However if the act giving rise to the claim was presented to and approved by the general assembly, the claim shall be discharged after one year. Again, with respect to LLCs this would apply to acts of its manager(s).

 

• Articles 174, 175 and 176 – These articles state, respectively, that shareholders holding 20% of the shares of a PJSC, the PJSC’s auditor, or the Securities and Commodities Authority (the “SCA”), may require the PJSC’s board to convene a meeting of the general assembly. It also stipulates deadlines within which to do so. Applied to LLCs, this would mean that partners owning at least 20% of the capital of the LLC, the LLC’s auditor, or the Economic Department of the relevant Emirate, may require the manager(s) to convene a meeting of the general assembly.

 

• Article 191 – This article stipulates that shareholders holding at least a 5% shareholding in a PJSC may apply to the SCA to have decisions of the general assembly annulled if such decision is prejudicial to a certain class of shareholders or are of particular benefit to the directors of the PJSC. Article 191 also states that the decision of the SCA may be appealed to a court of law. Thus partners of an LLC that hold at least 5% of the LLC’s capital may make a similar application to the relevant Economic Department for a decision to annul a resolution of the general assembly.

 

• Article 192 – Section 1 of this article states that in the event a PJSC’s general assembly fails to elect a board in two successive meetings, the SCA’s Chairman may appoint a temporary board for not more than one financial year. After such period the general assembly will be asked once again to elect a board, failing which the SCA’s Chairman will decide a course of action which may include dissolving the PJSC. Section 2 states that if the general assembly fails to appoint an auditor, the SCA may do so on its behalf for a period of one year. Applied to an LLC, Section 1 of Article 192 would mean that if the partners fail to appoint a manager after two successive meetings, the relevant Economic Department may do so. Section 2 would mean that if the partners cannot decide on an auditor, the Economic Department may do so.

 

• Chapter 7 (Dealing with Auditors) – Provisions relating to the requirement for appointment of an auditor (though for no longer than three consecutive years) (Article 243); requirement for the auditor to issue a report (Article 245); confidentiality of the report (Article 247); prohibition on the auditor from trading in the company’s securities (Article 248); requirement that the auditor report violations of law it may uncover (Article 249); required contents of the auditor’s report (Article 250); dismissal of an auditor (Article 251); resignation of an auditor (Article 252); liability of an auditor and limitation periods for such liability (Article 253 and 254). With the respective replacement of directors for managers and the SCA with the Economic Department, the above provisions apply virtually verbatim to LLCs.

 

• Article 236 – This article requires a PJSC to provide the SCA and the relevant Economic Department with a copy of the auditor’s report within seven days of the submission of the report to the general assembly. Thus an LLC will need to provide its audited financial statements to the Economic Department within the same time frame.

 

Article 3 of the Decision also sets forth provisions of the New Law which apply to PJSCs but do not apply to LLCs. ■

Federal Law No. 4 of 2012 on the regulation of competition (the “Competition Law”) introduced a regime for the regulation of anti-competitive behavior in the UAE which previously did not exist. If implemented strictly its effects would be very significant on UAE business. The Competition Law came into force on 23 February 2013 and introduces merger/acquisition clearance requirements, prohibitions against anti-competitive agreements and activities which constitute abuse of a dominant position, as well as some anti-competitive trade practices. The six month transition period allowing entities to become compliant with the Competition Law expired on 23 August 2013.

 

To date, the Competition Law has not been enforced in practice even moderately. One reason for this is that the Competition Law left key details to be set out in regulations that were to follow. The anticipated regulations have recently been issued but, disappointingly, they do not provide the clarity that was needed. Nonetheless, compliance with the Competition Law is (ostensibly) mandatory as it is a current, valid UAE law. With the recent issuance of the regulations it is foreseeable that this law could start to enjoy some level of enforcement. It is worth noting that, while the newly issued regulations do not provide a great deal of clarity on some key points under the Competition Law, they do set out a mechanism for making complaints against parties allegedly in breach of the Competition Law and the Ministry of Economy’s duty to investigate once a complaint is accepted.

 

Scope of Application

 

The Competition Law applies to all entities undertaking commercial activities in the UAE and to entities operating outside the UAE but whose activities affect competition inside the UAE.

 

Certain types of entities and industry sectors are expressly exempted. These include:

 

• federal and local government entities and entities owned or controlled by federal or emirate governments;

 

• small and medium size entities (not defined in the Competition Law or the regulations); and

 

• entities operating in telecoms; financial services; pharmaceutical production and distribution; cultural activities; oil and gas; postal services including express delivery; electricity and water production and distribution; sewage and waste disposal; transportation and railway.

 

Prohibitions

 

The Competition Law requires that entities seek merger clearance from the UAE Ministry of Economy if they are contemplating a transaction that:

 

• will result in the acquisition of a direct or indirect, total or partial interest or benefit in assets, equity, and/or obligations of another entity to which the Competition Law applies;

 

• will create or promote a dominant position; and/or

 

• may affect the level of competition in the relevant market.

In addition, the Competition Law prohibits entities from entering into agreements or arrangements (these terms should be construed very broadly) the aim, object or effect of which is to restrict competition. This includes, amongst other things, agreements or arrangements which directly or indirectly fix purchase or selling prices, grant exclusivity with respect to products or geography or other market division (other than through registered commercial agencies), and agreements or arrangements which involve collusion in bids and tenders. These restrictions would impact many distribution agreements in the UAE.

 

The Competition Law provides for potentially far-reaching penalties in the event of violation. These penalties include:

 

• fines of between AED 500,000 and AED 5 million for entering into restrictive agreements or abusing market dominance; and

 

• fines of between 2% to 5% of the infringing entity’s annual revenue derived from the sale of the relevant goods and services in the UAE for a failure to notify a transaction which is required to be notified pursuant to the Competition Law.

 

In addition, an entity violating the provisions of the Competition Law exposes itself to possible criminal sanctions.

 

Exemptions

 

The Competition Law allows for entities to seek an exemption to the Competition Law from the UAE Ministry of Economy. The procedure for seeking such an exemption is set out in the regulations to the Competition Law. It involves a written application seeking an exemption for a transaction. The entity seeking the exemption must provide copies of its constitutive documents and financial statements (for the last two financial years). In addition, it must submit an economic rationale for the transaction and its reasons for requesting the exemption. All documents submitted must be in Arabic, but may be accompanied by an English translation. The Ministry of Economy must respond to such a request within 90 days, but may extend this period by a further 45 days. In the event that no response is received within this time frame, approval is deemed to have been given.

 

Implications

 

Compliance with the Competition Law is now mandatory. Accordingly, businesses must consider the effect of the Competition law on their business. It remains to be seen how the UAE Ministry of Economy will interpret or enforce the Competition Law or the implementing regulations. As a minimum, the Competition Law and its potential effects need to be considered by any business operating commercially in the UAE or which intend to acquire a UAE business. ■