Al Tamimi & Company Secures Long-Awaited Dubai Court of Cassation Developments on Capital Increase Resolutions in Limited Liability Companies

Al Tamimi & Company are proud to be involved in achieving a recent landmark decision from the Dubai Court of Cassation regarding the interpretation of Article 101(1) of the Commercial Companies Law, focusing on capital increase resolutions in Limited Liability Companies.

On 29 November 2023, the Dubai Court of Cassation General Division issued a Decision No. 11 of 2023 covering judicial oversight on corporate general assembly capital increase resolutions (“Decision”), holding that the commercial companies law did not require the partners’ unanimous consent on capital increase resolutions and that such resolutions in themselves and the dissenting partner’s non participation in the increase do not qualify as damaging the dissenting partner or increasing its obligations. The Decision also clarified that another partner may settle the dissenting partner’s share in the resolved capital increase, and such partner shall be entitled to additional shares prorated to its participation in the capital increase. Nevertheless, the Decision confirmed that a dissenting partner has the right to file legal proceedings to annul a capital increase resolution in four specific events, if the dissenting partner is able to establish that the resolution: (1) contravenes the law, (2) breaches the company’s articles or memorandum of association, or (3) causes harm or increases the dissenting partner’s financial obligations (for instance, if the dissenting partner is forced to participate in settling its share in the capital increase), or (4) favors some partners or related parties without considering the company’s interests.

Furthermore, on 20 February 2024, the Dubai Court of Cassation, in a division composed of five judges, has accepted a reversal application filed by Al Tamimi & Co (“Application”) in relation to a Dubai Court of Cassation judgment issued in Cassation No. 666 of 2022 (Commercial) that mainly annulled a capital increase resolution of a limited liability company based on an unfounded claim filed by dissenting minority partners who alleged that such resolution increased their obligations and damaged their interests without their consent, on the basis that their shareholding percentage was ultimately reduced due to their non participation in the capital increase that they rejected.

The Application was based on the grounds that the above judgment contradicted the Decision and misinterpreted Article 101(1) of the Commercial Companies Law and contradicted established judicial principles regarding sufficient judgment reasoning and the right of defense.

It was unanimously held by all five judges upon ruling on the Application, that the judgment in question contradicted the Decision. Thus, the Application was accepted, and the subject matter was referred to another division of the Court of Cassation for further adjudication.

Considering the above, minority dissenting partners should reconsider filing capital increase resolution annulment cases, given that it is now confirmed that the law does not require the partners’ unanimous consent and allows such resolutions to be approved by partners representing at least three quarters (3/4) of the shares represented at the General Assembly meeting, unless the Company’s memorandum of association sets out a higher voting threshold. Dissenting partners may elect not to participate in the agreed increase at their sole discretion, and they may not annul the capital increase resolution on the ground that it results in forcing them to participate in the increase otherwise their shareholding is diluted.

Based on the Decision and current Dubai Court of Cassation precedents, the risk of a minority shareholder annulling a capital increase resolution, merely by arguing that such partner is being forced to participate in the increase to avoid the dilution of its shareholding in the company is minimized, if not eliminated. Indeed, such resolutions should remain intact if the dissenting partner is offered the option to participate in the increase and declines. We note that the principle set out under Article 101(1) of the Commercial Companies Law is well established and recognized in the legislations and case law of many jurisdictions, but the position was not clarified in UAE court precedents until recently.

How can we help?

Al Tamimi & Company stands ready to provide comprehensive legal support to companies navigating capital increase resolutions in light of the recent landmark decision from the Dubai Court of Cassation.