Highlights of Federal Decree No. 32 of 2021 concerning Commercial Companies repealing Federal Decree No.2 of 2015 concerning Commercial Companies and its amendments

Executive Summary

The United Arab Emirates government published the Federal Decree No.32 of 2021 concerning Commercial Companies (CCL 2021) which will come into force on 2^nd January 2022, on which date the Federal Decree Law No. 2 of 2015 and its amendments (CCL 2020) will be repealed. The CCL 2021 incorporates changes that will affect (in a positive way) the present operations of companies, and investors that wish to establish business presence in the UAE.

Key changes:

Inclusion of SPACs and SPVs

The CCL 2021 acknowledges the concept of a Special Purpose Acquisition Company (SPAC) which is defined as a Public Joint Stock Company classified by the UAE Securities and Commodities Authority (SCA) as a company that is solely operated for the purpose of Mergers and acquisitions of other companies. Operations of a SPAC will be regulated by the SCA through regulations to be issued by it in this regard.

In addition, the CCL 2021 recognises a Special Purpose Vehicle (SPV) which is defined as a company incorporated for the purposes of ring fencing obligations and assets connected with a particular financing availed by the SPV. The financing can be by way of credit transactions, borrowing, securitisation, issuance of bonds, and transfer of risk associated with insurance, reinsurance and derivative operations in accordance with the regulations issued by the SCA in this regard.

Until the SCA issues regulations governing the operations of SPVs and SPACs, they will continue to be regulated by the CCL 2021.

Notifying Creditors of Liquidation

CCL 2020 specified a notification period of no less than 45 days for submission of creditor’s claims against a company being in liquidation. CCL 2021 has reduced this period to no less than 30 days.

Changes affecting Limited Liability Companies (LLC)

Expiration of the Board of Managers’ term

If the term of the Board of Managers expires, and a new Board of Managers is not appointed, the existing board will continue to manage the LLC for a period of 6 months, at the end of this term a new board must be appointed by the LLC, and if not appointed, the Department of Economic development (DED) can appoint a board whose term will not exceed one year, during which, the LLC must appoint a new Board of Managers.  Therefore, the appointment of the Board of Managers by the DED is a stopgap arrangement that will be regularised if the LLC fails to appoint the board itself.

Appointment of the Supervisory Board

CCL 2020 obligated LLCs to appoint a Supervisory Board when the company consists of more than seven (7) shareholders. CCL 2021 has increased the number of required shareholders to fifteen (15). The Supervisory Board is appointed from at least three shareholders to supervise the company’s annual reports, budgets distribution of profits and to also supervise the LLCs managers and submit a report in this regard to the General Assembly.

Decrease in Legal Reserve

CCL 2021 has decreased the extent of allocating a legal reserve from 10% to 5%, and as prescribed by the CCL 2020, the CCL 2021 emphasized that shareholders can stop this allocation if the legal reserve reaches 50% of the share capital.

Public Joint Stock Companies (PJSC)

Subscription to shares in PJSCs

Certain provisions regulating the subscription to shares in PJSCs have been amended and a separate note will be issued in this regard. However, it is important to point out one major highlight in relation to the number of shares permitted to be subscribed by the founders. The initial provision providing that the founders of a PJSC have to subscribe to a minimum of 30% and a maximum of 70% of the issued share capital of a PJSC have been amended to state that the founders must subscribe to a percentage specified in the prospectus in accordance with SCA’s requirements in this regard.

Vacancy of a Director’s Position

The CCL 2021 stipulates that in case a director’s position is vacant, the Board of Directors (Board) must appoint a replacement within a maximum period of 30 days, provided that such appointment shall be submitted to the General Assembly in its first meeting to approve the appointment or to appoint another individual, and the newly appointed director shall continue to hold the position for the remaining term of the predecessor. In case the Board defaults in appointing a director during the period provided, the Board must then convene an election to appoint a new director in the General Assembly’s first meeting, and the newly elected director shall hold the position for the remaining term of the predecessor.

Remuneration of the Directors

The CCL 2021 permits directors to receive a bonus not exceeding 10% of the company’s profit. As an alternative to this, if (a) permitted by the PJSC’s Articles of Association and (b) the General Assembly approves the same, a director can be paid a lump-sum annual remuneration not exceeding AED 200,000, even if the company does not make any profits.

The General Assembly Meeting

The CCL 2021 stipulates that the invitation to meeting of the General Assembly would now be in accordance to the conditions and procedures issued by the SCA and after obtaining the SCA’s approval. The invitation for the meeting must be announced 21 days prior to the date of such meeting unless shareholders holding no less than 95% of the company’s share capital approve a period less than 21 days before convening the General Assembly meeting.

Issuing Discounted Shares

In case the market value of a company’s share price falls below the nominal value of its shares, the CCL 2021 permits issuance of discounted shares subject to the company (a) passing a special resolution; and (b) obtaining the approval of the SCA. According to the CCL 2021, the result of issuance of shares at a discount will cause a negative reserve, which must be settled from its future profits before any profit can be distributed amongst the shareholders.

Nominal Value of Shares

The CCL 2021 allows shareholders to determine the nominal value of shares as specified in accordance with the PJSC’ Articles of Association thus removing the range of AED 1 to AED 100 prescribed by the CCL 2020.

Corporate Social Responsibility (CSR)

CCL 2021 allows newly established companies to provide CSR and to reserve any profits for such cause. This removes the limitation prescribed by CCL 2020 that only allowed a PJSC to contribute to CSR if it had been established for at least two financial years with an upper limit contribution of 2% of the average profits for the last two financial years.  Further, the CCL 2021 mandates public disclosure on company’s website even if it does not contribute to CSR, which was not required under CCL 2020.

Dividing a PJSC  

The CCL 2021 introduces the concept of dividing a PJSC. Such division can either be (a) horizontal, that is, when the shareholders of the company being divided and the new company, which emerges from such division, are the same with similar shareholding percentage or (b) vertical division, that is when part of the assets or commercial activities of a company are carved out by setting up a subsidiary to acquire such carved assets or commercial activities, and such subsidiary is wholly owned by the company. In regards to the procedure for such division, the Board must prepare a “detailed division project” having necessary details as prescribed by the CCL 2021 and present it to the General Assembly for its approval. After approval of the General Assembly, a no objection from the SCA or the ministry or economy (as applicable) must be obtained before the “detailed division project” can be implemented.

Adjusting Companies’ Positions to Reflect the New Provisions

Companies incorporated at the date of commencement of the CCL 2021 , that is, 2^nd January 2022, will be permitted a period of 12 months from that date to amend their memorandum and articles of associations, such that they are not inconsistent with the provisions of the CCL 2021. Failure to do so can result in a company’s liquidation and exposure to fines that may be prescribed by Cabinet in this regard.

How can we help?

Should our assistance be needed we’ll be pleased to provide further advice on any matter of interest and also to amend the existing memorandum of association to ensure compliance with CCL 2021.