Saturday, 28 July 2012

Summary of UAE Companies Act Provisions

In order to assist foreign advisors considering Dubai  and the United  Arab Emirates as the base for a joint venture charter,  we have summarized some of the more important  provisions of the UAE Companies law to assist foreign advisors in a comparative analysis with the client's  home jurisdiction.  The provisions summarized below  are subject  areas of common interest to joint venture  participants and the discussion below  assumes  the joint venture  company is a company other than a ‘free zone’ company governed  by the U.A.E. Commercial  Companies Law. If the parties  to the U.A.E. based  joint venture  decide  that the charter of the joint venture can be based in one of the many ‘free zones’ in Dubai,  then your local U.A.E. legal  advisor  must  obtain  and  review  the  specific  Companies Law (and  related  company  regulations) applicable to companies incorporated and based  in that free zone.  Each ‘free zone’ has a different set of Companies Law and no two sets are the same.  In fact, any company incorporated and based  in Dubai’s latest ‘free zone’ (DIFC), will have in essence  been  incorporated in a “country  within a country”  in that not a single general  law of the United  Arab Emirates is applicable to a company incorporated and based in the Dubai  International Financial  Centre, other than general  criminal  laws and the Sharia’a laws. The DIFC will be creating a completely new set of laws applicable to those companies based and carrying on business  from the DIFC free zone.

The starting point  for this very general  brochure discussion  necessarily  must address  the ownership and controls imposed  in the joint venture  agreement if a “joint liability company” is utilized  as the vehicle of choice  (ie: 51/49  ownership between UAE nationals  and non-UAE nationals).  At least 51% of the shares of such a company must be legally and beneficially  owned  and controlled by UAE nationals.  Control is a very key element  and  extends  beyond  simply share  control  into each  and  every element  of company control imaginable and any attempt by contract  or otherwise  to restrict UAE national  control or ownership will likely be called into question  and ultimately be struck down  by the courts. As mentioned earlier, it is unlikely that participants in an international joint venture would choose  to conduct its business within the UAE through a ‘joint liability company’  as opposed to one of the other business formats discussed  above.

 Other  important  provisions  applicable to the  4 types  of UAE companies that  would  be  of interest  to business  entities contemplating any joint venture  within the UAE are discussed  below:

(i) Voting Rights. The UAE companies law provides that proposals  or questions  tabled at a general meeting of shareholders in a general  meeting  shall be decided by a simple  majority  of votes or by such  greater majority as may be specified in the joint venture company's Bye-Laws. Each shareholder is entitled to one vote  for each  share  held  which  may  be  cast  in person  at the  meeting  or by proxy.  Voting at general meetings  shall be conducted by the method  of voting prescribed in the Company’s bye-laws  and in most instances  is done  on a show of hands.  This general  rule is subject  to a number  of exceptions  where  the UAE companies law specifically provides for a secret ballot to be taken if the voting involves the election or removal of a board member  or if the resolution  to be voted upon  relates to the liability of the member or members  of the board of directors. In circumstances requiring an extraordinary general meeting certain resolutions  to be passed  require  the vote of not less than a majority of 75% of the shares represented at the meeting  (eg: amalgamation; alteration  of capital;  dissolution  and certain  other corporate actions).  In the  case  of a ‘joint liability company’,  any  resolution  of the  “partners”  must be  unanimous unless  the company’s  constitutive  documents provide  that  a  resolution   passed  by  a  ‘numerical  majority’  of the partners (except in the situation where  the company’s  constitutive   document is being amended in which event  100%  approval  of the  partners  is required).  In the  context  of a joint  venture,  the  above  rules of “veto” for minority partners must be borne  in mind.

(ii) Quorum.

The number  of shareholders required  to constitute  a quorum at any general meeting shall not be less than two shareholders holding  or representing  at least 50%  of the company’s  capital  and at any extraordinary general meeting not less than two shareholders representing  at least 75% of the company’s capital.  However,  the joint venture  company Bye-Laws may provide  for any greater  quorum  in order to ensure  a meeting  could  not  be  properly  constituted without  the  agreed  upon  representation from the various joint venture  participants. Again, the UAE quorum  rules provide  for a power  of veto in favour of the minority  shareholder(s)  and  as such,  prospective joint venture  participants should  be aware  of this from  the  outset  and  build  their  joint  venture  agreement accordingly. For example,   the  joint  venture agreement should  perhaps  be far more  detailed  to provide  for the approval  mechanism on a number  of decisions  that might otherwise  be dealt with in a general  meeting of the joint venture  shareholders

(iii) Requisitioned Meetings.  

At least  ten  shareholders holding  at least  30%  of the  paid-up  capital  of a company carrying the right to vote at general meetings of the shareholders may requisition  the holding of a special meeting of shareholders for the purpose or purposes stated in the requisition.  In a situation where less than 10 shareholders hold 30% of the share capital an application can be made  by such shareholder or shareholders to the Ministry of Economy & Commerce (“Ministry”) for a directive  to be issued to the board of directors mandating  that a general assembly be held. One  or more shareholders holding  at least 40%  of the share  capital  of a company may requisition  the calling  of an extraordinary general  meeting and if the board  of directors  fails to call such a meeting  within 15 days of the date of the shareholder(s) requisition,  the petitioning  shareholder(s)  may make application to the Ministry to have the Ministry issue the notice  calling the extraordinary general  meeting.  In this circumstance the Ministry and the regulatory body overseeing  companies in the UAE may each send one or more representatives to attend the meeting for the purpose  of observing  but not voting at the proceedings.

(iv) Telephonic Meetings.

The  UAE companies legislation  does  not specifically  permit a meeting  of the board of directors to be held by means of telephonic, electronic or other communication facility. As such, only informal board  meetings  would  be permissible  in the UAE through  conference telephone meetings an onl i situation wher n forma boar resolutio need t b passe an recorded. Notwithstanding the absence of such a provision,  there is equally no provision in the UAE companies law which  would  prohibit  telephonic conference board  “meetings”  from being held for informal briefings of all  board  members   on  business  issues  that  need   not  necessarily   be  embodied in  a  formal  “board resolution”.  In a joint  venture  situation  where  substantial  distances  exist among  all the  various  board members  and  there  is a necessity  to keep  all board  members  fully briefed on the business  affairs of the joint venture  operations, a telephonic communication facility (such that all persons  participating in the meeting  can  communicate simultaneously and  instantaneously with all others  involved  in the meeting) may  be  the  only  prudent  means  of holding  regular  “unofficial”  board  meetings  on  business  issues.  It would  be prudent  for the secretary  of the Board of Directors  to keep  a full record  of the minutes  of all such “meetings” and those minutes should be maintained in the Company’s records as this may be useful evidence in a future UAE court proceeding where  one or more “absentee” directors  take a position  that they had  no knowledge of the business  affairs of the company leading  up to taking a certain  particular corporate step or corporate action.  At the end of the day, however,  it is important  to note that all formal Board resolutions  must be passed  at an actual  meeting of directors and not through  a telephonic meeting of the directors.

(v) Written  Resolutions.  

Similarly, the UAE companies law does  not provide  for the concept of written consent  board resolutions  like many legal jurisdictions  authorize. This is an unfortunate limitation,  when combined with the inability to have authorized telephonic board meetings, on international joint ventures carrying  on  a business  venture  or project  in the  UAE where  large  geographic distances  separate  joint venture board members.  These limitations must therefore be kept in mind by the joint venture participants when  settling the bye-laws  and other constitutive  documents of the joint venture  company. One  method of minimizing  the  impact  of these  limitations  would  be to provide  in the  joint  venture  bye-laws,  joint venture  agreement and/or  the other constitutive  documentation that certain  key decisions  (such as loans or borrowings  by the joint venture  company)  may be authorized by the written consent  of 100%  of the joint venture  participants thereby  enabling  an instant  authorization if all joint venture  participants were available  to sign a consent  instrument  and thus avoiding  the time delays associated with a formal board meeting.

(vi) Directors.  

The UAE companies legislation provides for a general rule that a board of directors must be composed of at least 3 members  and not more than 12 and each  director’s term of membership shall not exceed  3 years. In addition,  a majority of the board  must be composed of UAE nationals,  a member  of a board  cannot  have  been  convicted of any crime  involving  moral  turpitude  and  a board  member  is not permitted  to be a member  of the Board of more than 5 joint stock companies domiciled in the UAE or be a chairman or vice-chairman of more  than  2 such  companies. Subject  to these  general  parameters and prohibitions, the  company’s   bye-laws  shall  set  out  board  composition and  term.  A majority  of  the directors  constitutes  a quorum  for a valid  meeting  of the  directors  and  any  resolution  passed  must be adopted or approved by a majority  of those  present  or represented at the  meeting.  An absent  board member  may authorize another  member  of the  board  to vote on  his behalf  provided  that the  member present  and  carrying  the absent  board  member’s  proxy shall not hold  more  than  one  proxy. This proxy mechanism is extremely  important  in a joint venture  company structure  with joint venture  participants from many jurisdictions.  It is therefore  possible in a situation of multiple co-venturers  to ensure that each co-venturer will have a board vote through its designated  board nominees should the situation arise where certain  designated  board  nominees may not be able to attend  any particular  meeting.  However,  a board member  is only permitted  to be absent  from attending  three consecutive board  meetings  or such person is deemed to have resigned  (subject to certain  limited situations).

Under  UAE companies law each  member  of the board  shall be liable  to the company, its shareholders and to third parties for any violation  of the statutory law, bye-laws  of the company and most importantly “for all errors in management”. This provision is statutory and cannot  be altered  or removed  by the joint venture  agreement, the  bye-laws  of the  company or  otherwise   and  any  provision  to  the  contrary  is considered void  and  unenforceable. The principal  exception to liability  for a board  member  is in the situation where a director dissents from the offending board resolution  and requires his dissent to be noted in the minutes  of the board  meeting.  An absentee board  member  may also avoid  liability if he had  no knowledge of the offending resolution  or, if he did have knowledge, he was unable  to attend the meeting to record  his objection.

(vii) Discontinuance.

There is no provision  in the UAE companies legislation  to export a UAE company and continue it under  the laws of another  legal jurisdiction  and as such, at the end or termination of the joint  venture’s  business  in  the  UAE, a  liquidation procedure  must  be  adopted (unlike  many  other jurisdictions   where  the  joint  venture  entity  could  be  continued under  the  laws  of  perhaps   a  home jurisdiction  and  then  amalgamated to  take  advantage of tax  free  reorganization rules).  As such,  it is important  for foreign tax advisors to non-UAE joint venture participants to take note of this limitation and plan accordingly for a liquidation and distribution  of the joint venture assets. This may, in turn, dictate the interposition of a  non-taxable IBC or  trust  between the  UAE company and  the  foreign  joint  venture company in order  to avoid  unwanted adverse  tax consequences in a joint  venture  participant’s  home jurisdiction  due to the dissolution  of the UAE joint venture entity and distribution  of the assets of the joint venture  company to its participants.

(viii) Holding  of Land in the Emirates.

The laws of the UAE permit both local and foreign companies to acquire  a leasehold interest in land. The laws with respect  to acquiring  a fee simple interest in lands are in  the  process  of development and  there  is a  certain  degree  of uncertainty of ownership relating  to‘foreign’ or non-UAE nationals  owning land in the Emirates or any company other than a company owned and controlled by UAE nationals  owning  land in the UAE. As such, in any joint venture  that involves the acquisition of anything  other than a leasehold interest,  careful consideration should  be given to the risks  associated with the new  and  developing foreign ownership rules and  regulations  and  a member  of our firm’s Property department should  be engaged  for advising and structuring  the land ownership aspects of the joint venture.

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