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 and only in situations where no formal board resolution needs to be passed and 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.
Our Services:Company Formation|Offshore Incorporation|Freezone Incorporation|Visa Assistance|Pro Services|Paralegal Services|Document Clearing|Business Consultancy|Language Services|Employment Visa|Transit Visa|Maid Visa|Visit Visa|Abu Dhabi Visa|Schengen Visas|Consulting Company|Hospitality Consultants|Trade Services|Managed IT Services|Outsourcing|Healthcare Services|Logistics services|Intellectual Property|Offshore Services
Winston Wambua
For more information please contact me on
Mobile +971553350517
Email: winstonk@live.com
Skype: Winston.wambua
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.
(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 and only in situations where no formal board resolution needs to be passed and 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.
Our Services:Company Formation|Offshore Incorporation|Freezone Incorporation|Visa Assistance|Pro Services|Paralegal Services|Document Clearing|Business Consultancy|Language Services|Employment Visa|Transit Visa|Maid Visa|Visit Visa|Abu Dhabi Visa|Schengen Visas|Consulting Company|Hospitality Consultants|Trade Services|Managed IT Services|Outsourcing|Healthcare Services|Logistics services|Intellectual Property|Offshore Services
Winston Wambua
For more information please contact me on
Mobile +971553350517
Email: winstonk@live.com
Skype: Winston.wambua
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