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28 March 2024

UAE firms can make employees shareholders

London retained its position as the top city for investment. (Shutterstock)

Published
By Waheed Abbas

Good news for the UAE employees. Under the newly-issued Commercial Companies Law (CCL) regulations in the UAE, companies can make their employees shareholders in order to incentivise them.

This was stated by the international law firm Allen & Overy in a note issued in April that the UAE has introduced a new Commercial Companies Law (UAE Federal Law No.2 of 2015) which replaces the previous Commercial Companies Law (UAE Federal Law No.8 of 1984), as amended.

This note is based on the Arabic version of the New CCL, as published in the March 2015 edition of the Official Gazette. The new law will come into force July 1, 2015.

The law firm comments on the key provisions of the New CCL and compares and contrasts them with the regime in the previous CCL.

“The New CCL permits companies to issue shares pursuant to an employee share incentive scheme on such terms as are approved by the shareholders and pursuant to regulations that will be issued by the SCA (Securities and Commodities Authority) in this regard. A similar provision did not exist under the previous CCL,” the respected law firm in the 7-page note.

The new law retains 49 per cent limit on foreign ownership – one of the key issues the market was waiting for.

“The New CCL does not diverge from the previous CCL in this regard and retains a 49 per cent limit on foreign ownership. The new CCL appears to be more restrictive, as it grants the Cabinet of Ministers the right, upon the recommendation of the Minister of Economy, to limit certain sectors to UAE Nationals only,” Allen & Overy commented.

Companies incorporated in free zones remain exempt from the application of the new CCL.

Public joint stock companies (PJSCs)

It said various changes have been introduced to the provisions governing public joint stock companies (PJSCs). In some instances, the changes relax the procedures for establishing PJSCs in the UAE and convening general assemblies but, in others, they limit the options for composition of the board. It seems that not only should the majority of the board members and the chairman be UAE nationals, but in addition at least two-thirds of the directors must hold shares in the company.

Under the New CCL, the minimum number of founders has been reduced from ten to five.

“This change will be welcome, in particular, by family companies and LLCs (Limited Liability Companies) wishing to go public as it will allow them to carry out an IPO (Initial Public Offering) with an initial founder shareholder base of five,” Allen & Overy said in the note.

The New CCL prohibits companies from making loans to board members including their family members and creates an offence for anyone accepting such a loan. The previous CCL differed in this regard as it allowed banks to make loans to its board members.

The minimum share capital of PJSCs has been raised from Dh10 million to Dh30 million. Unlike the case for private joint stock companies (PvtJSCs), the New CCL does not allow existing PJSCs to be exempt from this increased share capital requirement. As such, unless competent authorities would otherwise permit, existing PJSCs with a share capital less than Dh30m will have to increase its share capital within one year of the New CCL coming into force.

The New CCL also introduces for the first time the concept of “authorised” share capital.

The authorised share capital serves the function of a pre-approval obtained from the general assembly (and granted to the board of directors) to increase issued share capital up to the limit of authorised share capital (which must not exceed twice the issued share capital). The SCA is expected to issue legislation regulating the method of such increase, the note said.

The New CCL retains the minimum of three board members under the previous CCL, but reduces the maximum number of board members from 15 to 11, with a requirement that the total number of directors must be an odd number.

The minimum notice period for invitations to attend general assembly meetings has been reduced from 21 days to 15 days. Shareholders representing 95 per cent of the share capital can also now agree on a shorter period of time for notice which is in line with international market practice.

This approach is certainly a welcome development, allowing for a more fluid and flexible regime in terms of timing of general assembly meetings, the legal firm said in the note.

The minimum share capital of a private joint stock company (PvtJSCs) has been increased from Dh2m to Dh5m. However, existing PvtJSCs are exempt from this.

Capital markets

The new laws also encourage listing on the local markets.

“The New CCL reduces the minimum free float requirement in an IPO from 55 to 30 per cent, which will be a welcome development for company owners who would like to take their company public but do not wish to relinquish control (this minimum 30% free float requirement previously only applied to family-owned companies). In addition, the maximum stake that can be sold by founders in an IPO has been reduced from 80 to 70 per cent,” according to Allen & Overy.

New CCL explicitly permits companies to increase their share capital through capitalising debt on such terms as approved by the shareholders by special resolution and pursuant to regulations that will be issued by the Securities and Commodities Authority. A similar provision did not exist under the previous CCL.

The New CCL introduces the concept of a companies’ registrar, who is required to maintain a trade name register. The Minister of Economy will issue regulations to regulate this role.

(Image via Shutterstock)