BACKGROUND

1.1       UAE Federal Law No 2 of 2015 concerning the Commercial Companies  (“New CCL”) came into force on 1st July 2015, replacing the existing Federal Law No 8 of 1984 and its amendments concerning the Commercial Companies   (“Old CCL”).  All companies are required to amend their existing memorandum/articles of association to comply with the changes introduced by New CCL. Any company which fails to regularise their status by 30the  June 2016 (now extended to 30th June 2017) will automatically be deemed to be dissolved (Article 374), and fine could be levied at AED 2000 per day for delay beyond the expiry date.

1.2       As with the Old CCL, Non-UAE Nationals cannot be general partners with unlimited liability - i.e. only UAE Nationals can be general partners with unlimited liability.

1.3       The Local Authority in each Emirate (i.e. the concerned Municipality or The Department of Economic Development), is the relevant Competent Authority to register and licence the companies.

 

2.0         LIMITED LIABILITY COMPANY

2.1       Although various forms of companies are available, "Limited Liability Company" (“LLC”), is the preferred vehicle for foreign investors to do business within non Free Zone areas in UAE. Important features of LLC are given below

2.2       51% shares in LLC will have to  be held by UAE Nationals, at all times, unless exempted by New CCL or other provisions of UAE Laws.

2.3       LLC shall not engage in the business of insurance, banking, investment of money on behalf of other parties;

2.4       Minimum of two Partners; maximum 50; Single shareholder LLC is possible but on account of the restriction of foreign shareholding to 49%, such entity can be incorporated for  UAE Nationals.

2.5       Minimum capital is not specified in the New CCL. Article 76 provides for adequate capital for LLC but the Cabinet by means of a resolution may stipulate  minimum capital of   LLC.  In practice, LLC continues to be set up in Dubai with  the previous minimum capital of AED 300,000. All shares shall be of equal value.

2.6       Each Partner's liability is limited to nominal value of capital;

2.7       As per Article 76(2), share shall be paid in full at the time of incorporation. In practice, licence may be issued without the proof of bank deposit.

2.8       Under Article 29(1), profit/loss share of partner will be pro-rata to his stake in the capital, unless   the Memorandum of Association stipulates otherwise. Any provision in the Memorandum of Association  for excluding a partner from profit or exempting a partner  from loss or stipulating fixed profit share of a partner, shall be void;

2.9       LLC shall not offer its shares for public subscription;

2.10     Transfer  of  shares  shall  be  restricted  and  existing  partners  shall  have  the  first  right of refusal. In the event of disagreement of price, an expert approved by the Competent Authority has to be appointed for valuation of the share;

2.11     A partner’s share can be pledged provided this is done under notarised document and entered in the Commercial Register with the Competent Authority.

2.12     A partner in LLC shall be liable against the company for any of its properties held by such partner as a trustee or profits or benefits made through the business or activities of the company or by the use of the property, name or commercial relationships of the company (Article 82)

2.13     Management may be entrusted to one or more Managers (equivalent to Directors), selected from amongst partners or outside party. Previous limit  5 Managers in the Old CCL is no longer applicable. Memorandum of association may provide the powers of management to the Manger/Board of Managers.

2.14     Without the consent of the General Assembly, Manager may not carry out management of competing or similar  business or  carry out deals or trades  for his own account or for  the account third party for competing  or similar business. In case of violation the manager may be dismissed and liable to compensate the company (Article 86)

2.15     If the number of partners exceeds seven, a Supervisory Board is to be formed;

2.16     Directors shall be responsible for preparing annual accounts and get them audited within three months from the end of the financial year and hold the Annual General Meeting within four months from the end of the financial year;

2.17     Notice of  General Meeting of Partners to be sent by registered post or other agreed method (15 days before  General Meeting of Partners);

2.18     Quorum is the  number of partners representing 75% of the capital; in case of lack of quorum in the first meeting, another meeting will be held within 14 days from the date of the first meeting wherein quorum of 50% of the capital will be enough; in case of failure of quorum in the first two meetings,  a third meeting will be held with 30 days from the date of the second meeting wherein the partners representing will constitute the quorum. Resolutions of the general assembly shall not be valid unless passed by the majority of the partners present in persons and represented at the meeting, unless Memorandum of Association provides for a higher majority.

2.19     Partners may attend the  General Meeting personally or through a proxy permitted by the Memorandum (Manager may  be a proxy);

2.20     No fictitious profit can be distributed and the board of Directors shall be liable against the shareholders and creditor for such violation. If a company distributes profit in violation of the New CCL or the memorandum of association, partner shall repay such profit to received in violation of such provision (Article 30)

2.21     10% of the net profit shall be transferred to a legal reserve (until such reserve is equal to 50% of the paid up capital) which is not available for distribution.

2.22     The Manager is required to maintain the Register of Partners and the  Minutes of Directors and Partners.

2.23     LLC has to maintain books of accounts and appoint an auditor to audit the accounts. The provisions of auditors as applicable to joint stock companies shall be applied to LLC auditor (Article 102)

2.24     Unless otherwise provided by New CCL, the provisions of joint stock company shall be applicable to LLC. This has uncertain implications for the LLC. In this connection  Circular 272 of 2016 has been issued by the Ministry of economy-see para 6.0 below.

3.0       OTHER  MATTERS  PERTAINING  TO  LLC

3.1       Very often where UAE National is not an active financial partner, foreign partner usually brings in full capital and LLC is usually formed with minimum capital wherein 51% shares are held in UAE National’s name. Additional investment capital maybe  brought in by the foreign partner by way of loan capital which may carry interest and or profit participation or management fees. This should be properly documented and approved by the partners.

3.2       With a small capital, banks do not give credit facilities unless the foreign partner gives personal guarantee and/or provides other collateral such as fixed deposits/mortgage of assets. In case of loan capital, banks usually impose a condition of subordination of loan amount in favour of bank and/or non-withdrawal of loan capital.

3.3       Under the Companies Law, profit/loss distribution ratio can be different from the capital contribution ratio. Partners can also approve, by means of resolutions of the general assembly,  management fees and remuneration for their services.

 

4.0         FORMATION  OF  LIMITED  LIABILITY  COMPANY

Following procedures to be followed in Dubai for LLC formation :

4.1       Signing prescribed application form by partners and obtaining approval of trade name, activities and partners from The Department of Economic Development, Government of Dubai. For certain activities NOC may be needed from other Departments or Ministries (such as Central for Exchange companies, KHDA for schools, etc.)

4.2       Signing of’ the Memorandum of Association for forming a LLC, before Notary Public.

4.3       Following documents should be delivered to the Office of The Department of Economic Development :

4.31.    Prescribed application approving trade name, activities and partners approved from The Department of Economic Development;

4.3.2    Notarised Memorandum of Association in original and copy;

4.3.3    A certificate from the Bank for the total amount deposited by each partner, with the undertaking from the bank not to make payment of the amount except to the Company's Director/s after producing a proof of entry in the Commercial Register (presently this proof is  often dispensed);

4.3.4    Passport copies of all partners;

4.3.4    Tenancy contract for the premises;

4.4       If the partner is a foreign body corporate, following documents duly notarised at the place of incorporation and legalised by UAE Embassy, attested by UAE Foreign Ministry, and Arabic translation authenticated before Ministry of Justice have to be submitted :

4.4.1    Resolution of the Board of Directors, specifying the Representative and his powers;

4.4.2    Power of Attorney in favour of the Representative;

4.4.3    Memorandum & Articles of Association of the foreign body corporate; &

4.4.4    Certificate of Incorporation.

 

4.5       The Department of Economic Development shall check the application and above documents and enter in the Commercial Register and furnish the Ministry of Economy and Commerce, with a copy of the Memorandum of Association and other enclosures, along with a copy of entry application indicating that the entry has been effected, giving the date thereof and a copy of the certificate of entry in the Commercial Register.

4.6       The Ministry shall arrange for publishing the details of LLC in the Companies Bulletin after payment of fees and shall notify The Department of Economic Development accordingly.

4.7       LLC cannot commence its activities except after its name is entered in the Commercial Register and after having obtained the trade licence from The Department of Economic Development.

 

4.8       LLC cannot set up branches in other Emirates except after complying with the trade licence rules of the concerned Emirate.

 

4.9       LLC has to renew its commercial registration and trade licence every year.

 

5.0         EXCEPTIONS  TO  COMPANIES  LAW

            New CCL do not apply to :

5.1       Professional enterprises or sole proprietorship concern. Most Emirates have special regulations for professionals/artisans which provide for appointment of a Service Agent who is not responsible for any financial liabilities of such enterprises;

5.2       Companies established in the Free Zones of UAE, if special provision to this effect is contained in the Laws or regulations of the relevant free zone. New CCL will apply to them if they conduct their activities  in UAE and outside the free zone. Cabinet may issue a resolution determining applicable conditions for operations of their activities in UAE outside the free zone.

5.3       Companies excluded from the application of Commercial Companies Law by a resolution of the Council of Ministers if a special provision to this effect is contained the Memorandum of Association

5.4       Companies held in full by the Federal Government or the Local Government and any other companies held in full by such companies if a special provision to this effect is contained in the Memorandum of Association

5.5       Companies in which the Federal Government or the local government or their  entities, directly or indirectly, own 25% of the capital of companies  which operate in the field of oil exploration, drilling, refining, manufacturing marketing and transmission or operate in the power industry of all kinds of power generation, gas production and water desalination, transmission and distribution , if a special provision to this effect is contained in the Memorandum of Association of such  companies

5.6       Companies excluded from the Old CCL prior to 1st July 2015.

5.7       Companies excluded from the provisions of New CCL under special Federal Laws.

 

6.0       APPLICABILITY OF PUBLIC JOINT STOCK COMPANIES PROVISIONS

6.1       As per Circular 272, the following provisions of public joint stock companies will  be applicable to LLC

 

6.1.1    Directors shall be liable to the company, shareholders and third parties  for damage arising from fraud, misuse of power, violations of the provisions of the New CCL, violations of the memorandum of association of the company or an error in management (Article162)

6.1.2    The company shall be bound by the acts of a Director against a bon fide third party even if it is later found that Director’s powers or appointment was defective (Article 163)

 

6.1.3    No time barring of liability suit against directors for their errors and criminal acts (Article 167)

6.1.4    Power of the shareholders, auditors and Authority’s request to convene the general Assembly by virtue of Article 174, 175 and 176

6.1.5    Suspension of the general assembly’s decision under Article 191

6.1.6    Non-election of the Board of Directors or appointment of the auditor by virtue of Article 192

6.1.7    Appointment of auditors, their duties, manner of dismissal and filing liability suit against them (Articles 243, 245, 247, 248, 249, 250, 251, 252, 253 and 254)

6.1.8    Lodging a copy of the accounts and auditors report with the Authority (Article 236-2)

 

6.2       As per Circular 272, the following provisions of public joint stock companies will NOT  be applicable to LLC

6.2.1    Election of the Board of Directors, minimum and maximum number of directors, nationality of the Chairman and members of the Board, number of memberships in the companies  Boards of Directors, and annual remuneration (Articles 143, 144, 145, 147, 149, 151 and 169)

6.2.2    Prohibition of  transactions or dealings with related parties-Article 152-1 and 152-2

6.2.3    Prohibition on powers of the Board of Directors as defined in Article 154, unless memorandum of association of LLC provides for such restrictions.

6.2.4    Prohibition on financial aid for acquiring shares in a company (Article 222)

6.2.5    Where special provisions have been specified for LLC in part III of the New CCL  (Articles 71 to 104)

6.2.6    Any other issues which contravene the nature of the LLC and the resolutions or circulars issued by the Ministry of Economy or the Competent Authority.