United Arab Emirates: Foreign investment sought following multiple reforms

December 7, 2015

Commercial companies

The United Arab Emirates (UAE) has recently overhauled its commercial companies legislation, with the objective of bringing it in line with accepted global standards. The new legislation should ensure that companies meet the required standards by improving governance in the region, helping protect shareholders, and encouraging corporate social responsibility. Under the UAE’s new Commercial Companies Law (CCL), one person or a single corporate body can own a limited-liability company – a marked improvement on the old CCL, which prevented a single shareholder from controlling a company in this way. Furthermore, under the CCL, if a company goes public it only has to offer 30 percent of its shares – down from 55 percent under the old law.

Partners of limited-liability companies will henceforth be able to use their shares as security, which makes these companies a more lucrative option for those that choose to invest in them. While company owners won’t be required to issue new equity to float the company, they will have the option to sell shares that already exist. This offers a more effective financing structure, gives better access to debt finance, and creates greater collateral.

Commentators speculated that the new CCL would ease restrictions on foreign investors owning companies, but the possibility of foreigners owning the majority of companies outside of ‘free zones’ has succumbed to political pressure.

Free zones are special areas that have different laws and regulations, including different tax and customs regimes. There are over 35 in the UAE – 20 of which are in Dubai, according to Arabian Business.

Foreigners can own 49 percent of a company, which remains unchanged from the old CCL, and the new CCL gives power to the cabinet of ministers to restrict certain sectors to UAE nationals if recommended by the Minister of Economy.

There may be light on the horizon, though: Minister of Economy Sultan bin Saeed Al Mansoori has stated that in the near future foreigners may be able to own 100 percent of a business in select sectors. As of yet the sectors in which this would apply remain unclear and a timeframe has not been given.

Companies may be exempt from the CCL if there is a cabinet resolution or if there are other relevant laws that specifically grant exemption to a particular company. Furthermore, companies operating in the oil, power generation, gas, water desalination and energy sectors are exempt from the new CCL.

The scope for sector-specific exemption is slimmer than with the old law though, as exemption is only granted to companies with at least 25 percent of the share capital owned by the federal or an emirate government. Companies that have received exemption via government ownership or sector-specific exemption, and those that have circumnavigated obligations under the old CCL, may now offer initial public offerings or list their shares to end their dependences on those exemptions.

The new CCL was expected to increase scope for the governance of limited-liability companies by developing the necessity for a board of directors, but this has not changed much from the previous law. It still only requires one or more managers, although it has removed the upper limit of five managers.

Labour

The UAE has come under serious scrutiny for its treatment of manual labourers, particularly in the wake of FIFA awarding Qatar the football World Cup. Many workers in the UAE are immigrants who are allegedly exploited, unable to leave and often die due to poor working conditions and the UAE’s intensely hot and dry climate. Companies wanting to operate in the region risk tarring their own reputations by associating with the UAE’s policies.

Therefore, the amendments to the UAE’s labour law that are expected to come into effect on 1 January 2016 will provide some welcome relief.

The aim of the amendments is to create transparency and compliance with labour contracts, in particular termination policies.

Under the new policy, prospective employees will have to sign an employment offer in their home country. Only once this contract has been signed and submitted to the Ministry of Labour will a work permit be granted. A legal contract will then be registered on arrival, which will include no changes except additional benefits to the worker, according to The National.

The contract can be terminated by either side, and workers are free to seek a new employer upon completion of the contract.

Insolvency

Current insolvency laws in the region are archaic and chaotically spread across a number of regulations. They include the Commercial Transactions Law and the old Companies Law, which monitor traders, and the Civil Code, which applies to people who are not considered traders. Debt collectors, investors and businesses alike have been left wanting by the outdated insolvency scheme, which has hampered foreign investment.

A new law is in the pipeline and awaiting approval from the Federal National Council and Supreme Council. It will then pass its final obstacle: UAE President and Emir of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nahyan.

Although details of the new insolvency law are yet to be released in full, one positive change for foreign investors is the decriminalisation of ‘bad cheques’. As it stands, writing a cheque but having insufficient funds to honour the amount promised can be considered fraud and result in criminal convictions, according to The National Law Review.

 

The UAE is set to become a much more attractive destination for overseas investors in the coming years, which is great news considering its huge potential. However, it is important for companies to understand the implications of these new reforms and not make any major decisions until the full details of the reforms have been announced.

 

 

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