United Arab Emirates

UAE: Corporate Governance and the Limited Liability Company


By Ahmed Elnaggar, Managing Partner, LKMB & Elnaggar Consulting (07/07/2015)

Limited Liability companies in the United Arab Emirates (UAE) are regulated by Federal Law No 8 of 1984 and its later amendments to the regulation of commercial companies.

Below is a quick introduction to the Limited Liability Company as per the UAE law and some important points worth mentioning before we go into the detail.

In the UAE most company’s official names must reflect the company’s objectives. The minimum number of partners in a Limited Liability Company (LLC) is two and the maximum acceptable is 50. It is mandatory to have a local Emirati national as partner(s) with a minimum share capital participation of 51 per cent of the total share capital of the LLC. However, the law has relaxed with regards to profit sharing and sets the minimum acceptable profit share to be distributed to the Emirati national(s) partner(s) at 20 per cent. The financial liability of the shareholders is limited to their shares in the capital.

LLCs cannot engage in insurance, banking or investment of funds and cannot seek public subscription at creation or at any later stage.

Shares and Capital

There is no minimum share capital for Limited Liability Companies in the UAE. The federal government has issued a decree amending Article 227 of the Commercial Companies Law, with the effect of abolishing minimum share capital requirements for LLCs in the United Arab Emirates, which previously were AED150,000, with the exception of Dubai where the minimum share capital was AED300,000

All shareholders must register their full details with the public authority determining their names, nationalities, addresses, number and value of shares owned and company’s managers.

The transfer of shares is regulated by the law. The transferee has to favour the existing shareholders by offering them first option on the shares for sale. Determining the value of the sold shares is regulated by an external auditor evaluation in case the shareholders cannot reach agreement on the shares’ value. 

Management

LLCs require at least one manager and the maximum acceptable is five. As per the law, the manager shall prepare and provide the financial reports to the partners and shall provide the same approved reports to the concerned authority. However, common practice does not require the manager to provide the financial reports to any authority in order to keep the company running as there is no operational audit practiced by the authorities.

The Law requires the company to hold general meetings that shall be attended by all partners. General meetings shall be held at least once every year. The number of votes per partner should be equal to the number of shares owned. The company must appoint at least one auditor and the company shall reserve at least 10 per cent of its annual profit as savings.

 

General Overview

A lot of companies from all around the world come to the UAE as one of the largest trading and business centres in the Middle East and the world. This is because of its modern lifestyle and because it is a tax-free country with no restrictions on the repatriation of profits. However, there are stringent laws and regulations to comply with. For example: the mandatory ownership of 51 per cent of the share capital by an Emirati national in the limited liability company makes some investors reluctant. The UAE government introduced the Free Zones as an alternative option for foreign investors to trade using the UAE companies. However, for some business activities, some products and whenever the company wants to trade with the local market the UAE locally registered Limited Liability Company stays the most relevant and suitable legal structure.

So, most small and medium sized, as well as the big multi-national companies that seek to maintain sustainable local business in the UAE choose the limited liability structure to be registered with the Department of Economic Development to start doing the business.

Drafting the Memorandum of Association of the Limited Liability Company

The official language of the UAE is Arabic. This means that all the documents issued by and presented to the public and government authorities must be in Arabic. However, since the public authorities in the UAE understands the necessity of having the English language as well in official documents as per international business needs, they allow such documents presented to the public authorities to be in both English and Arabic.

The Memorandum of Association of the Limited Liability Company must be fully drafted and typed in Arabic. It can also have the English translation next to the Arabic version and in such a case the translation must be stamped, confirmed by a certified legal translator. This is to protect the foreign investor from any variance between the Arabic and English text as the law protects the Arabic text and in the case of any variation between the two texts, the Arabic language version is the one to be acknowledged.

The memorandum and Articles of Association should mention the name approved and reserved with the Department of Economic Development at the head of the document. Also, it should contain the full identification information for the company shareholders like: Full names - As per the exact spelling mentioned in their passports or identification documents, nationality/citizenship and passport number, residential or mailing address, PO Box – in case the correspondences should be directed to the mail box - , attorney details – in case the contracting party/the shareholder is represented by another person via a notarized power of attorney. All the aforementioned information must be proved and supported by available documents such as an original and valid passport, original and valid Emirates ID for an UAE Emirati national and UAE residents a utility bill as a proof of address, and original power of attorney. The purpose of showing the original document and keeping a copy of it with the authorities is for the basic verification and authenticity checking as it is required in most developed countries.

 

The Limited Liability Company Memorandum of Association

Purpose of the Company

This defines the principal objectives of the company and must be in line with the reserved name. It is extremely important to define what the exact wording of the business activity is, to understand its definition, what the scope of activity is, and whether it fits the business objectives and the future planning of expansion or not. The Chamber of Commerce in each Emirate annually updates the commercial activities classification, describing and coding all the commercial activities acceptable to be undertaken within the Emirate.

In Dubai it is often easier to do business, the Dubai Chamber issues its book with proper definition to each business activity and its scope.

To achieve its purposes, the limited liability company is allowed to have an interest in or participate in any way with another company conducting similar business or another company that may help it reach its business targets inside or outside the UAE. Also, it is allowed to acquire, and/or possess any real estate properties for the purpose of deploying the business in the UAE. The limited liability company is allowed to establish branches all over the UAE or even outside the UAE.

Location

The limited liability company must have and maintain an office facility inside the same Emirate where it is registered. This means that LLCs registered in Dubai cannot have their offices in Sharjah or Ajman. Also, the office for the limited liability company can be located anywhere within the Emirate as long as it is in any of the free zones.

The limited liability company is allowed to operate from a business centre office facility for the first two years of activity only. Starting the third year of activity the limited liability company MUST maintain a standalone office where they should have separate access, utility bills on their names, etc…

Determining the office facility or the location where the company can operate from must come during the incorporation process and not after. The authorities would not allow a company to have a license without having a proper location to operate from. Also, the locations have to be approved by each Emirate’s planning department to make sure the location chosen is suitable for the chosen business activity.

 

Duration

The limited liability company memorandum of association draft should include the duration of the company. There is no minimum duration defined by the law, however, the common practice has been to agree on a duration of at least 10 years that should automatically be renewed unless otherwise agreed and a proper liquidation and de-registration is processed.

Share Capital

As per the commercial companies law as amended on September 2009, the minimum share capital has been waived coming down from AED150,000. Shareholders have the right to determine the share capital of their LLCs, provided that the LLC has sufficient capital to achieve its objectives. Shareholders also have the right to determine the par value of the shares, as no minimum amount is prescribed.

Despite the amendment to the Companies Law, the UAE authorities may continue to impose minimum share capital restrictions in respect of certain activities or objects for which an LLC is established. For example, an LLC established to undertake construction-related activities has historically required a higher share capital than that prescribed by the Companies Law. However, it is not yet clear how the changes will affect the requirements of the UAE authorities.

The share capital must be described in the draft of the Memorandum of Association and cannot be of any other foreign currency. It must be mentioned in digits and words. The description to the share capital shall mention the party, number of shares owned, the total value of his shares and the percentage of the owned shares towards the total share capital as defined. The shareholders may declare in the draft whether the share capital is paid in full or not.

Management

The name and duties of the manager should be mentioned in the draft of the Memorandum of Association of the limited liability company defining his identity with the full name, nationality and passport number and residential or mailing address.

The company operations manager can be one of the shareholders and can be another person to be appointed for certain duties that can be defined in details in the Memorandum of Association. The appointment of the manager can be defined for a specific period of time and can be left to be renewed automatically annually with the ability to change afterwards through a board resolution.

Such a position is usually controlled by the commercial manager - he one who should be signing the commercial agreements, in charge of the daily operations, etc... as his name appears as manager of the trade license of the limited liability company to make it easier for third parties to recognise the company’s representative.

Profit Distribution

The draft of the Memorandum of Association of the limited liability company should describe the ratio of the profits to be distributed among the shareholders. This means that it is possible to reduce or raise the percentage of the profit sharing of any of the shareholders disregarding their position in the share capital. However, the minimum acceptable profit sharing that should be agreed to the local Emirati partner cannot be lower than 20 per cent of the distributed profit shares.

 

How do most foreign investors protect their businesses in the UAE?

Most foreign investors come to the Emirate of Dubai and in general to the United Arab Emirates with a very well organised business plan seeing a lot of opportunities within the market. The plan usually follows one of the below two scenarios:

-          The foreign investor finances 100 per cent of the business. Having full control of the management of the business, the investor is free to solely close the business in case of failure. The local partner in this case is a nominee.

 

-          The Foreign Investor finances the majority of the business with a local partner who is able to help the business to grow through his local network and expertise and introduce the business easily to the market. In this case the investor wants to share the financial and business risk while at the same time remain in control of the company’s management, financial position and the business life in general. The local partner in this case is an active partner who would be a company operating locally.

One of the major fears is the ownership. The mandatory regulatory requirement to register is at least 51 per cent of the company shares, a significant portion of the shares – in reality – owned by the foreign investor to a local Emirati partner who did not majorly contribute to the share capital. Another fear is Management Interruption – a fear of the involvement of the nominee partner at any point from the critical and important corporate decisions to the daily operational works. And most important is the event of death. The classic fear of succession consequences.

The common practice is to put together a set of documents to minimise the risks and comfort the foreign investors against the above mentioned risks.

The Memorandum of Association should include the appointment of the real investor - himself ‘the foreign investor’ or someone from his circle of trust as the general manager, keeping his hand in the operational management, and financial control to make sure the business operations stay under his control and to mention as well the profit share of the nominee partner as 20 per cent of the net profit. Which is the minimum percentage acceptable as per the law.

It is also very common that a side agreement ‘Trust Deed’ is drafted and signed between the foreign investor and the nominee and is shared only between them and witnesses but cannot be notarized or attested by the public authorities. It is basically a completely independent and separate agreement from the Memorandum of Association referring to the limited liability company and its official documents and acts in reality as a ‘Trust Deed’, showing the actual relation between the partners, terms regulating its own termination, the company’s termination and will include a confirmation of both parties that whatever is included in the side agreement and is in disagreement with the articles of the Memorandum of Association of the limited liability company is enforceable as per the side agreement. In other words, it will confirm that the terms of the side agreement prevails whatever is contradicting in case of any conflict with the Memorandum of Association.

The enforceability of the side agreement before the local authorities is rare if it is shown at any point to the local authorities at the administrative level. However, it would be useful in case of any kind of legal dispute that may arise as a result of the relation between the foreign investor and the local Emirati partner that would be referred to any of the judicial authorities in the country. It would provide strong evidence in proving the actual relation between the contracting parties and as a general legal rule; no one would benefit from breaking the law. So, logically the local Emirati partner would not be supported by the regulation that he broke himself. This is enforceable against the local Emirati person himself or against his successors at the event of death.

Additionally, a Power of Attorney to sell the shares owned by the nominee is prepared and notarized to give freedom to the foreign investor to change the nominee whenever deemed necessary. This document is drawn up and drafted in a way that give power of authority to a certain person appointed by the foreign investor or to the foreign investor himself to act on behalf of the nominee to sell his shares and remove his name completely, replacing him with any other nominee. This POA should be notarized by the public notary in the UAE. This means that holding power of attorney is enough to conclude the transfer of shares procedures completely on behalf of the nominee.

The only downside is that there is no such regulation that a Power of Attorney can be irrevocable. So, such power of attorney can be revoked by the sole discretion of the nominee. So, its validity has to be checked from time to time.

Issues for local Emirati Partners

Any interruption of the business operations of the limited liability company that may lead to any default in the registration of the company, the renewal of its license or even payment of employees’ salaries would have a huge impact to the local Emirati partner business.

Over the years numerous local Emirati partners have been negatively impacted by the actions of foreign investors who build weak structures, take loans and leave the country, leaving the local Emirati partner behind to face the government, the employees and banks. To combat this, it is becoming more and more common that the local Emirati partners are becoming very selective of the foreign investors that they go into partnership with and create documents that prove that they are not the real investors to protect their side in case of business failure.