UAE Federal Decree No. 32 of 2021 on Commercial Companies: Key Provisions

UAE company law was amended by the Federal Decree No. 32 of 2021, in effect since January 2022, and introduced significant changes geared towards enhancing the business environment and enticing foreign investment. Key provisions include the introduction of SPACs and recognition of SPVs, relaxation of foreign ownership rules, and adjustments to LLC and PJSC regulations. 

By Giulia Interesse

Upon celebrating its 50th anniversary, the United Arab Emirates (UAE) introduced a number of significant legislative reforms to boost foreign investment and enhance its business environment. Central to these reforms is Federal Decree No. 32 of 2021 on Commercial Companies (hereinafter, the “New Companies Law”), which replaces the older Federal Law No. 2 of 2015.

The New Companies Law updates existing rules and introduces new provisions to align the UAE with international standards. Effective from January 2, 2022, companies had one year to adjust to the new regulations.

Overview of the UAE’s updated company law

The UAE’s New Companies Law, encompassing 365 articles organized into 12 titles, is designed to improve the UAE’s business climate and economic standing.

This extensive law regulates the establishment, management, and dissolution of companies, detailing the governance, rights, and duties of shareholders, partners, directors, managers, and auditors. It is applicable to both domestic commercial companies and foreign companies with headquarters, branches, or representative offices in the UAE.

The law includes provisions for corporate governance, rules for issuing and trading securities, and mechanisms for dispute resolution. It also outlines activities of strategic importance and the licensing requirements for companies involved in these activities. Title 11 addresses crimes and penalties for violations of the law, granting law enforcement powers to certain employees of the Ministry of Economy and the Securities and Commodities Authority.

Key changes in UAE company law

Introduction of SPACs

The New Companies Law introduces the concept of Special Purpose Acquisition Companies (SPACs), which are to be established as Public Joint Stock Companies (PJSCs) and approved by the UAE Securities and Commodities Authority (SCA). SPACs are specifically designed for acquiring or merging with other companies, aligning with the trend seen in other jurisdictions like the United States where SPACs are utilized for initial public offerings (IPOs).

This introduction offers another avenue for facilitating mergers and acquisition (M&A) activities, including foreign investment. We anticipate further resolutions from the SCA to provide clarity on the practical implementation of SPACs and their treatment under the New Companies Law.

Recognition of SPVs

The New Companies Law acknowledges onshore Special Purpose Vehicles (SPVs) for the first time. SPVs are separate entities established to manage specific financing operations independently from their parent companies. They are used for various financial activities, such as credit operations, borrowing, bond issuance, and risk management.

Like SPACs, SPVs are recognized under the law but will be governed by separate regulations issued by the SCA. The introduction of SPACs and SPVs aims to boost transactions in corporate and financing sectors, offering greater flexibility and aligning the UAE with international legal standards.

Relaxation of foreign ownership rules

The New Companies Law reaffirms the significant change introduced in 2020, which removed the requirement for a minimum 51 percent UAE shareholding in onshore entities, except for certain “Activities of Strategic Effect”.

While not introducing new principles, the law confirms these changes, signaling a favorable environment for foreign investors. This underscores the UAE’s commitment to attracting foreign investment and aligning with global standards.

Changes to LLCs

• Extensions of managers’ terms: Managers’ terms in office can now be extended by up to six months if they haven’t been replaced at the end of their term, awaiting appointment of a new manager.
• LLC general assembly meetings: Non-managers can now represent shareholders as proxies at general assembly meetings. Notice period for convening general assembly meetings has been extended to a minimum of 21 days (previously 15 days). Moreover, quorum requirements have also been relaxed; if the first meeting lacks quorum and a second meeting is held, no quorum is required, and the meeting is considered validly constituted.
• LLC statutory reserves: The statutory reserves, comprising net profits, have been reduced from 10 percent to 5 percent.
• LLC memorandum of association: The company’s memorandum of association (MOA) must now outline methods for resolving disputes arising between the company and its managers/directors or among shareholders concerning the company’s business.

Changes to PJSCs

The New Companies Law introduces significant changes to Public Joint Stock Companies aimed at enhancing governance and transparency while fostering a conducive environment for business operations. These changes cover various aspects, including:

• Replacement directors’ appointment: If a director vacates their position before their term ends, the board must appoint a replacement within 30 days, who will serve for the remainder of the departing director’s term and be presented to the general assembly.
• PJSC subscription shares: Founders are now required to subscribe to a percentage of shares as specified in the prospectus and subject to SCA requirements, removing the previous requirement of subscribing for shares between 30 percent and 70 percent.
• PJSC’s ability to issue discounted shares: Subject to SCA approval and a special resolution, PJSCs are now allowed to issue shares at a discount when the market price falls below the nominal value.
• Directors’ compensation: Directors’ compensation is capped at 10 percent of the fiscal year’s net profits after accounting for depreciation and reserves deductions. In cases where the company doesn’t generate profits, and with approval from the general assembly and adherence to the company’s constitution, a board member may receive a lump sum fee not exceeding AED 200,000 (US$54,451) at the end of the fiscal year.

Conclusion

In conclusion, the UAE’s New Companies Law represents a significant milestone in the country’s ongoing efforts to enhance its business environment and attract foreign investment.

As businesses in the UAE adapt to these changes, it is crucial for them to stay informed and ensure compliance with the updated regulations. By embracing these reforms, companies can position themselves for sustainable growth and contribute to the continued prosperity of the UAE’s economy.

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