The long awaited Federal UAE Commercial Companies Law (law no. 2 of 2015) was published in the Official Gazette on 1 April 2015 and came into effect three months later, on 1 July 2015.

The introduction of the new law ends a lengthy period of speculation over its content, particularly in relation to restrictions on foreign ownership of onshore corporate vehicles in the UAE. The new law requires existing entities, particularly onshore limited liability companies, to reconsider the content of underpinning shareholder arrangements and existing constitutional documents to ensure compliance with the newly adopted regulations.

Key amendments

The new law introduces key changes meant to improve standards of corporate governance. The key amendments include:

Board membership

The new law removes the restriction of a maximum five-director (managers) board and allows certain limited liability companies (LLCs) to accommodate an overarching management board with a greater number of members and wider skill set than before.

Accounting records

Each UAE company must keep accounting records describing the company’s underlying transactions to ensure the true financial position of the company at any given time is accurate and transparent.

Management of LLCs

Included in the law is provision that management of LLCs be undertaken by one or more managers appointed either under the Memorandum of Association or a separate contract.

Shareholder meetings

A quorum at a general meeting of shareholders requires one or more partners holding at least 75 per cent of the share capital of the company to be present. Where such quorum is not present, partners are to be invited to a further meeting, held within 14 days of the first meeting and a quorum will be present when at least 50 per cent of the share capital is then present.

Statutory reserve

Importantly, from a corporate governance perspective, all LLCs must maintain an annual statutory reserve of 10 per cent of net profits. This provision has been maintained from the old law.

Share pledges

Shareholders may pledge their shares in a UAE company to third parties, as long as the pledge is in line with terms laid out in the Memorandum of Association and in accordance with the provisions of the new law.

Shareholders in Limited Liability Companies

LLCs may be held or incorporated by one natural or corporate entity. This means the sole holder of the share capital may now be afforded a limitation of liability to the extent of the share capital contributions set out in the company’s Memorandum of Association.

By 1 July this year, companies must have updated their Articles of Association to ensure compliance with the new law. Violations for non-compliance could potentially involve financial penalties of AED10,000-100,000 or, in more extreme cases, a forced dissolution of the company and withdrawal of its trade licences.