Ministry of Economy clarifies the application of the UAE Commercial Companies Law to LLCs

Written by Philip O`Riordan, Justine Reeves and Rebecca Hilton

Key PJSC provisions applied to LLCs
• Directors' liability
• Audited accounts
• Accounts filing
• Auditor provisions
• Right to call a general meeting

Key PJSC provisions not applied to LLCs
• Financial assistance
• Board formation and composition
• Director remuneration
• Related party transactions
• Restrictions on powers of the directors

Additional rules created by the Ministry specifically for LLCs

No extension to 30 June 2016 deadline

Since the new UAE Commercial Companies Law came into effect on 1 July 2015, there has been much market commentary on the application of the Law to Limited Liability Companies (LLCs). 

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In a welcome move by the UAE government, the Ministry of Economy has clarified which provisions relating to Public Joint Stock Companies (PJSCs) are carried over to LLCs by virtue of Article 104 of the Law.

Many provisions have been taken out of the scope of LLCs, such as the prohibition on financial assistance. However, more importantly, the Ministry has specifically applied some PJSC provisions and added some new requirements.  It is important that LLC managers take action to comply with these in the future.

Ministerial Resolution

Ministerial Resolution No. 272 of 2016 (the Resolution) was published in the April edition of the Official Gazette, and came into force the day after publication on 29 April 2016.

Article 104 and the market debate

Article 104 of the Law states that the provisions which apply to PJSCs apply to LLCs on all issues not specifically provided for in the Law.

In the absence of guidance, it was difficult to be certain which provisions were intended to carry over to LLCs.  Particular concerns were voiced over the prohibition on financial assistance, loans to directors and the provisions on unfair prejudice.  Whilst not specifically referring to Article 104 of the Law, the Resolution sets out a list of the PJSC provisions which apply to LLCs and those which do not.

Key PJSC provisions which do not apply to LLCs

The Ministry has taken the following Articles out of the scope of Article 104. Therefore, these provisions only apply to PJSCs and private joint stock companies.

·         Financial assistance (Article 222) – it is made clear that it is not prohibited for financial assistance (for example in the form of a loan or the offer of financial security) to be given in relation to the acquisition of the shares in an LLC.  This exclusion will be well received by banks and financial institutions.  The concern was that such a prohibition (without the ability to "whitewash" its grant) would have had a disproportionate effect on the local acquisition finance market.  The Resolution does not specifically refer to the giving of financial assistance by an LLC in respect of the acquisition of a parent PJSC's shares (so called "upstream financial assistance"), but it seems clearer now that this is intended to be prohibited.  See our earlier briefing on financial assistance click here.

·         Formation and constitution of the board of directors – the Resolution takes many of the provisions relating to the board out of the scope of an LLC's management.  For example, the Ministry has highlighted that there is no need to elect LLC managers through a secret ballot and that the nationality restrictions do not apply to them.  These provisions did not fit well with the general nature of an LLC.  However, the clarification removes any residual doubt.  Also, the cap on the remuneration of directors under Article 169 does not apply to LLC managers.

·         Related party transactions (Article 152) – the Resolution removes any debate that the related party provisions apply to an LLC.  These provisions (i) prohibit a director and other related parties from dealing in securities and using inside information, and (ii) require shareholder consent for transactions with related parties with a value of more than 5% of the capital of the company. The Resolution does not specifically address whether the part of Article 152 which requires annual shareholder consent for a director to be involved in a competing business applies. However, involvement in competing businesses for LLC managers is dealt with specifically in Article 86 of the Law, which also provides for the consent of the general assembly (although as a "one off" permission).

·         Powers of the board of directors (Article 154) – there was some concern amongst law firms that this Article, which sets out certain types of matters for which special consent is required, applied to LLCs. This would have meant, for example, that the authority to agree to arbitration, or to enter into a loan with a duration of more than three years, had to be expressly permitted in a LLC's memorandum of association (MOA), or shareholder consent obtained.  This was at odds with the understanding prior to the Law, under which the manager named on the trade licence was believed to have these inherent powers.  The Ministry has now made clear that Article 154 does not apply.  Therefore, the LLC manager has full power to manage, unless otherwise restricted in the MOA or by special agreement.

Key PJSC provisions which do apply to LLCs

There are a few important provisions which are now considered to apply to LLCs.  Managers of LLCs are well advised to take note of these provisions and ensure that they are complied with.  At a minimum, failure to comply with the Law may attract a fine of at least AED10,000.  However, there may be other consequences, depending on the breach.

·         Suspension of a shareholder resolution by the general assembly (Article 191) – this Article allows shareholders who hold at least 5% of the capital of the company to request that the DED suspends the application of any shareholder resolution (within three working days of it being passed), where that resolution (i) is contrary to the interests of the shareholders, or (ii) favours any particular class of shareholders, or (iii) gives a special benefit to the directors or others.  The DED may agree to the suspension if the grounds for the request are serious and valid.  This suspension allows five days for any of the parties to apply to the court for the shareholder resolution to be annulled.  If such timeframe is not met, the suspension lapses.  In practice, clearly documented board and shareholder resolutions (together with the commercial rationale for decisions) will be important to defend resolutions.

·         Audited accounts - under Article 245, an LLC must produce audited accounts (audited in accordance with International Accounting Standards as required under Article 27 of the Law).  In addition, due to the application of Article 236(2) to LLCs, there is a requirement that such audited accounts are filed with the local DED within seven days of the annual general meeting approving those accounts. 

·         Other auditor provisions – most of the provisions relating to the appointment of auditors apply to LLCs.  This is due to Article 104, but also a specific provision in Article 102.  These contain a couple of important practical points.  Firstly, the auditor must attend the LLC's annual general meeting and read out the content of its report.  This means that, as a matter of course, LLCs must send a notice of meeting to the auditor and require their attendance.  Secondly, the Ministry appears to require an LLC to replace its auditors after three successive years in office, by expressly applying Article 243.  However, the additional wording in the Resolution concerning auditors does not refer to this requirement.  Nevertheless, LLC managers are advised to assess the length of service of their current auditors.

·         Invitations to attend a general assembly (Articles 174 to 176) – the Articles which set out who can request the manager(s) to call a general meeting of the company apply to LLCs.  This includes shareholders holding more than 20% of the capital (thereby allowing a minority partner in an LLC to request a meeting, even where there is no prospect of it being able to pass resolutions), the LLC's auditor and the DED in certain circumstances (including if it finds that there has been a breach of the Law or the company's MOA).  See also the new right to call an urgent general assembly in the additional points below.

·         Liability of directors – the Ministry has applied some of the provisions relating to the liability of a PJSC director to an LLC manager.  Some of these provisions deal with the same concepts as provisions specifically included in the LLC sections of the Law.  In some cases, the LLC provisions differ in their detail. For example, Article 162 states that a PJSC director may be liable for "mismanagement", whereas Article 84 describes liability for an LLC manager for "gross error". Therefore, it is less clear which standard now applies.

What has not been expressly clarified?

There are a few concepts which may carry over to LLCs that have not been dealt with specifically by the Ministry.  Of particular note is the prohibition on providing loans to directors and their family members.  There is no equivalent provision in the LLC sections of the Law and so, on the face of it, this Article 153 applies to LLCs.  A breach of this provision is a criminal offence and so, it is still advisable to assume that it does capture LLCs.  Therefore, any accommodation or other types of loan to managers of an LLC should be restructured.

In addition, Article 164 on unfair prejudice is not covered in the Resolution.    Consequently there is still a risk that a minority shareholder could bring court proceedings with the support of the DED, where it considers a corporate action to be taken against its interests.  This is not dissimilar to the suspension of a shareholder resolution under Article 191, which does expressly apply – see above.

Additional points contained in the Resolution

The Resolution contains some additional rules which apply to the operation an LLC.  For example:

·         There are new matters for which a special resolution of the LLC's partners is required.These include charitable donations, and a sale of more than half of the company's assets by one or more transactions in any 12 month period.

·         The Resolution states that if an LLC is managed by a board of managers, the chairman and deputy chairman must be appointed by the general assembly.It is unclear whether it will be possible to provide for them to be appointed in a different way in the MOA, for example by one of the partners.Note also that the chairman has the casting vote.If this is not wanted, the parties must state this in the MOA expressly.

·         There is a new right for partners holding 10% or more of the shares in an LLC to ask the DED to call a general meeting in urgent cases.Partners holding at least 10% of the capital may request that matters be added to the agenda during the course of the meeting, and there is an additional right for partners holding 5% or more of the capital to request the DED to add an item onto the agenda of a general meeting before the meeting is held.

The 30 June deadline for "adjusting positions"

The Resolution does not address the impending 30 June 2016 deadline for existing LLCs to "adjust their position" under Article 374 of the Law.  Therefore, unless a separate extension is granted shortly, companies must comply with the Law to its fullest extent, including amending any inconsistent provisions in their MOAs.

Under Article 374, the Law provides that any company which has failed to do so will be "deemed as dissolved".  What this means in practice is unclear, for example whether a court order will be needed by the DED to take concrete steps to de-register a company under Article 295.  However, our advice remains that LLCs should review and amend their MOAs as quickly as possible to comply with the Law and to take advantage of its deregulatory aspects.  

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