The new Companies Law No. (2) expands the scope of its application compared to the previous Companies Law. It now applies to commercial companies established in the country, as well as foreign companies that establish a presence in the country by establishing a center, branch, or representative office. The provisions related to foreign companies, as well as the decisions and regulations issued in accordance with the law, are also applicable.
The new law also broadens the exceptions to its validity. Apart from the requirement of registration and renewal in the excluded companies registry, the Ministry, the Authority, and the relevant authorities within their jurisdictions are exempt from the law’s provisions. In contrast, the previous law applied to commercial companies established in the country or with a center of activity within it. It did not apply to companies established in free zones, subject to specific provisions in the respective free zone regulations. Additionally, it did not apply to oil companies involved in exploration, extraction, marketing, and transportation, as well as companies operating in electricity, gas, water desalination, and related activities of transmission and distribution. Companies excluded by a decision of the Council of Ministers were also exempted.
The provisions of the new law do not apply to:
- Companies excluded by a decision of the Council of Ministers, which have specific provisions in their memorandum of association or articles of association, according to the regulations issued by the Council of Ministers.
- Companies wholly owned by the federal or local government, including those owned by such companies, with special provisions in their articles of incorporation or articles of association.
- Companies in which the federal or local government, or any of their institutions, bodies, agencies, subsidiaries, or related entities, directly or indirectly, contribute at least 25% of the capital.
- Companies operating in the field of oil exploration, extraction, refining, manufacturing, marketing, and transportation, as well as energy-related sectors such as electricity and gas production, water desalination, transportation, and distribution, with special provisions in their founding contracts or articles of association.
- Companies previously exempted from the provisions of Federal Law No. (8) of 1984 on commercial companies and its amendments, before the implementation of the new law.
- Companies excluded by special federal laws from the provisions of the new Companies Law.
It is important to consult legal professionals to understand the specific implications and requirements of the new Companies Law and its application to individual cases.
The new corporate law contains several additional details and provisions, including:
- Free Zone Companies: The law clarifies that its provisions do not apply to companies established in free zones unless the laws or regulations of the specific free zone allow them to operate outside the free zone within the country.
- Manager’s Responsibility: Article No. 51 states that managers are liable for any damages incurred by the company, partners, or third parties due to their failure to exercise utmost care. Article No. 52 emphasizes that multiple managers must act with the care of a prudent person in their work, going beyond the care expected of an ordinary person. This highlights the increased responsibility of managers or delegates to act diligently and carefully on behalf of the company to protect the interests of the company, partners, and others.
- Corporate Governance: The law defines governance as a set of controls, standards, and procedures that promote institutional discipline in company management, aligned with international standards. It involves defining the responsibilities and duties of board members and executive management, while also safeguarding the rights of shareholders and stakeholders. Article No. 6 specifically addresses corporate governance, with the Ministry issuing decisions to establish a general framework for private joint-stock companies with 75 or more shareholders, and the Authority’s Board of Directors issuing governance decisions for public joint-stock companies. The company’s board of directors or managers are responsible for implementing these rules and standards, and violating them may result in fines not exceeding ten million dirhams.
- Price Building for Securities: The law introduces the term “price building for securities,” which refers to the process of determining the price of securities during their issuance or sale in a public offering. The Authority issues a decision outlining the provisions related to price building.
- Strategic Partners: The law defines a strategic partner as a partner whose contribution to the company provides technical, operational, or marketing support for the company’s benefit. Under certain conditions, a public shareholding company can increase its capital by including a strategic partner as a shareholder without granting priority rights to existing shareholders. The conditions include the strategic partner’s activity being similar or complementary to the company’s and yielding tangible benefits. The strategic partner must also have issued at least two budgets for two fiscal years, with exceptions for federal and local government entities in the country.
The new corporate law introduces several regulations concerning limited liability companies:
- National Partner’s Shareholding: The law retains the requirement of a 51% shareholding by a national partner in all companies. However, it introduces fundamental amendments regarding the establishment of limited liability companies. Unlike the previous law, the new law does not specify a minimum capital requirement for limited liability companies. Instead, the Council of Ministers is authorized to issue a decision determining the minimum capital for such companies.
- Definition of Limited Liability Company: Article 8 defines a company as a contract in which two or more individuals agree to participate in an economic project with the goal of achieving profit. They contribute money or work and share the resulting profit or loss. Article 71 defines a limited liability company as a company with a minimum of two and a maximum of fifty partners. However, the second paragraph of the same article allows for the establishment of a limited liability company by a single individual, with the capital mentioned in the company’s memorandum of association being the only required capital.
- National Contribution Rate: Article 10 stipulates that all partners in a general partnership or a simple partnership company must be citizens. Additionally, any company established in the country must have one or more citizens holding at least a 51% share of the company’s capital. The second paragraph of the article provides an exception to this requirement. The Council of Ministers, upon a proposal from the Minister and in coordination with the relevant authorities, can issue a decision specifying the activities that are restricted to citizens of the state. The third clause of the same article declares any transfer of ownership of shares that would breach the specified percentage (as mentioned in clauses 1 and 2) null and void.
It’s important to note that the new law contradicts the previous law, which deemed the entire company contract invalid in case of a breach, rather than just the assignment of the share. This change may result in practical challenges, as there are existing companies where a citizen does not possess an actual share. Courts have traditionally accepted such arrangements but ruled to invalidate the company contract. The Court of Cassation in Dubai has established that the company contract is deemed invalid if the objective pillars of the company are not met. Consequently, false information or violations of the law’s provisions in the company contract or its regulations will result in penalties.
It is evident that the new law results in the invalidation of declarations made by citizens claiming that they do not own any shares in the company. This leads to their ownership of shares contrary to the actual circumstances, which is an unjust form of ownership that infringes upon the rights of others. It would have been sufficient for the law to declare the invalidity of companies or impose financial or other penalties without encroaching on property rights and negatively affecting the inflow of investments into the country due to indirect confiscation. To address this issue, the new law could have allowed for the formation of specialized companies owned by foreigners, similar to those in free zones, or reduced the percentage of national shareholding to 10%. This would have made it sufficient for the citizen’s share to be in the form of work, effort, or other contributions that encourage investment and attract foreign capital.
Pledge of Shares
The new law permits the disposal of company shares as they are considered assets. This includes various types of disposals, such as assignment and mortgage, whether to other partners or third parties. However, such disposals must be carried out in accordance with the provisions of the company’s memorandum of association and documented through an official notarized document, as prescribed by the law. The assignment or mortgage does not have legal effect against the company or third parties until it is registered in the commercial register with the competent authority. The company is obligated to record the assignment or mortgage in the register unless it contradicts the provisions of the memorandum of association or the law.
Assignment of Shares
Article 80 of the law outlines the procedures for assigning a partner’s share in the company. If a partner intends to assign their share, whether with or without compensation, to a person outside the existing partners, they must inform the other partners through the company’s manager about the assignee or purchaser and the terms of the assignment or sale. The manager must promptly notify the partners upon receiving the notification. Each partner has the right to reclaim the share within 30 days of being notified, by offering the agreed-upon price. If multiple partners exercise this right, the assigned or sold shares are divided among them in proportion to their respective shares in the company’s capital. If the specified period elapses without any partner exercising the right of recovery, the partner is free to dispose of their share.
Manager’s Rights and Restrictions on Dismissal
According to Article 83 of the new law, a limited liability company can be managed by one or more managers, as decided by the partners in the memorandum of association. These managers can be selected from among the partners or from outside. The general assembly of the partners has the authority to appoint the managers. If the manager’s appointment contract, the memorandum of association, or the bylaws do not impose limitations on the manager’s powers, they have full authority in managing the company, and their actions are considered binding as long as they accompany their actions with a statement of their capacity in which they are acting.
Under Article 84, the manager of a limited liability company is held responsible towards the company, partners, and third parties for any fraudulent acts committed by the manager or any gross negligence on their part. Any provision in the memorandum of association or the manager’s appointment contract that contradicts this clause will be deemed invalid.
Removal of the Manager
Article 85 of the law addresses the procedure for dismissing a manager. Unless otherwise specified in the company’s memorandum of association or the appointment contract, the manager can be dismissed by a decision of the general assembly, regardless of whether the manager is a partner or not. Additionally, a partner or multiple partners may request the court to dismiss the manager if there is a legitimate reason justifying the dismissal. The manager can also submit a written resignation to the general assembly, with a copy provided to the competent authority. The general assembly must make a decision regarding the resignation within thirty days from its submission. If no decision is made within this period, the resignation is deemed effective, unless the company’s memorandum of association or appointment contract states otherwise.
Under the previous law, Article 236 stipulated that if the manager was appointed in the company’s memorandum of association without a specific term, they would remain in their position for the duration of the company’s existence unless the memorandum of association allowed for their dismissal by a majority vote. If the company’s contract did not provide for the manager’s dismissal, they could be dismissed through the consensus of the partners or by a court ruling when there were substantial reasons justifying it. It is evident that the law does not specify the manager’s term of appointment, and it is understood that the appointment should last for the company’s duration unless stated otherwise in the appointment contract. Furthermore, while the previous law allowed for the manager’s removal by the required majority to amend the memorandum of association, the new law only permits removal by a unanimous decision of the general assembly or a court ruling, unless the appointment contract states otherwise.
The General Assembly and its Formation and Convening Methods
According to Article 92, a limited liability company has a general assembly comprising all partners. It is convened at the invitation of the manager or the board of directors at least once a year, within four months following the end of the fiscal year. The assembly also convenes when requested by one or more partners who own at least a quarter of the capital. The invitation letter specifies the time and location of the meeting.
The annual general assembly, as defined by Article 94, is responsible for considering and deciding on the following matters:
- The managers report on the company’s activities and its financial position during the fiscal year.
- The auditor’s report and the supervisory board’s report.
- The balance sheet and the profit and loss account, along with their certification.
- Distribution of profits to partners.
- Appointment of managers and determination of their remuneration.
- Appointment of members of the board of directors (if applicable).
- Appointment of members of the oversight board (if applicable).
- Appointment of members of the internal Sharia Supervision Committee and the Sharia Controller (if the company operates in accordance with Islamic Sharia provisions).
- Appointing one or more auditors and determining their remuneration.
- Considering other matters within the competence of the General Assembly as per the law or the Memorandum of Association.
- Attending the General Assembly meeting is a right for every partner, regardless of the number of shares they own. A partner can delegate another partner, a manager, or any other authorized party specified in the Memorandum of Association to represent them in the General Assembly. Each partner has a number of votes equal to the number of shares they own or represent.
Regarding the legal quorum for convening and voting, Article 96 states the following:
- The General Assembly meeting is not valid unless attended by one or more partners who own no less than 75% of the shares in the company’s capital. If the required quorum is not met, partners must be invited to a second meeting within 14 days, where attendance should not be less than 50% of the capital. If the legal quorum is still not met, partners must be invited to a third meeting after thirty days from the date of the second meeting, and the meeting is considered valid regardless of the number of attendees. Decisions of the General Assembly are only valid if passed by a majority of the partners present and represented at the meeting, unless the Memorandum of Association specifies a greater majority.
Public Joint Stock Companies
The definition of a public shareholding company in the new law remains the same as in the previous law. It is a company with capital divided into negotiable shares of equal value. However, Article 117 introduces an additional requirement for founders’ subscriptions. Founders must subscribe to shares ranging from 30% to 70% of the issued capital before offering the remaining shares to the public. In the previous law, founders were required to subscribe to shares ranging from 20% to 40% of the company’s capital.
The new law also makes changes to the number of founders. A public joint stock company can now be established by a minimum of five individuals. Additionally, the federal government, local government, any wholly-owned company, or entity owned by them can be shareholders or establish a public shareholding company. They may also contribute capital in an amount less than what is specified in the law. This provision allows for the transformation of existing companies into public joint stock companies, which was not present in the previous law.
The new law includes a provision requiring the Board of Directors to notify the Authority if the company, before the approval of the first fiscal year’s accounts by the General Assembly, acquires assets, companies, or institutions with a total value exceeding 20% of its capital. The Authority may subject these assets, companies, or institutions to an evaluation in accordance with the provisions of the law. Such a provision did not exist in the previous law.
In contrast, the previous law only prohibited the company from issuing loan bonds before receiving the full capital from shareholders and publishing the balance sheet and profit and loss account for at least one fiscal year.
- The new law introduces few changes to the provisions concerning foreign companies.
- It states that the law applies to companies conducting activities within the country or having their management center located in the country. However, the provisions related to company establishment do not apply to foreign companies since they are established abroad.
- The law applies to all companies except foreign companies licensed to operate within the country’s free zones.
- The requirement to appoint an agent for foreign companies remains unchanged in the new law. The agent can be a citizen of the state, either an individual or a company. If the agent is a company, it must have national citizenship, and all its partners must be citizens. The agent’s obligations are limited to providing necessary services to the company without assuming any responsibility or financial obligations related to the company’s operations or activities, whether domestically or internationally.
- The law also includes provisions for representative offices of foreign companies. These offices are established solely for market research and exploring production possibilities without engaging in any commercial activities.
Existing Legal Forms of Commercial Companies:
With the enactment of the new company law, the legal existence of joint venture companies and partnerships limited by shares has been abolished. The new law recognizes the following five types of companies:
- General Partnership
- Limited Partnership (restricted to citizens only, excluding participation by foreigners)
- Limited Liability Company
- Private Joint Stock Company
- Public Joint Stock Company
In addition to the above, the new law introduces a new legal form called the One-Person Limited Liability Company.
The Company’s Fiscal Year:
The new law introduces a definition for the company’s first fiscal year with the following provision:
- Every company must specify a fiscal year in its Articles of Association. The first fiscal year of the company should not exceed eighteen (18) months or be less than six (6) months. The calculation of the fiscal year starts from the date of the company’s registration in the commercial register with the competent authority.
If the fiscal year is less than six months, it is added to the subsequent fiscal year. This provision is innovative, as a period shorter than six months does not warrant a separate budget, especially during the company’s initial stages. Subsequent fiscal years are considered consecutive periods of twelve (12) months each, starting immediately after the end of the preceding fiscal year.
Privately Regulated Companies:
The new law introduces companies with specialized structures, including holding companies and investment funds.
The law defines a holding company as a joint-stock company or a limited liability company that establishes subsidiaries within and outside the country or controls existing companies by owning shares that enable it to manage and influence their decisions. The company’s name must be followed by the phrase “holding company” on all company documents, advertisements, and other issued papers.
The holding company, as defined by the law, is not a new legal form added to the existing forms of companies with independent legal personality, such as joint-stock companies, limited liability companies, simple partnership companies, and partnership companies. A holding company can only be a joint-stock company or a limited liability company. Other types of companies, such as partnership companies and simple partnership companies, cannot operate as holding companies.
The objectives of a holding company, as per the law, are limited to:
- Owning shares or stakes in joint-stock companies and limited liability companies.
- Providing loans, guarantees, and financing to its subsidiaries.
- Owning real estate and movable assets necessary for its activities.
- Managing its subsidiaries.
- Owning intellectual property rights, such as patents, trademarks, industrial designs, models, or franchise rights, and leasing them to subsidiaries or other companies.
Holding companies can only carry out their activities through their subsidiaries.
According to the law, the establishment of investment funds must comply with the conditions and regulations set forth in a decision issued by the Authority. The law excludes investment fund licenses issued by the Central Bank prior to the enforcement of this law. Investment funds have their own legal personality, legal form, and independent financial liability. The law does not specifically regulate the conditions and controls for establishing investment funds but authorizes the Securities and Commodities Authority to issue the relevant decision.
The new law introduces the acquisition system, which applies to any person or group of related individuals or parties who intend to purchase or undertake any action leading to the acquisition of shares or transferable financial assets into shares of a public joint stock company incorporated in the country. These individuals or parties must comply with the provisions and decisions regulating the rules, conditions, and procedures for acquisitions issued by the Authority. In case of violation, the Authority may take one of the following actions:
- Cancel the purchase or disposition that resulted in the acquisition.
- Impose a fine ranging from twenty (20) percent to one hundred (100) percent of the value of the acquisition. The provisions of Article 339 concerning the regulation of reconciliation shall apply.
- Deprive the violator of nomination or participation in the board of directors of the acquired company and prohibit them from voting in the General Assembly meetings, proportionate to the extent of the violation. The law also requires publishing the acquisition decision in two local daily newspapers, one of which must be in Arabic, at the expense of the concerned company.
Protecting the Customer with the Company:
The new law includes a provision in Article 25 that emphasizes the protection of the company’s customers. It states that the company cannot evade responsibility towards its customers by claiming that the appointed authority did not follow the required procedures as per the law or the company’s bylaws. However, this provision applies only if the actions of the authority are within the normal limits for individuals in similar positions in companies engaged in the same type of activity as the company.
To ensure protection, it is necessary that the person dealing with the company acts in good faith. Good faith does not apply to individuals who actually know or could have known, based on their relationship with the company, about any deficiencies in the company’s behavior or work that they intend to rely on in their dealings with the company.
This provision is new in this law, but it is not new in the legal system. It aligns with the principle of apparent agency established in the Civil Transactions Law, which has been consistently applied by the higher courts in the country.
The new law significantly expands the imposition of penalties on violators, to the extent that it resembles a punitive law rather than solely a commercial law. Chapter Seventeen of the law introduces various crimes and violations, some of which may be reconciled and others which may not. The crimes eligible for reconciliation include:
- Non-compliance with the Registrar’s decision.
- Failure to list.
- Refusal to provide stakeholders with the company’s documents.
- Failure to convene the annual general assembly.
- Failure to invite the general assembly in case of losses.
- Failure to invite the general assembly upon request from the Ministry or the Authority.
- Failure to invite a board member to board meetings.
- Refusal to assist the auditor or inspectors.
- Failure to maintain accounting records as specified by the law.
- Non-accreditation of the auditor by the Authority.
- Non-compliance of the Sharia auditor and members of the Sharia Internal Control Committee.
- Failure to refund amounts exceeding the subscription.
- Violation of the shareholding percentage of state citizens.
- Illegally disposing of shares in violation of the law.
- Non-registration of a foreign company with the registrar or competent authority.
- A representative office engaging in commercial activities without proper regularization.
- Publication of public subscription invitations without the approval of the Authority.
- Accepting public subscriptions without the approval of the Authority.
- Violation of the provisions of the law and its implementing decisions.
The penalties for these violations range from fines of ten thousand dirhams to ten million dirhams, depending on each violation.
Offenses not eligible for reconciliation:
Crimes that are not eligible for reconciliation include:
- Providing false or unlawful statements.
- Overvaluing in-kind shares.
- Distributing profits or interests in violation of the law.
- Concealing the true financial position of the company.
- Providing false information in inspection reports.
- Deliberate harm to the company by the liquidator.
- Issuing securities contrary to the provisions of the law.
- Providing loans, guarantees, or collateral to board members, their spouses, or second-degree relatives.
- Disclosure of company secrets.
- Manipulating securities prices.
The penalties for these violations include imprisonment for a minimum of three months and fines ranging from ten thousand to five hundred thousand dirhams, with concealing the financial position of the company attracting the higher range of penalties.
The new law includes transitional provisions for existing companies to comply with its provisions. Article 374 states that existing companies subject to this law must reconcile their conditions according to the new law within one year from the date it becomes effective. The Council of Ministers may extend this period for another similar period upon the proposal of the Minister. Failure to comply with this provision will result in the company being considered dissolved as per the law’s provisions.
Article 376 of the law stipulates that any provision conflicting with or contradicting the new law shall be repealed, including Federal Law No. 8 of 1984 concerning commercial companies and its amendments. However, the regulations and decisions issued in the implementation of the previous law shall continue to be valid and enforced in a manner that does not conflict with the provisions of the new law, until the Ministry and the Authority, within their respective jurisdictions, issue the necessary regulations, bylaws, and decisions to implement the new law.
Publication and Implementation of the Law:
The law will be published in the Official Gazette and will become effective three months after its publication.
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