Article by: Izabella Szadkowska, Partner, Corporate Structuring
While Dubai has been actively preparing for Expo 2020, UAE authorities have been assessing the business offering and global competitiveness of the UAE as far as attractive foreign investment framework is concerned.
In line with the general climate of the UAE, Dubai International Financial Centre (“DIFC”), a flagship free zone in the Emirate of Dubai, with its own independent legal system modelled on Anglo-American common law principles, introduced a new companies’ regime under its Companies Law DIFC Law No. 5 of 2018, Operating Law DIFC Law No. 7 of 2018, Companies Regulations, Operating Regulations and Ultimate Beneficial Ownership Regulations (“New Legislation”).
The New Legislation came into effect on 12 November 2018.
The new legislation has been long-awaited by a wide variety of international and regional parties. These include medium- and small-size private companies limited by shares, their shareholders and directors, as well as legal and financial professionals advising entities considering the DIFC as its jurisdiction to operate from or those already operating in the DIFC. The decision taken by the DIFC to revamp the company’s regulations and introduce the new legislation demonstrates the commitment the DIFC is taking towards boosting the attractiveness of doing business there.
The new legislation changes appear aimed at giving more flexibility to companies operating in DIFC and giving them more leeway to rely on their own internal checks and balances and the prudence of the board of directors, whilst prescribing a robust sanctions regime should the companies not comply with DIFC law.
However, which elements set out under the New Legislation deserve particular attention?
In this article, we focus on private companies limited by shares and highlight the New Legislation aspects that in our view make the new DIFC offering particularly appealing.
Previously, the types of companies that could be incorporated in the DIFC included limited liability companies (“LLCs”).
The LLCs were not necessarily a suitable vehicle for entities regulated by the Dubai Financial Services or those to serve as holding or proprietary investment vehicles.
The New Legislation abolishes the LLCs making the corporate offering of the DIFC much more straightforward and user-friendly.
The types of companies that the DIFC offer are now:
- Private Companies limited by shares;
- Public Companies limited by shares; and
- Recognised Companies.
As a result of this change, each LLC will be converted automatically, by the DIFC Registrar of Companies (“ROC”), into a company limited by shares (“Ltd”).
Varied Compliance/Disclosure Requirements
The former regime provided no distinction between different companies limited by shares where it came to their corporate governance, accounting, and disclosure requirements. However, the New Legislation allows private companies limited by shares to benefit from less demanding requirements than those that apply to public companies, e.g.:
- Share capital – An Ltd. has no minimum share capital, whereas a public company needs at least $100,000 in issued and allotted share capital;
- Annual General Meeting (“AGM”) – Unless the Ltd.’s articles of association require it to do so, an Ltd. is not required to hold an AGM. A public company is required to hold an AGM regardless.
- Auditor – Unless the Ltd.’s articles of association require it to appoint an auditor, an Ltd. is not required to do so if the Ltd,’s annual turnover is $5,000,000 or less (including those of its subsidiaries) and has no more than twenty (20) shareholders. A public company needs to appoint an auditor however.
- Directors – An Ltd. is required to have at least one (1) Director, whereas a public company needs to appoint at least two (2).
- Secretary – An Ltd. may appoint a secretary, whereas a public company is required to appoint one.
These lower compliance and capital requirements for Ltds. make the DIFC a friendlier and more attractive jurisdiction in which to operate, particularly for smaller businesses. This in turn will enhance both the DIFC and UAE’s business ecosystem and their competitiveness in the region.
Articles of Association
Formerly, only standard DIFC articles or modified DIFC articles could be adopted by an Ltd. as its articles of association (“Articles”). The modified Articles had to be filed with the DIFC alongside a legal opinion confirming their compliance with DIFC law.
Under the New Legislation, the Articles to be adopted can be:
- based on the standard DIFC format (“DIFC Articles”);
- as per modified DIFC Articles; or
- any articles the Board of Directors of the Ltd. consider suitable (“Individual Articles”).
Modified DIFC Template and Individual Articles must be filed with the ROC together with a statement made by the Board of Directors of the company to confirm their DIFC law compliance.
There is no longer a requirement for the Ltd. to secure a legal opinion in respect of the Articles. The change allows the Ltd. to handle the Articles revisions in-house so long as the Board of the Ltd. are comfortable with their content. This development is likely to allow that the Articles get adopted/modified by companies at a lower cost and faster than before as no third party legal counsel needs to be involved in the process.
Formerly, every company was required to, before the end of March in every calendar year (after the year it was incorporated), file with the ROC, an annual return form. Under the New Legislation, the annual return has been replaced by a confirmation statement (“CS”) that an Ltd. is required to file alongside its annual license renewal process.
The CS is a more convenient solution for DIFC companies than the former annual return form, as the timing of that submission coincides with the license renewal.
The New Legislation has introduced a transparent regime in relation to the duties and responsibilities of Directors of Ltds.
Formerly, a Director or other officer of a Company, in exercising his powers and discharging his duties, was obliged to:
- act honestly, in good faith and lawfully, with a view to the best interests of the Company; and
- exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
disclose interest in a transaction that concerned the Company
The New Legislation has introduced specific duties the directors must abide by, such as, the duty to:
- act within powers;
- promote the success of the company;
- exercise independent judgement;
- exercise reasonable care, skill and diligence;
- avoid conflicts of interest;
- not accept benefits from third parties; and
- declare interest in a proposed transaction or arrangement.
This legislative change has contributed to the further transparency of DIFC laws.
Board members that would before often wonder what the scope of their powers and responsibilities was, can now easily reference the New Legislation and identify the general areas they should pay attention to.
The introduction of the New Legislation enhances the already sophisticated legislative regime of the DIFC, giving existing DIFC companies and new investors greater flexibility in terms of managing their business, with wider options with regards to the regulation needed. Moreover, the introduction of director duties heightens their level of responsibility and accountability which in turn gives extra comfort to investors.
Although the full effect of the New Legislation is yet to be seen, we have already noticed positive impact has made on the business community locally, regionally and on the enterprises as well as professional advisors around the world.
Al Tamimi & Company is one of the leading law firms in the Middle East and the largest law firm in the region. Established in 1989 by senior partner, Essam Al Tamimi, the firm has 65 partners, 350 lawyers and 17 offices in nine countries throughout the UAE, Bahrain, Qatar, Iraq, Saudi Arabia, Jordan, Kuwait, Oman and Egypt.
The firm specialises in advising major international corporations and financial institutions, Middle East banks and financial institutions, government organisations, businesses and families in their global operations and investments. It has particular expertise in arbitration & ADR, banking & finance, dispute resolution & litigation, IP & data security, shipping & aviation, project & infrastructure finance, real estate & construction, corporate & commercial, technology, media & telecommunications, insurance and private client.