After several years of discussion, the United Arab Emirates has issued a long-awaited companies law aimed at boosting IPO activity, enhancing corporate governance and encouraging foreign investment into the Arab world’s second biggest economy. Kanishk Verghese reports

The UAE’s new Commercial Companies Law (CCL), which came into force on July 1 this year, is viewed as a welcome improvement to the 1984 law, and marks the culmination of several years of drafts and discussion. The law aims to stimulate IPO activity, encourage entrepreneurship and attract foreign capital through rules that loosen stock market floats and align corporate regulation closer to international standards. The CCL also contains a number of provisions seeking to make limited liability and joint stock firms simpler to manage and more attractive to investors, while strengthening corporate governance in areas such as company loans to directors.

The law applies to both UAE incorporated public and private companies, but exempts companies that are established in UAE economic free zones or wholly owned by the government.

KEY CHANGES

A key change under the new CCL permits a single shareholder, either a person or corporate body, to wholly own a limited liability company (LLC). The provision is tipped to spur business activity as Emirati entrepreneurs are now able to move away from the bind of the old law which required at least two shareholders to form an LLC. “This change is restricted to UAE and GCC nationals only, but in the context of holding companies this is a very positive improvement,” says Samer Qudah, the regional head of corporate restructuring at Al Tamimi & Company, based in Dubai. “Although the law has come into force, the licensing authority is still in the process of amending their systems to allow this development,” says Qudah.

Another noteworthy change, notes Qudah, is that the CCL enables partners of an LLC to pledge their shares as a security to financiers, making an LLC a more lucrative option for investors.

Arguably the biggest development is one that will make IPO listings in the UAE more attractive to founders of businesses. Under the old law, founders wanting to take their companies public had to offer a minimum of 55 percent of shares to the public – a threshold that caused much apprehension among owners who were reluctant to give up a controlling stake in their businesses. The new law has addressed this concern by lowering the minimum threshold to 30 percent – a move designed to encourage founders to seek an IPO as they can now offer their shares to the public, but at the same time retain control over their business, says Ahmed Ibrahim, head of equity capital markets at Al Tamimi & Co in Dubai.

Company owners are also able to carry out floats by selling existing shares, rather than by issuing new equity. “Under the old law, IPOs could only happen by way of capital increase, and it didn’t really offer the existing founders a proper exit option because there was a lockup period of two financial years. The new law has addressed this by allowing the founders to participate in a share sell down in the IPO, offering them a very nice exit option,” says Ibrahim. Furthermore, the CCL recognises the role of underwriters for the first time, and also allows IPO prices to be set by bookbuilding, or obtaining indicative bids from fund managers, rather than through a fixedprice evaluation method. And to enhance corporate transparency, the law requires an independent auditor to oversee accounts, instead of a valuation committee under the old law. “This will offer more comfort to investors in applying for an IPO, and it will allow for more certainty when it comes to the valuation of the business,” says Ibrahim.

THE FOREIGN INVESTMENT DEBATE

While the CCL signals a positive step toward encouraging business, investment and IPOs in the UAE, the law is less sweeping than some had hoped. Perhaps the most noteworthy was the rejection of a proposal to lift the restriction on foreign ownership of companies in the UAE outside of the free zone, which remains capped at 49 percent. Officials had at one stage intended to use the companies law to ease that rule, but the reform was scrapped under political pressure. This came as a disappointment and a slight surprise to lawyers and investors alike, many of whom who had expected the new law to follow a more liberal approach toward foreign ownership restrictions.

However, international investors may not be disappointed for long. Speaking at a conference in March, Sultan bin Saeed al-Mansouri, the UAE’s economy minister, said the country is at an advanced stage of drafting a foreign investment law that would allow 100 percent foreign ownership of businesses in some sectors. “This law is expected to allow full ownership to foreign businesses if they meet certain criteria. Our understanding is that the criteria will focus on the size of the investment that the foreign company intends to make, after which there will be a process for an exemption to be granted by the cabinet to allow 100 percent ownership,” says Qudah. Many are hopeful that the new investment law can be enacted before the end of the year. But drafting and enacting major laws, such as the CCL, can often take years, so there is no guarantee the investment law will see the light of day in 2015, says Qudah.

While foreign investors eagerly await further details on the investment law, they will have to grapple with other perceived disappointments in the CCL relating to restrictions governing the nationality of a company’s board of directors. “The majority of the board of directors, including the chairman, of public companies needs to be a UAE majority,” says Ibrahim. “As you can imagine, this also caused a bit of disappointment to foreign investors and companies targeting to go public because until now they may not have the full authority to appoint their board of directors and they will have to meet the majority rule of UAE nationals in the board of directors,” he adds.

BOOSTING INVESTMENT

The CCL contains a number of additional articles, including measures to enhance corporate governance and a provision that permits free zone companies to operate onshore. “It is still not clear as to how the free zone provision will be applied, as we are awaiting regulations to be issued by the cabinet. But if free zone companies can operate onshore, it will help ease the impact of the statutory limitation on foreign ownership, because in the free zones, unlike onshore, foreigners can own 100 percent of a company,” says Qudah.

A separate decree covering the details of the new corporate governance rules are expected in the coming months, as well as major pieces of supporting legislation to interpret the provisions of the new law, including rules on book-building, takeovers and an employee incentives share option scheme.

Companies are required to comply with the new law by July 1, 2016 or face the dissolution of their business. The lead up to the July deadline is keeping many law firms busy with ensuring that clients are fully compliant with the CCL. For Al Tamimi & Co too, the new law has sparked an increased in compliance work, and is expected to boost the firm’s corporate and equity capital markets practices. “Our team is very busy advising on the establishment of companies, especially with an increased interest in the Middle East region,” says Qudah. “The CCL should attract more investment, but this is not the only initiative that has been taken by GCC governments. We have seen new laws in Kuwait and Qatar which have increased the competition among the GCC countries, but are also attracting foreign investment into the region as a whole,” he says.

And with a potential foreign investment law on the horizon for the UAE, foreign investors have much to look forward to. New foreign direct investment (FDI) in the UAE rose 25 percent to $13 billion in 2014, the UAE’s economy minister Mansouri said. He added that the government aims to raise FDI to 5 percent of gross domestic product in coming years (GDP was 1.540 trillion dirhams, or $420 billion, in 2014). “The new CCL is certainly an improvement on the old law, and it contains many positive elements that will encourage foreign investment into the UAE,” says Ibrahim. “The UAE and Qatar have already been lifted from ‘frontier market’ to ‘emerging market’ status, and this will encourage a lot of foreign firms, funds and investors to come to this region and invest in publicly traded companies.”