Jody Glen Waugh                         Renata Rai
Partner                                          Senior Associate
Banking and Finance                   Banking and Finance
j.waugh@tamimi.com                   r.rai@tamimi.com

Al Tamimi & Co
A: Building 4, 6th Floor,
S heikh Zayed Road
PO Box 9275, Dubai, UAE
T: (971) 4 3641 641
T: (971) 4 3641 777
W: www.tamimi.com
I. INTRODUCTION

UAE Federal Law No. 2 of 2015 (“New Law”) governing commercial companies in the UAE became effective on 1 July 2015 (“Effective Date”), replacing UAE Federal Law No. 8 of 1984 (“Existing Law”). The New Law’s provisions regarding company structure and governance have been well documented. Developments relevant to financing transactions have received less attention but include provisions on: (i) corporate power and authority; (ii) regulation of Islamic banks; (iii) lending to board members; (iv) requirements in respect of directors interested in transactions; (v) financial assistance; (vi) pledges of shares in limited liability companies (“LLCs”); (vii) related party transactions; and (viii) application of provisions relating to public joint stock companies (“PJSCs”) to LLCs. This article covers some of these developments.

II. POWER & AUTHORITY

Capacity and authority are problematic under the Existing Law because there is no statutory provision bestowing core powers upon a company. Financial institutions usually therefore require shareholder resolutions to approve a transaction, where the requisite powers are not explicitly granted in the constitutional documents. Rather than introduce a default level of corporate powers, the New Law focuses on implied powers and an authorized individual acting in a “usual manner” and “within the usual limits”. It would therefore seem that a detailed review of constitutional documents will continue to be required, with shareholder resolutions obtained where necessary.

III. PLEDGE OF SHARES IN LLCs

The New Law sets out a framework taking security over shares (or quota) in LLCs, allowing for the transfer or pledge of a partner’s share in a company to an existing partner or a third party. Such a transfer or pledge must be executed in accordance with the company’s Memorandum of Association before a notary public and registered with the commercial register of the relevant emirate. While the New Law clarifies the position on the pledging of shares in an LLC, it remains subject to implementation by the Economic Departments of each emirate (noting that a system is already in place in Dubai).

IV. FINANCIAL ASSISTANCE

Financial assistance is generally seen as a company providing direct or indirect assistance to a person who is or becomes a shareholder, in connection with their acquisition of shares in the company. The Existing Law was silent on this subject. The New Law restricts a company and any of its subsidiaries from providing financial aid to any shareholder for the purchase of any shares, bond or Sukuk issued by the company. Financial assistance is widely defined under Article 222 and includes providing (i) loans; (ii) gifts or donations; (iii) the assets of the company as security; and (iv) a security or guarantee of the obligations of another person.

In many other jurisdictions where equivalent restrictions on financial assistance exist, the legislation typically prescribes a process to override the restriction in certain circumstances. The New Law, however, does not contemplate such a process, meaning that, on the face of it, the prohibition is absolute.

V. RELATED PARTY TRANSACTIONS

The New Law also introduces the concept of related party transactions. Related parties are defined by the New Law as (i) companies in which a director, chairman, senior executive manager or employee holds at least 30% of the share capital and (ii) subsidiary, associated and sister companies. Article 152 prohibits a person from utilizing information they possess due to their membership or occupation to achieve any interest for themselves or a third party as a result of dealing in securities and any other transactions. While this is similar to restrictions on insider trading in western jurisdictions, the ambit of this article appears broader, as “other transactions” are not defined.

Additionally, related party transactions that exceed 5% of the company’s share capital require board and shareholder approval. The New Law also states that such transactions shall be evaluated by an assessor approved by the SCA (though there is no information on who may be the assessor or how they are appointed). Given the overlapping relationships and prevalence of multiple family businesses and corporate appointments in the UAE, companies should take these changes into consideration and develop systems to show segregation of interests and independent decision making.

VI. COMPLIANCE

The New Law instructs existing companies to comply with its provisions by one year from the Effective Date (“Grace Period”), noting that the Grace Period may be extended. Notwithstanding other specific penalties prescribed under the New Law, Article 374 states that if a company fails to make the necessary changes in order to comply with the New Law, the company shall be dissolved in accordance with the provisions of the New Law. Article 374 does not distinguish between significant and technical breaches of the New Law and this will likely be a point for further consideration and perhaps secondary legislation.