UAE: 100% Foreign Ownership now Allowed

The United Arab Emirates has taken another important step towards attracting foreign direct investment and making business easier.

While the rest of the world was occupied with the pandemic, the United Arab Emirates made substantial improvements regarding the incorporation of foreign-owned companies and their operation.

The most important change is the abolition of the rule requiring that 51 percent of the share capital of a company established in the UAE outside free economic zones be owned by Emirati nationals.

The changes also cover other important aspects related to the management, financing and control of UAE companies and are aimed at increasing flexibility and improving corporate governance – making the UAE a safer and more attractive place for foreigners to do business.

Federal Decree-Law No. 26/2020 (the Decree-Law) passed in late September and published in late November 2020, amends Article 51 of the Federal Law No. 2/2015 on Commercial Companies Law (the New CCL) and introduces three new articles. The main changes are given in detail in the chart below.

The Decree entered into force on January 2, 2021, except for provisions eliminating the minimum level of share ownership for citizens of the United Arab Emirates, the citizenship requirements for directors of public and private limited companies, and provisions eliminating the requirement of a local service agent for branches and representative offices of foreign companies. They will take effect at a later date. Some of the changes include the adoption of additional regulations and rules. 

Changes in Company Registration in the UAE Free Zones

Companies established outside free zones are called local companies. 

At first glance, the new possibility to own 100% local companies should reduce the attractiveness of free zones.

However, this is not necessarily the case. Financial free zones such as Dubai International Financial Center and Abu Dhabi Global Market, and other free zones will still remain attractive.

Prior to the new law, the possibility of allowing foreigners to own 100% of shares was one of the main advantages of registering companies in free zones. In addition to that, relatively high real estate prices and the difficulty of doing business outside the free zones came into play.

However, international financial companies, asset management and investment companies, holding companies and professional service providers still seek to invest in financial free zones because of their familiar legal and regulatory regimes, and because free zones are now established ecosystems friendly to businesses located there. They also guarantee a 50-year tax-free environment. Local companies are currently tax free, but as we saw with the introduction of VAT, there are no guarantees local companies will remain tax free.

The Decree-Law, among other things, removes the requirement for local service agents which will make it easier for free zone companies to do business in the UAE outside of free zones.

Changes in the Foreign Ownership Restrictions upon Company Registration

Foreign investors wishing to own more than 49 percent of a UAE local company have conventionally relied on a number of institutions, including trusts and sponsorship agreements, to circumvent ownership rules relating to foreigners.

Such trusts, sponsorship agreements and other arrangements will not be automatically revoked after the Decree-Law comes into force, unless the sponsor agrees to do so and unless the arrangements contain appropriate provisions.

In an effort to encourage foreign direct investment, the UAE issued the Foreign Direct Investment Law (the FDI Law) in September 2018 that paved the way for the possibility of 100 percent foreign ownership in certain sectors.

The list of those sectors was determined by the UAE Cabinet in a March 2020 decision.

The FDI Law was a significant step toward liberalizing the UAE’s foreign ownership regime, but required companies wishing to benefit from it to follow certain procedures and comply with certain rules not applicable to local UAE commercial companies in general.

The new Decree-Law that was announced just weeks after the first FDI Law licenses were issued, abolishes the FDI Law and makes a paradigm shift in the UAE’s national policy towards investment. 100 percent foreign ownership is now the rule rather than the exception.

Certain types of business having strategic importance that have not yet been identified may still be subject to restrictions in terms of foreign ownership.

Changes in the Company Registration Law and their Impact on Domestic Mergers and Acquisitions and International Listings

In the past, the 49 percent limitation of foreign ownership has made mergers and acquisitions rather difficult. While the sponsorship and trust agreements mentioned above allowed foreign companies to have full or majority beneficial ownership and control over local commercial companies, many international investors, particularly third-party fund managers such as private equity companies, were uncomfortable with the separation of beneficial and legal ownership and the uncertainty that prevailed around the enforceability of sponsorship and trust agreements.

This obstacle has now been removed.

In addition, sponsorship and trust agreements were a nuisance for the international listings of local UAE businesses with holding companies from outside the UAE. These listings required extensive disclosure of risk factors related to sponsorship and trust arrangements used to own business in the UAE outside of free zones, requiring scrutiny by regulators, underwriters and auditors. 

The new amendments to the Commercial Companies Law were a welcome simplification of the listing and disclosure procedures.

Main Changes in Company Registration and Business Operations

The chart below summarizes the main changes introduced by the Decree-Law.

Main Changes	Description
Possibility of full foreign ownership	Foreigners are now allowed to own 100 percent of shares of the UAE companies unless their type of business has a strategic impactIn the UAE, local companies were required to have one or more UAE nationals as shareholders owning at least 51 percent of the company’s capital. This requirement has been abolished. The general rule henceforth is that all companies (except those involved in business having a strategic impact) are open to full direct foreign ownership. Types of business having strategic impact will be determined by the Cabinet upon the recommendation of a special committee that will include representatives of the Department of Economic Development (DED) for each emirate. It is yet unclear whether this list will still cover all of the types of business appearing on the prohibitive list of the FDI Law which the Decree-Law repeals. While it is reasonable to expect that such sectors as oil and gas exploration and production, military and defense, air transportation, and telecommunication services would continue to be restricted, it is unclear whether this would apply to such businesses as banking and finance, insurance, and commercial agencies.Companies conducting business that have strategic impact may be subject to a requirement of minimum participation of the UAE national shareholders, and a requirement for the Board composition to be determined by the Department of Economic Development for each individual emirate. Thus, different restrictions may apply to companies operating in the same sector, depending on the emirate where they choose to establish their business.
Directors	Requirements concerning the composition of the Board of Directors have been easedThe new amendments remove the requirement that a majority of the directors of a public or private limited company, including the Chairperson must be UAE nationals. This may not apply to companies involved in business having a strategic impact that must meet certain specific requirements set by the Cabinet or the Department of Economic Development for each individual emirate.Prior to the new amendments, only one-third of the Board of Directors of a public company could consist of non-shareholder directors. Now this upper limit has been removed.
No requirement to having a local service agent	A local service agent is no longer required for establishing a branch or representative office of a foreign company in the UAEForeign companies wishing to establish a branch or representative office in the UAE outside free zones were previously required to appoint a local service agent whose mission was mainly to communicate with UAE government and administrative authorities on behalf of the company and assist in the license renewal process. Such an agent is no longer a requirement under the recent changes.
Extra flexibility for certain types of companies	Extra flexibility for various other types of companiesThe Decree-Law provides an avenue for the legal entities that are not public companies to engage in banking and insurance business if the specific legislation governing those industries allows it. This amendment should be considered in conjunction with another recent change to the Federal  Law No. 14 of 2018 Regarding the Central Bank and Organization of Financial Institutions and Activities, which now allows non-bank financial institutions to take the form of private limited companies or limited liability companies (LLCs).
Corporate equity transactions	Balance of flexibility and protection of corporate interests New provisions have been introduced to allow urgent capital raising upon the request of a partner for any limited liability company facing the risk of insolvency or default on its debt. The share of shareholders who do not participate in the urgent capital raise will be diluted.The concept of pre-approval of share capital is abolished. All capital increases must be specifically endorsed by the shareholders. Shareholder decisions for capital increases may be valid for a period of three years. Capital increases must be made in accordance with the rules and requirements established by the Securities and Commodities Authority (SCA).The SCA has issued the Rules of Acquisitions and Mergers of Public Shareholding Companies (Decision No. 18/RM of 2017) that contain provisions for the displacement of minority shareholders from public tender offers, as well as provisions that entitle minority shareholders to request the repurchase of their shares. The Decree-Law provides the statutory basis for these procedures. It also includes a provision allowing a company to issue new shares (without granting shareholders the subscription privilege) in support of an exchange offer. The new changes offer greater flexibility in accepting strategic partners into a public company. The previous requirements that the strategic partner must conduct a business that is similar or complementary to that of the company, and that the strategic partner must have financial statements for at least two fiscal years have been removed. The issuance of shares to the strategic partner must comply with all other conditions imposed by the SCA.The Decree-Law gives the company greater flexibility in acquiring and disposing of its own shares (i.e., treasury shares) as long as all of the requirements set forth in the SCA are met.
New rules for public offering of shares and issuance of bonds and sukuk securities	Possibility to offer up to 70 percent of shares in the IPO upon reorganization; 6-month lock-up of founders’ shares; new duty of careWhen an existing company reorganizes to a public company, it can sell up to 70 percent of its shares in an appropriate public offering, previously it was 30 percent. The reorganized company can also make an initial public offering by means of a capital increase. In addition, the lock-up now applies to the shares owned by the founders in the case of reorganization, and ends six months after the listing of the public limited company. In the case of setting up a new public limited company, the founding committee is responsible for the accuracy, sufficiency and completeness of any document, study or report submitted to the relevant authorities. The founding committee and the Board of Directors (if any) jointly sign the offering memorandum and are responsible for the accuracy of the information contained therein. The duty of care applies to professional advisors and others involved in the offering process. They must do their jobs in good faith and each must be responsible for their roles.
	Greater flexibility in issuing bonds and sukuk securitiesRequirements for the issuance of negotiable bonds and sukuk (convertible or non-convertible into shares) will only be determined by the SCA (reference to the UAE Central Bank has been removed). The previous conditions requiring full payment of capital and a company to issue financial statements for at least one fiscal year before it can issue debt or sukuk have been removed. A new provision has been added allowing a company to increase its capital by issuing bonds or sukuk and converting them into equity. In addition, the new amendments allow companies more flexibility in determining the conditions of their convertible bonds.
Improvement of corporate governance	Further improvement of corporate governanceAll non-listed local for-profit companies will have to comply with the corporate governance requirements set by the Minister of Economy. Previously, the Minister of Economy had the authority to adopt governance standards for listed companies with more than 75 shareholders. Additional disclosure requirements were introduced for related party transactions (which now follow the definition in the SCA Corporate Governance Guidelines).More specific rules have been introduced, for a situation where a company’s aggregate losses reach 50 percent of its share capital. They include extended disclosure obligations of the Board of Directors to shareholders (an auditor’s report and, as the case may be, either a clear restructuring plan with a timeline or a clear liquidation plan with proposed names of liquidators approved by the SCA). In the event of a restructuring, the Board must oversee implementation of the plan and provide regular updates to SCA. The prohibition on providing financial assistance to any person wishing to purchase securities issued by the company and any of its affiliates has been extended. The company shall not use its reserves, cash or profits to satisfy any obligation of any such person. However, an exception has been added to allow loans (subject to these conditions, not including preferential terms) to allow persons to purchase securities of entities licensed and regulated by the UAE Central Bank. The changes clarify that obligations and payments to underwriters are not considered financial assistance.
Extended grounds for liability	Liability of directors and managementDirectors continue to be liable for any fraud, abuse of authority, violation of the law, or violation of the requirements set in the company’s incorporation documents. Recent changes extend this liability to all members of executive and senior management.The base of possible shareholder claims has been significantly widened to include claims against the company and its management, claims against the Board of Directors without prior notice to the company, and an expanded base of possible claims filed on behalf of the company by holders of 10 percent of the shares. Shareholders are entitled to be reimbursed for their legal expenses, including attorneys’ fees.In the case of a limited liability company, the memorandum of association must set out the mechanisms for resolving disputes between the company and its management or between the company’s partners.
Auditor Rotation	Auditor rotationNew rules for the appointment and rotation of auditors have been introduced. Public companies must be audited by an audit firm that cannot continue its mandate for more than six consecutive years (during which time the responsible partner must be changed after three years). The firm may be reappointed only after two years from the date of termination of its appointment.
New rules for shareholders’ meetings	Shareholders’ meetingsA general meeting must be called at the request of shareholders or partners who own 10 percent of the company capital (previously it was 25 percent for limited liability companies and 20 percent for public companies). The quorum for holding a general meeting of a limited liability company was lowered to 50 percent on the first session (lowered from 75 percent). New rules regarding notification requirements have been introduced. The minimum notification period has been extended from 15 to 21 days for both limited and public companies and a copy of such notice must be sent to the Department of Economic Development in the relevant emirate (for a limited company) or to the SCA (for public companies).One or more shareholders holding 5 percent of the share capital of a share company shall be entitled to request the inclusion of items on the agenda of the general meeting. The previous minimum threshold was 10 percent.A number of changes provide for the use of modern technology to allow for remote meetings and electronic voting and discussion (subject to any specific requirements established by the Minister of Economy or the SCA).

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