The long-awaited new companies law will be a boon to IPO activity in the UAE, and boost corporate governance, lawyers have said.
The Commercial Companies Law No 02 for the year 2015 was issued by President Sheikh Khalifa on Wednesday, bringing to a close a multiyear legislative process.
“The new law will bring significant improvements, particularly in the level of corporate governance expected of listed companies,” said Husam Hourani, managing partner at Dubai-based law firm Al Tamimi & Company. It will also “encourage financial markets and new IPO activity on UAE markets,” he said.
The legislation allows companies to float a minimum of 30 per cent of its equity, according to state news agency WAM.
Previous rules required companies to float at least 55 per cent, and were widely seen as making IPOs in the UAE less attractive than in other jurisdictions.
“A major obstacle facing the founders of business is that they don’t want to divest from a business they have put a lot of sweat equity into,” said Murad Abida, head of corporate practice in the Middle East at law firm DLA Piper.
“Under the new law, founders can keep 70 per cent of the company’s equity, which they can offload at a later date at valuations that are higher than the intital valuations. This is more attractive for a company’s founders.”
Underwriting has been given statutory recognition for the first time, meaning that companies will be also able to use a book-building process to price shares. This was not permitted under previous regulations.
The law introduces the concept of a “sole founder” to UAE commercial law. An individual can now establish a private or limited liability company, in a move that is likely to make life easier for the UAE’s entrepreneurs.
“For a single entrepreneur, the only option heretofore was an unlimited liability sole partnership, which some folks are not comfortable with, because they want to separate personal and financial liability,” said Mr Abida. “Segregating personal liability and business deals will give them much greater comfort to venture into the world of business and commerce.”
The change will make it more appealing for Emiratis to seek opportunities beyond traditional employment, he said.
Listed companies are allowed to convert debt to capital for the first time.
The law does not relax restrictions on foreign ownership, which remains capped at 49 per cent. Officials had previously indicated support for allowing majority foreign ownership, but the measure was scrapped after disagreement between government departments.
A draft of the law, made available in 2013, contained a number of further provisions not mentioned in the government release.
A forthcoming cabinet decree would specify the terms under which free zone companies can do business onshore, the draft law said. Until the full text of the new law is published, it is not known whether these provisions were included.
Private joint stock companies would also be subject to as-yet unpublished corporate governance rules, and to issue a minimum of Dh30 million in share capital – up from Dh10m in previous regulations. Under the draft law, sole founders would be able to float their companies. Serving company executives would not be allowed to operate any business that competes with the listed business. Companies would be permitted to issue shares to employees as part of an incentive scheme.
The draft law contained further detail on accounting and reporting procedures, as well as rules governing shareholder meetings and board composition.
Sultan Al Mansouri, the Minister of Economy, said in a statement that the law aims “to raise the level of competitiveness of the national economy, and achieve one of the main objectives of the national agenda of reaching the tenth position on the Global Competitiveness Index.”
Earlier this week, Mr Al Mansouri expressed the aim of getting the UAE into the top 10 countries on the World Bank’s Ease of Doing Business Index. The UAE is currently ranked 22nd.
On Monday, Mr Al Mansouri said that the UAE was close to introducing a new law that would permit 100 per cent foreign ownership of companies outside of free zones in certain sectors.
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