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Editorial

Changes to Company Norms

Zouhdi Yakan, Partner at Law House Advocates & Legal Consultants, explains the implications of the new Federal Law No. 2 of 2015 concerning Commercial Companies on private joint stock companies.

The new Federal Law No. 2 of 2015 concerning Commercial Companies (NL) repealed the previous Commercial Companies Law – Federal Law No. 8 of 1984 (PL) and came into force on July 1, 2015.

Under the NL, provisions concerning public joint stock companies (PJSCs) also apply to private joint stock companies (PJCs), except for the provisions of public subscription, and if otherwise provided therein. For PJCs, the term “Ministry” (i.e. Ministry of Economy) replaces the term “Authority” (i.e. Securities and Commodities Authority). (See Art. 265, NL). Any reference hereinafter to joint stock companies (JSCs) shall mean reference to both PJSCs and PJCs.

A brief review of certain changes enacted under the NL and the impact of such on PJCs:

Management

• Board of directors - formation, election and meetings

Article 143 of the NL reduced the maximum number of directors of a JSC from 12 to 11 and stipulates that the total number of directors must be an odd number to prevent possible deadlock in board decisions. The three-year term of membership on the board remains the same, as does the possibility of re-election of the board member more than once.

Directors shall be elected by way of cumulative secret voting, i.e. each shareholder may distribute his votes (being equal to the number of shares held by him) according to his candidate preference and may allocate all his votes to one candidate or amongst the candidates. (See Art. 144, NL).The general assembly (GA) is also granted the right to appoint certain experienced non-shareholders as directors of the company, provided their number does not exceed a third of the number of directors specified in the Memorandum or Articles of Association (AoA). (Ibid)

The NL sets a minimum requirement of four board of directors’ (BoD) meetings per year, unless the company’s AoA specifies more. (See Art. 156, NL). In an effort to minimise the unexcused absence of directors, the NL stipulates that the director be deemed resigned if he is absent for five non-consecutive meetings without a valid excuse. (See Art. 158, NL)

• Prohibited dispositions

The PL prohibited certain transactions by the chairman and members of the BoD (See Art. 108, PL) which were widened under the NL to cover a larger scope of individuals or entities, defined therein as ‘Related Parties’: “the chairman, directors, senior executive management and employees of the company, the companies in which any of such persons holds at least 30 per cent of its share capital, and subsidiaries, sister or affiliated companies.” (See Art. 1 and 152, NL)

General Assembly

• Invitation to general meetings

The statutory minimum notice period for holding a GA meeting has been reduced from 21 days under the PL to 15 days under the NL. (See Art. 172, NL)

If the invitation to hold the GA meeting is notified within a period less than 15 days from the proposed date of the meeting, the notice will be deemed valid if approved by a number of shareholders representing 95 per cent of the company’s share capital. (See Art. 173, NL)

The invitation to the meeting, subject to the consent of the Authority, must be completed by publication in two daily local newspapers, one of which must be in Arabic, or under registered letters or according to the method of notification as determined by the Authority.(See Art. 172, NL)

Under the PL, the BoD was required to call for a meeting upon request of a minimum of 10 shareholders holding at least 30 per cent of the company’s share capital. (See Art. 121, PL). The NL lowers such threshold by requiring only one or more shareholders representing at least 20 per cent of the share capital, unless the company’s AoA specifies a lesser percentage. (See Art. 174, NL)

Invitations to meetings in such cases should be addressed within 5 days from the date of the application and the GA shall convene in 15 to 30 days from the date of invitation. (Ibid)

• Quorum at the meeting and resolutions

The minimum statutory quorum required for convening a GA meeting as per Article 183 of the NL is 50 per cent of the share capital of the company, while the right to agree on a higher percentage/majority is retained for the shareholders in the AoA of the company.

If the quorum is not present at the first meeting, it shall be adjourned and a second meeting shall be held after 5 and within 15 days from the date of the first meeting (under the PL the second meeting was to be held within 30 days from the date of the first meeting). The second meeting shall be valid irrespective of the number of shareholders present. (See Art. 183, NL)

Unlike the PL requirements of an absolute majority (See Art. 128, PL), resolutions of the GA may now be passed by majority of the shares present at the meeting (i.e. simple majority), or such higher majority as determined by the AoA. (See Art. 188(1), NL)

The NL only recognises the GA and no longer distinguishes between ordinary and extra-ordinary GA. Instead, the NL replaces the extra-ordinary GA with the concept of a ‘Special Resolution’ (SR) of the GA which is issued by the majority of votes of shareholders holding at least 75 percent of the shares represented in the meeting of the GA of the JSC. A SR is required to pass certain significant matters, including: extending or shortening the duration of the company if its purpose so requires (See Art. 108, NL); amending the AoA (See Art. 139, NL); the purposes of the transactions listed under Article 154 of the NL regarding board powers; increasing or decreasing of the capital of the company (See Art. 194 and 202, NL); the merger of the company with another company (See Art. 283, NL); or the dissolution of the JSC before the end of its fixed term or continuation of its activities in cases where company losses reach half the value of its issued capital. (See Art. 302, NL)

Shareholding, share capital and auditors

• Number of shareholders

The founder’s committee required to incorporate a PJC may now be composed of 2 members instead of 3 (See Art. 257, NL) and the minimum number of shareholders has been reduced from 3 to 2 with a maximum set of 200 (See Art. 255, NL), subject to the exceptions stipulated under the NL.

Share capital

The issued share capital of a PJC shall not be less than AED 5,000,000 and shall be paid in full, with the exception of existing and registered PJCs. (See Art. 256 NL)

The NL has introduced the concept of ‘authorised share capital’ which shall not exceed 2 times the ‘issued share capital’. (See Art. 193, NL)

Minority shareholders’ rights and claims

The NL emphasizes protection of minority shareholders by granting them the right to file an application to the Authority in instances where one or more shareholders holding at least 5 per cent of the shares of the company consider(s) that the affairs of the company are, or have been, conducted to the detriment of the interests of any or all of them; or the company’s actions may harm a shareholder. Should the Authority reject or fail to decide on an application within 30 days, the shareholder may resort to court. (See Art. 164, NL). Likewise, shareholders holding such percentage of share capital may request the Authority suspend enforcement of resolutions passed by the GA in favour of a certain class of shareholders or which bring special benefit to the directors or others. (See Art. 191(1), NL)

• Share register secretariat

The NL introduced the ‘Share Register Secretariat’ (SRS) for PJCs to organize their ‘Share Register’, which shows the shareholding in JSCs and the rights attached to shareholders. (See Art. 1 and 260, NL). Share transfers shall only be effective (against the company or third parties) from the date of their registration with the SRS. That is, the title of shares shall be transferred by the entry of such transfer with the SRS. PJCs may not enter any transfer of its shares other than with the SRS. (See Art. 263, NL)

• Auditors

Under the NL, appointment of the company’s auditors remains vested with the GA; however, their appointment shall be for 1 year renewable for a maximum of 3 successive years (See Art. 243, NL), unlike the PL which did not impose any cap. (See Art. 144, PL)

Conclusion

The NL is more pragmatic than the PL and has resolved previous practical impediments for JSCs by simplifying voting majorities and shortening the notice period for reconvened meetings of the GA. It also contains several provisions which strengthens corporate governance, such as extra protections for minority shareholders, the widening of prohibited transactions to include ‘Related Parties’, and introducing a cap on auditors’ term of appointment. We await further regulations, rules, resolutions and circulars to be issued as required for implementing the provisions of the NL.