Overview

His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the United Arab Emirates, has promulgated Federal Decree Law No. 26 of 2020 (the Decree) which introduces landmark amendments to Federal Law No. 2 of 2015 on Commercial Companies (the CCL). The Decree has a specific focus on encouraging foreign direct investment into the UAE, amends 51 articles of the CCL and introduces three new articles.

In this alert, we focus on the changes to the foreign ownership regime and what businesses should think about doing next.

The highlights

100% foreign ownership

The Decree represents a fundamental change to the restrictions on foreign investment into the UAE. In particular:

• foreign investors are now allowed to own 100% of certain UAE businesses by way of a single shareholder company; and
• removal of the general requirement for a UAE national (or company wholly owned by UAE nationals) to:
  • own 51% of the share capital of UAE onshore companies; or
  • act as service agent of UAE onshore branch offices.

The foregoing new regime is subject to the UAE Cabinet, in conjunction with a new committee to be formed by the Cabinet, preparing a list of activities with "strategic impact". Companies that conduct activities with "strategic impact" may be subject to unspecified minimum UAE ownership or UAE board representation requirements to be determined by the relevant economic department in each Emirate. Therefore, the full impact of the changes to the foreign ownership restrictions will not be clear until the list of activities with "strategic impact" is published.

No UAE nationals required on boards of public or private joint stock companies

Previously the chairman and a majority of the board needed to be UAE nationals.

Repeal of the Foreign Direct Investment Law (Federal Law No.19 of 2018)

This was previously enacted as the UAE's initial step to liberalise its foreign ownership restrictions.

Timing

The majority of the amendments set out in the Decree will take effect from 2 January 2021. However, the following fundamental changes (as described above) will only come into force six months from the date of publication in the Official Gazette:

• the removal of UAE national ownership;
• the removal of service agents for branches; and
• the removal of UAE nationals on the boards of public and private joint stock companies.

This means incumbent foreign shareholders and new foreign investors will need to wait until at least 30 March 2021 (on the basis the Decree was published on 30 September 2020) before taking advantage of these changes. Of course, this is subject to the activities with "strategic impact" having been released, enabling an appropriate assessment of what is possible to be carried out.

Existing companies have until 2 January 2022 to adjust their positions in accordance with the Decree and a failure to do so will mean a company is considered dissolved. In addition, violation of the CCL and/or the Decree may incur financial penalties ranging from AED 100,000 to AED 10 million. 

What should you do now?

Foreign shareholders in onshore UAE companies (or foreign owners of branch offices) will therefore need to consider their current arrangements with their UAE national partner(s) and assess their ability to walk away from these arrangements.

If you are a business in a free zone, you may wish to assess whether that arrangement remains an attractive option.

Given the critical potential penalties (both financial and being dissolved, as described above), parties should also ensure that they arrange for their company's memorandum of association to be updated to align with the other changes brought about by the Decree in regard to matters such as notice periods for meetings, quorum and disputes among shareholders and/or managers. This will inevitably require parties to appear before the UAE notary public to execute these amendments. However, these changes could be made at the same time as any related share transfer, which would also require the company's memorandum of association to be updated.

How Dentons can help

We are an international law firm with a 50-year tenure in the UAE and have offices in both Abu Dhabi and Dubai. Our team is ideally placed to:

• advise on your options/future structure by reviewing your existing arrangements;
• utilise our Arabic language capabilities to assist in negotiations with your UAE partner; and
• assist with implementing the changes by preparing the necessary documentation and facilitating any changes with the notary public and relevant authorities.

Please contact us if you would like to discuss this new regime and explore your options.