New and proposed laws modernising Dubai's legal framework

In looking back at both the legal changes introduced in the UAE in 2015 and forward to those expected in 2016, an underlying theme begins to emerge, at least in relation to the changes affecting companies and investors doing business in the UAE. It is apparent that the federal government is focused on liberalising and modernising the legal framework underpinning the way in which investors and companies in the UAE operate. There are four main changes to the legal framework:

• The new Commercial Companies Law (New CCL);
• Possible changes to restrictions on foreign direct investment (FDI) outside of free zones;
• Developments in labour laws, along with newly issued anti-discrimination law; and
• The new law supporting small and medium-sized enterprises (SMEs).

By looking at these four main areas, certain issues can be identified in the changes implemented which may affect the delivery of a more liberal and modern framework, as well as how these changes are expected to contribute to that goal.

Working Under The New CCL

Since its inception in 1984, the previous Commercial Companies Law in the UAE, known as Federal Law No. 8 of 1984, remained largely untouched despite significant changes in the commercial landscape in the federation. The enactment of the New CCL, also known as Federal Law No. 2 of 2015, on July 1, 2015 was long awaited. While the New CCL largely retains the same legal framework and features for the regulation of companies in the UAE as its predecessor, it also introduces some significant reforms. Much has been written about those changes and they will not be reviewed again here. Instead, the focus is on how the New CCL is faring in its early days and some of the key issues that have been identified by the business community since the New CCL came into force in 2015.

Reliance On Further Resolutions

One of the more general concerns with the New CCL is that it anticipates and relies on the later publication of various regulations to implement and/ or expand upon many of its operative provisions. These further regulations are vital for a full and comprehensive assessment of the New CCL. In their absence, it is difficult to comment on certain new concepts introduced by the law. For example, the New CCL now includes a provision on takeovers of public joint stock companies, but that provision only sets out that parties will need to comply with the rules issued by the Securities and Commodities Authority (SCA) on takeovers.

As those rules have not yet been issued, many continue to await a more comprehensive takeover framework. Similarly, the New CCL allows public joint stock companies to offer shares to a “strategic partner” without first offering them to the existing shareholders (i.e., enabling such companies to increase their share capital outside of the statutory pre-emption rights regime). The New CCL includes certain conditions for offering shares to a strategic partner; however, it also provides that the board of the SCA will issue a resolution setting out further conditions and procedures for the entry of a strategic partner as a shareholder in the company. Again, investors must await that resolution to fully comprehend how an offering to a strategic partner will operate.

Perhaps the most written-about omission from the New CCL is that it does not amend the foreign ownership restrictions, which apply in the UAE outside of the free zones, but grants the UAE Federal Cabinet of Ministers (Cabinet) the right, upon a recommendation made by the Ministry of Economy (MoE), to restrict the current UAE ownership requirements to certain classes of economic activity only. It is expected, however, that the foreign ownership restrictions will be dealt with under a forthcoming new foreign investment law, which will be discussed briefly below.

Application Of New CCL To LLCs

One of the most significant issues of interpretation is proving to be determining which provisions of the New CCL apply to limited liability companies (LLCs). Article 104 of the New CCL states that provisions relating to joint stock companies (JSCs) also apply to LLCs, unless otherwise specifically provided for by the New CCL. The effect of this article appears to be that many of the provisions applying to JSCs also apply to LLCs. However, there are major differences between the corporate model of a JSC and that of an LLC. This risks unsatisfactory and illogical results for LLCs in certain circumstances.

This position is further muddied by Article 84 as, in addition to Article 104, Article 84(2) sets out that without prejudice to the provisions on LLCs under the New CCL, the provisions which apply to the members of the board of directors of JSCs also apply to the managers of LLCs. This raises the question as to whether, as a result of Articles 104 and 84(2), the prescriptive provisions which apply to a board of directors at a JSC also automatically apply to the board of directors (or managers) at an LLC. Examples of these more prescriptive provisions in the New CCL which apply to boards of directors of a JSC include the following:

• Under Article 151, the chairman and majority of the board of directors of a JSC must be UAE nationals;
• Under Article 156, a JSC board must have at least four meetings a year; and
• Under Article 157, JSC board resolutions must be passed by majority vote and, in the event of a tie, the chairman has a casting vote.

In fact there is no requirement for an LLC to constitute a board, and an LLC can have a single manager and no board if the shareholders so wish. Under the previous CCL law, if the shareholders of an LLC did decide to create a board of directors, these matters were left to the discretion of the shareholders as set out in the memorandum of association/contract of establishment of the LLC.

If the effect of either Article 104 or Article 84(2) were to impose all the rules governing the composition, conduct and proceedings of a JSC board on all LLC boards, it would be a disruptive change for many LLCs and would potentially cut across many carefully negotiated board structures for joint venture LLCs. Given that the LLC is the most commonly used and preferred onshore corporate structure for foreign investors in the UAE, this will be of particular interest to non-UAE nationals, and there has been much debate in the market around the interpretation of these provisions.

Financial Assistance

One of the headline changes brought about by the New CCL was the introduction of a prohibition on financial assistance by JSCs. Financial assistance involves a company, or its subsidiary, providing financial aid to its shareholders by way of loans, donations or by providing guarantees or asset security to enable such shareholders to hold shares, bonds or sukuk (sharia-compliant bonds) issued by that company, or a subsidiary. Article 222 of the New CCL prohibits such financial assistance.

Given the general terms of Article 104, the market has also been debating whether it applies the financial assistance restriction in Article 222 to LLCs as well. The question is key in leveraged finance transactions where the target company may offer financial assistance as security for the acquisition financing, and particularly as the New CCL does not include any “whitewash” procedure that would allow the shareholders to approve financial assistance in certain circumstances.

LLCs & Share Pledges

Under Article 79 of the New CCL, shareholders of LLCs are now expressly allowed to pledge their shares in an LLC to another shareholder in the company or a third party. Previously, the law was silent on whether shares in an LLC could be pledged and, while there was a discussion in the market as to whether a share pledge was legally effective, in practice parties to agreements for share pledges were able to register share pledges in some of the emirates by relying on the provisions of civil and commercial transactions laws – although only in favour of financial institutions licensed in the UAE.

Article 79 sets out the requirements for the creation and registration of a share pledge. For example, in order for a share pledge to be valid it must be registered in the commercial register. However, it remains unclear how the process of enforcing a pledge over shares in an LLC will operate in practice given that the statutory pre-emption rights still apply. In addition, the New CCL does not include some of the concepts ordinarily necessary for a share pledge. For example, there is no requirement in the New CCL for share certificates to be issued in relation to LLC shares. This means a pledgee cannot take physical possession of share certificates, and there is no concept of numbered or registered shares in an LLC.

While the New CCL remains in its infancy and is untested by the judicial system, it is expected that other issues of interpretation and application may well arise. The market needs more clarification from the authorities on certain of these issues and how the new provisions will be applied in practice.

Changes On FDI Restrictions

Under the previous CCL law, a UAE national or a company wholly owned by UAE nationals was required to hold at least 51% of the issued share capital of an LLC, private joint stock company or public joint stock company. As a result, foreign companies often use joint ventures to invest in the onshore UAE market (i.e., outside of the free zones) in order to avoid breaching these restrictions. Before the New CCL was issued, there was much speculation that the law might relax foreign ownership restrictions. This would further open up certain sectors outside of the free zones in the UAE to foreign investors, and thereby encourage more foreign investment. In the event, it did not. Rather, the New CCL grants the Cabinet the right, upon the recommendation of the MoE, to limit certain classes of activity to UAE nationals only (Article 10). Accordingly, as it currently stands the restrictions on foreign ownership outside the free zones remain as before.

Foreign ownership restrictions are expected to be the subject of a new FDI law. In March 2015 Abu Dhabi-based daily The National reported that not only had a first draft of the new law been approved by a Ministry of Justice (MoJ) committee and the Cabinet, but it was at an advanced final stage. The law is expected to be redrafted by the MoJ before receiving final approval from the Federal National Council and the Cabinet. However, it is still uncertain exactly when the law will be introduced, or which sectors specifically would benefit from a new 100% ownership allowance. Until the law is published, the public will remain in the dark as to its scope and the exact detail regarding a relaxation of foreign ownership restrictions onshore.

Developments In Labour Laws

The combination of the recent issue of three ministerial decrees regarding employment contracting procedures, termination and transfer of employment and a new law against discrimination and hatred will introduce significant changes for employers and employees alike in the UAE. Three decrees issued recently by the Ministry of Labour (MoL), which went into effect on January 1, 2016, will introduce changes to the procedures for contracting terms of employment and also to how employment contracts can be terminated and transferred. The decrees do not represent an amendment to Federal Law No. 8 of 1980 (the Labour Law). However, they do repeal any contrary or inconsistent terms provided in any other decrees. It is expected that the decrees will introduce greater transparency to employment practices, improve employee rights and generally help towards the delivery of a more regulated employment market in the UAE. The decrees are covered in detail below, along with their impact.

Standard Employment Contracts

Under Ministerial Decree No. 764/2015 (Decree 764), in order to obtain the initial approval of the MoL for the admission of a foreign employee for the purpose of employment within the UAE, employers will be required to deliver offer letters to new foreign employees. The offer letter must meet the following requirements:

• Signed by the employee in his or her home country, or, if the employee is already in the UAE, the UAE; and
• Conform with the terms of a standard employment contract, the specimen form of which was attached to the decree.

Other key aspects of Decree 764 include the requirement that an employer obtain a standard employment contract from the MoL which captures exactly the terms of the employment offer letter signed by the employee and to present this contract, signed by the employee, to the MoL for registration. The decree also includes restrictions on amendments and additions to the standard employment contract signed by the employee. Amendments can only be made with the approval of the employee and the MoL and only if they are for the benefit of the employee. New provisions can only be added in the following cases:

• They are compliant with the applicable regulations and do not conflict with the other provisions of the standard employment contract; and
• They have explicit approval from the MoL.

In addition, the standard employment contract adopted by the MoL must also be used when an existing employment contract is renewed (i.e., it applies to those in existence before the decree was issued). In practice this means employers will need to send employment offer letters to foreign employees for acceptance in their country of origin. The offer letter must be in the same terms as the standard employment contract to be presented to the MoL in order to obtain initial approval to admit the foreign employee for employment in the UAE. These requirements, together with the need for the employee’s consent to any amendment to his or her employment contract, will help to ensure that the process for foreign employees in the UAE is more transparent and that foreign employees do not find that their terms of employment are unilaterally changed upon or after their arrival in the UAE from those offered and on which they made the decision to move to the UAE.

Terminating Employment

In addition, Ministerial Decree No. 765/2015 (Decree 765) will regulate how employment contracts can be terminated in the UAE. Decree 765 sets out the conditions and circumstances under which a relationship of employment can be terminated in limited-term (i.e., fixed-term) and unlimited-term employment contracts, and those circumstances under which the employment will be deemed to have been terminated. It is also worth highlighting that, under the decree, notice periods will be capped at three months. This will have implications for companies and other employers that ordinarily require longer notice periods for senior employees in order to avoid turnover at the senior staff/management level. Decree 765 also sets out that employers and employees will be entitled to apply to the courts to seek compensation and enforce any other rights provided for under the Labour Law and its implementing regulations. By regulating and clarifying how employment contracts can be terminated, Decree 765 will help to protect both the rights of employees and employers upon termination.

New Work Permits

Ministerial Decree No. 766/2015 (Decree 766) sets out the rules governing the issue of a new work permit by a new employer to an individual following the termination of his or her previous employment contract. The decree will apply to both limited- and unlimited-term employment contracts. The decree also sets out that those granting new work permits to employees in educational institutions during the academic year must obtain the approval of the relevant governmental agencies (such as the Ministry of Education, the Knowledge and/ or Human Development Authority in Dubai and the Abu Dhabi Education Council) prior to issuing such permits, and provides that a new work permit granted under Decree 766 may be repealed if the MoL discovers that the data relied upon to grant the new work permit was false. It is hoped that the introduction of clarity on the conditions that apply to the issue of a new work permit upon a change of employment will help to enhance the free movement of employees in the UAE and, as a result, their career opportunities.

Anti-Discrimination Law

Although of wider application than the employment context, the recently enacted Federal Decree by Law No. 2 of 2015 against Discrimination and Hatred (Anti-Discrimination Law) will also have an impact on the Labour Law framework in the UAE. The Anti-Discrimination Law is aimed at preventing, and will criminalise, the following types of behaviours:

• Any form of discrimination on the basis of religion, belief, sect, caste, creed, doctrine, race, colour and/or ethnic origin;
• Hate crimes and the incitement of hatred;
• Religious contempt; and
• Incitement and facilitation of any of the above.

The penalties will include imprisonment, with terms between six months and over 10 years, and fines ranging from Dh50,000 ($13,600) to Dh2m ($544,000). Discrimination is also defined for the first time in UAE law as any distinction, limitation, exception or preference among individuals or communities on the basis of religion, belief, sect, faith, creed, race, colour and/or ethnic origin.

Under Article 6 of the new Anti-Discrimination Law, it is a criminal offence to commit any of these acts that may create any form of discrimination by any means of expression. Article 6 of the law is set up to have wide application. The new legislation defines “expression” in order to cover any speech, written material, drawing, signal, photography, singing/music, acting or mime. In addition, “means” is defined under the law as the internet, telecommunications network, websites, social media, industrial materials, information technology means or any written, audio or visual means.

Both employers and employees in the UAE will need to be aware of the terms of the Anti-Discrimination Law and that it will apply to workplace conduct. Employers should be particularly concerned with Article 17. This renders employers liable under the Anti-Discrimination Law for the conduct of their employees under certain circumstances. Article 17 sets out that the representative, manager or agent of a corporate person shall be liable if any of the crimes set out in the Anti-Discrimination Law are committed by any personnel of the company in its name and/or on its behalf. However, this is only if the representative, manager or agent is found to be aware of the offending behaviour. If that is the case, the employer will be jointly liable for the payment of any financial penalties or compensations ordered by the court.

It is not clear if the law will apply to discrimination in the workplace due to the age or gender of the employee. Despite the absence of specific provisions in relation to discrimination on the grounds of age or gender, it is still highly advisable that employers take steps to prevent any type of discrimination in their workplace. Employers will need to update their internal policies in order to reflect the new law (e.g., policies in relation to social media) and implement training programmes to ensure that employees are aware of the new terms of the law and understand its impact on their conduct in the workplace and otherwise.

Need For SME Legislation

According to a 2013 report on SMEs from Dubai’s Department of Economic Development (DED), SMEs in the emirate account for approximately 95% of all businesses, with 42% of the workforce employed by this category of company.

The DED estimated that SMEs contributed approximately 40% of the total value-add generated in Dubai’s economy in 2013. Clearly, SMEs are an important part of the economy and a legal framework to support and regulate their operations is seen as a key step in developing and encouraging further SME activity.

In fact, a draft SME law had been discussed and deliberated upon by the Cabinet for almost three years before the federal government officially adopted Federal Law No. 2 of 2014 on SMEs (SME Law). This section sets out the key features of the SME Law and considers the outlook for SMEs in Dubai and how proposed new regulations, including regulations on bankruptcy, may impact SMEs. Key features of the SME Law include:

• Establishment of an SME Council, which is responsible for creating strategic policies for the development of SMEs;
• The SME Council is granted the right to establish a unified definition for an SME;
• Registration of SMEs into the SME Programme (discussed below); and
• Details of fee exemptions and financial incentives for SME owners.

The SME Law targets SMEs that are 100% owned by UAE nationals. It does not apply to SMEs where the shareholding involves foreign nationals. The SME Law does not include an express definition of what constitutes an SME for its purposes. It merely sets out that an SME will be classified by the number of its employees, its share capital and yearly returns. However, the term was defined by the DED in its 2013 SME report and the DED’s definition may be illustrative as to the criteria. The DED (in line with the draft SME Law that was being deliberated at the time) defined an SME generally upon the following two criteria:

• Total number of employees; and
• Annual turnover.

The qualifying criteria are set out more specifically in the table below.

SME Programme

The SME Law states that the Council of Ministers shall by resolution create an SME programme, known as the National Programme for SMEs. Article 10 of the SME Law provides SMEs registered under the SME programme with benefits, including the following:

• Credit, promotion and marketing facilities to be provided by the private sector;
• A commitment by companies in which the federal government has a 25% or higher interest to award at least 5% of their purchase, service and consultation contracts to SMEs;
• Local, specialised exhibitions for the promotion and marketing of SME products;
• Potential exemptions for SMEs from Customs duties imposed on the import of equipment, raw materials and intermediate goods; and
• Potential exemptions for SMEs from MoL bank guarantee fees paid when employing and sponsoring workers.

In order to benefit from the SME programme, an SME is required to register with the Mohammed Bin Rashid Establishment for SME Development. The foundation runs annual awards ceremonies for the top-performing SMEs, known as the Dubai SME 100. Other examples of the foundation’s initiatives include the Young Entrepreneurs Competition, which calls on high school and college students to consider starting their own businesses as a career option. The foundation offers young students the chance to learn about business planning, marketing and product conceptualisation.

Shortcomings In SME Law

Commentators have argued that the SME Law does not fully support SMEs in Dubai, and the UAE more generally, because it only applies to SMEs wholly owned by UAE nationals. In total only 35% of SMEs are owned by UAE nationals. Another criticism is that the SME Law does little to resolve the lack of transparency in SME culture. For example, the SME Law does not require any maintenance of account books, nor oblige SMEs to have bank accounts.

The SME Law also does not provide any assistance in the event of a business facing bankruptcy. In a jurisdiction where a bounced cheque can lead to criminal prosecutions and potential jail terms for the debtor, a foreign owner of an SME who has defaulted on a debt may find himself forced to leave the UAE altogether in order to avoid criminal penalties, leaving behind unpaid debt and a business forced to shut down, costing jobs and livelihoods in the process. The issues created by the lack of a bankruptcy law were particularly acute given the market outlook and financial stresses for many SME owners. Abdulaziz Al Ghurair, chairman of the UAE Bank Federation (UBF), estimated recently that due to the current economic climate and the sustained slump in international oil prices loans to SMEs totalling $1.5bn were at risk of default. Al Ghurair further anticipated that banks will face a surge in default on small company loans and, as a result, will place tougher restrictions on SME lending, making it harder for SMEs.

Other Initiatives

However, significant changes in the regulation of bankruptcy in the UAE have been on the regulatory agenda for some time and a new bankruptcy law has been drafted and recently approved by the UAE’s Cabinet of Ministers. It should nullify the bankruptcy provisions in the UAE Commercial Transactions Code. For SMEs, the bankruptcy law will be particularly revolutionary by resolving the issues SME owners face in times of financial stress, as well as support the risk taking and entrepreneurism so often imperative to the survival of a small business. Some of the key provisions of the bankruptcy law are outlined below, along with certain other initiatives for SMEs which may encourage access to credit.

The bankruptcy law makes provision for assistance for business owners, including SMEs, and lenders in bankruptcy-type situations including:

• The ability for businesses to declare bankruptcy without facing criminal prosecution;
• Suspension of legal action against SMEs for up to three months for companies that have borrowed Dh50m ($13.6m) or more from several banks and show signs of financial stress;
• Option for borrowers of total exposure less than Dh50m ($13.6m) to approach lending banks;
• The ability for concerned parties to follow a clear bankruptcy procedure that is codified and regulated by a competent body of professionals, known as the Committee of Financial Restructuring; and
• Continuation of business contracts and other obligations, free from the risk of rescission or termination simply by virtue of the business declaring bankruptcy.

The UBF is currently working on the implementation of the bankruptcy law, as well as decriminalising bounced cheques. The UBF is also advocating the introduction of a code of corporate governance at the federal level, under which SMEs would be required to maintain accounts and adopt a structure depending on their size and annual turnover. It is hoped that, once adopted, this corporate governance code will encourage a culture shift among SME owners towards greater financial transparency, assist lenders in determining creditworthiness and improve access to the incentives and financial benefits envisaged by the SME Law.