Under the civil transaction laws of the UAE, a company is defined as a contract where two or more persons are bound to each other to participate in a financial project by providing a share of work or project for exploiting the said property and the division of profit and loss that may arise there out.
The contract should be in writing. The capital of the company should be in cash or like property. In case, the capital is not in cash, the value thereof should be assessed. It shall be permissible for the share of the partners to be equal or diverse but, it shall not be permissible for the debt owed by a third party to constitute capital of the company.
Profits of the company shall be distributed as stipulated in the contract. In case the contract doesn’t mention the share of profits, the profits shall be distributed according to the partners’ shares in the capital.
Article 659 of the Federal Law No (5) of 1985 says that the losses of the company could be shared by partners only in proportion to the shares in the capital. Any provision contrary to the above mentioned shall be void.
MANAGEMENT OF THE COMPANY
Partner will act agent of other partners. They also act as trustee of the property of the company in his possession. A person has to be deputed by the company to manage the affairs of the company. Sometimes more than one person (two persons) shall be appointed to manage the affairs. In that case, two of them should act JOINTLY always. Except where the consultation of the other is not required or in the case where the delay in decision will cause damage to the company.
The partners who are not appointed as managers cannot take part in the management of the company. But these partners can inspect the books and papers of the company. If the partner is having personal debt, the creditor may not get it from the share of the partner in the capital before liquidation or they can take from the profits of the shares of the partner.
It shall be permissible for the court to order that the company be dissolved upon the application of any of the partners on the grounds that the partner has not done that which he has undertaken to do or by reason of his having caused the company fundamental damage by virtue of his actions in the affair thereof.
According to article 677 of the Federal Law No. (5) of 1985, it shall be permissible for a majority of the partners to apply for a judicial order dismissing any partner if they adduce serious reasons justifying the dismissal.
According to article 678 of the Civil Transaction Laws, the assets of a company shall be liquidated and distributed in such manner as the partners agree, and if they do not agree it shall be permissible for any person having the interest to apply to the court for an order appointing one or more liquidators to carry out the liquidation and distribution.
The New Foreign Investment Rules in UAE
The Federal Law No (26) of 2020 removed, with some exceptions, the long-standing requirement for UAE companies to have one or more UAE sponsoring shareholders holding at least 51 percent of the issued share capital of a company.
The Federal Decree has also abolished the former requirement for appointing a UAE national service agent. The appointment of a national service agent was a requirement for the registration of a branch or representative office of a foreign company onshore in the UAE.
The changes related to foreign investment rules under the Federal Decree will come into effect by the end of March 2021. The Cabinet of Ministers is expected to issue a number of resolutions clarifying certain changes under the Federal Decree. We will issue a separate client alert once the Cabinet of Ministers’ resolutions are issued.
Foreign investors operating in the UAE are encouraged to assess their existing arrangements with their UAE shareholders (for onshore companies) or national service agents (for branches or representative offices). If arrangements with UAE counterparties were put in place to comply with the previous foreign investment rules, and such arrangements are no longer required from a strategic business perspective, then it would be advisable to stress test the enforceability of these arrangements, in order to:
- Consider available options to retake control, including the enforceability of any contractual protections and any other securities or guarantees provided by the UAE counterparty;
- Consider the impact of any potential disagreements or disputes on the business operations and licenses; and
- Identify any applicable formalities or timelines that are related to retaking control or initiating termination of existing arrangements and, if applicable, dispute proceedings.
Undertaking this strategy review is essential and should be conducted in consultation with the business’s legal advisors prior to initiating any discussions with the UAE counterparty. This exercise will allow the business to consider, from the outset, any potential issues or risks and mitigate any business disruption or exposure.
Civil Law, Corporate Law, Company Law, The New Foreign Investment Rules in UAE
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