Major changes in UAE’s foreign investment legal system

By Wang Jihong and Huang Guanli, Zhong Lun Law Firm
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The United Arab Emirates (UAE) has attracted global investor interest in recent years. The latest data from the World Bank reveal that the UAE ranks 16th in terms of its business environment in bank’s Doing Business 2020 report, and the amount of foreign direct investment (FDI) ranks 27th in the world, the top among Arabic countries for many years.

王霁虹, Wang Jihong, Partner, Zhonglun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

To further attract foreign investment, the UAE issued Federal Decree Law No. 26 of 2020 on 27 September 2020, and published it in the government gazette on 30 September. The new decree amended the Commercial Companies Law 2015, and abolished the Foreign Direct Investment Law 2018. By comparing the old and new legal frameworks, this article introduces some major changes that are worth attention.

Removal of restrictions on the proportion of foreign investment shareholding.

According to the Commercial Companies Law 2015, except for setting up offshore companies in Jebel Ali Free Zone (Jafza) and Ras Al Khaimah Economic Zone (RAKEZ), foreign-invested onshore companies set up in the UAE are subject to restrictions on the shareholding ratio. At least 51% registered capital should be held by UAE citizens, or UAE companies in which all the shareholders are UAE citizens.

On this basis, the Foreign Direct Investment Law 2018 divided the business area that may be carried out by foreign companies into a positive and negative list. For the 13 categories of business activities on the positive list, the new decree authorises the emirates to decide the maximum ratio of the shareholding of the foreign investment. For the areas still on the negative list, the legal regulations on the shareholding ratio restrictions still need to be followed.

In response to the above-mentioned requirements, the most common operation in the past was to introduce a unique UAE sponsorship system, which had the characteristics of shareholding nominees and service intermediaries under Chinese law. The sponsors were usually the nominal shareholders, who did not contribute capital to the company.

黄冠理, Huang Guanli, Associate, Zhong Lun Law Firm_
Huang Guanli
Associate
Zhong Lun Law Firm

Sponsors and foreign investors usually sign nominal shareholder agreements or similar agreements, and transfer the shares and corresponding responsibilities of the nominal shareholders to the foreign investors, to make sure the foreign investors are the sole beneficiaries and decision makers of the company. The sponsor usually charges a fixed fee as corresponding remuneration. The sponsor also provides assistance on administrative issues, such as the mediation between companies and government departments.

The new decree basically removes the restrictions on the foreign investment shareholding ratio. The amended law stipulates that foreign investors can set up onshore companies in the UAE without restrictions, unless the company is carrying out activities of “strategic impact”.

Lowering the shareholding proportion requirements to convene shareholders’ meetings and removing the nationality restrictions on the composition of boards of directors.

According to the Commercial Companies Law 2015, the shareholder meeting of a limited liability company must be convened by shareholders who hold 25% of the shares (20% for joint stock companies), and the number of attendees at the shareholders’ meeting must meet the statutory requirements of shareholders who hold at least 75% of the shares. Shareholders who hold more than 10% of the shares have the right to make proposals. In addition, the law stipulated that the majority of the company’s board of directors, and the chair of the board, should be UAE citizens, and at least two-thirds of the board of directors should be company shareholders.

The new decree abolishes the requirement that the chair and majority of the board should be the UAE citizens (unless the company is carrying out activities of “strategic impact”) and lowers the requirements to convene shareholders’ meetings. According to the amended law, the shareholding ratio threshold to convene the shareholder meeting was lowered to 10%, the effective number of shareholders attending the meeting was reduced to 50%, and the shareholding requirement for shareholders who have the right to make proposals was also reduced to 5%. This adjustment reduces the limit on shareholding ratios and at the same time strengthens the protection of the interests of foreign investors who usually act as minority shareholders.

Introduction of “strategic impact” concept.

The new decree abolished the Foreign Direct Investment Law. However, to continue the regulation of foreign investment activities, the concept of “strategic impact” was introduced. The new decree authorises the Council of Ministers of UAE to set up a committee, which consists of representatives from the Department of Economic Development in each emirate, to determine what activities have “strategic impact”, and additional legal requirements each emirate has for each foreign investor to participate in such activities.

As at the time this article was finalised, the exact scope of the “strategic impact” activities were still not clear. However, it is reported that most of the activities in the negative list of the original Foreign Direct Investment Law – such as oil and gas exploration and development, military defence, aviation and communications – are most likely to be defined as “strategic impact” activities. Strict restrictions will be imposed if foreign investors are to carry out such investment activities.

Chinese investment in UAE

According to the new decree, the amended Commercial Business Law came into effect on 2 January 2021, the original shareholding ratio restrictions will be abolished on 1 April 2021, and the adjusting period for companies to amend relevant articles of association will end on 2 January 2022.

Under the new legal framework, on the one hand, entry barriers to invest in the UAE will be greatly reduced, and Chinese investors can better choose the location to set up their companies based on their own business characteristics of business, and the business environment of each emirate. On the other hand, Chinese companies that were already set up under the original legal framework will have a chance to redesign and adjust their shareholding structures, governing structure, and rules of procedure.

Especially regarding the sponsorship system that was common in practice, Chinese-funded companies can also consider the pros and cons and adjust accordingly. For an investment area that might involve “strategic impact”, the law and regulations are not yet clear, and the impact on relevant investors remains to be seen.

Wang Jihong is a partner and Huang Guanli is an associate at Zhong Lun Law Firm

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