The UAE Government Clarifies the Rules for Private Joint Stock Companies
On July 30, 2024, the Ministry of Economy (the “Ministry“) of the United Arab Emirates (“UAE“) issued Ministerial Decision No. 137 of 2024 concerning the operation of the registrar of private joint stock companies (“PrJSCs“) and regulations and governance applicable to such companies (the “Decision“).[1]
The Decision sets out detailed steps and regulations concerning the incorporation, registration, management and governance of PrJSCs. The Decision implements provisions of Federal Decree Law No. 32 of 2021 on Commercial Companies (the “CCL“) that are relevant to PrJSCs and that were delegated to the Ministry for further clarification.
This alert memorandum provides a high-level overview of the rules issued by the Decision. This alert does not claim to be a comprehensive summary of the Decision and the CCL provisions that apply to PrJSCs. Background
The PrJSC is a corporate form often used by privately held businesses in the UAE. The CCL does not contain many provisions that are specific to PrJSCs. Instead, it refers to the Ministry’s further regulations and guidelines. The CCL does not contain any provisions relating to public subscription or PrJSCs. The Decision clarifies processes related to incorporation and management of PrJSCs, as well as their operation and governance in the UAE. Scope
The decision applies to all PrJSCs operating in the UAE. However, PrJSCs operating in the financial services sector that are regulated by the Central Bank of the UAE, branches and representative offices of foreign companies, and free zone companies are exempt from the governance rules set out in the Decision.
III. Key Provisions
Filings
Electronic Platform
: In line with the provisions of the CCL, the Decision provides that the Commercial Registration and Agencies Department at the Ministry (the “
Registrar
- “) must establish an electronic portal through which all PrJSC-related filings shall be submitted, and which shall be linked to the commercial registers within each relevant competent authority. These filings include applications for incorporation and corporate documents related to PrJSCs, such as articles of association, resolutions, and annual financial statements.Access to Corporate Information: Pursuant to the Decision, interested parties may request information on a PrJSC from the Registrar, which may issue a certificate in response to such request. The Decision does, however, not define “interested party” in this context nor does it specify what details the Registrar is required to provide in a certificate. Board of Directors
- Nomination Criteria: The Decision provides that a PrJSC may, pursuant to its articles of association, set criteria for nominations to its board of directors (the “
Board
- “), provided that such criteria are in line with the CCL and the Decision and also acceptable to the Ministry. The Decision also outlines a list of requirements for Board nominations. These include, among others, that the nominee be a legal adult who has never been convicted of any criminal offense, or of a crime involving dishonesty, or of breach of trust, unless their good standing has been restored. The nominee must also agree to comply with CCL, its implementing regulation and the articles and regulations of the PrJSC and to exercise due diligence in performing his or her duties. The Decision defines the “due care” standard as the care exercised by a natural person who has sufficient experience and exercises due diligence in performing his or her professional duties.Removal:In addition to the right of the general assembly of a PrJSC to dismiss any or all of the members of its Board pursuant to the CCL, the Decision further clarifies that Board members appointed by any shareholder that is a corporate or government entity may be removed and/or replaced by such shareholder at any time during the term of the Board, without requiring the approval of the general assembly.Remuneration
- : In line with the related provisions in the CCL, the Decision mandates that the remuneration of Board members must be calculated as a percentage of the net profits of the PrJSC for the relevant financial year. The Decision also specifies that the remuneration of Board members must not exceed 10% after depreciation and amortization. The Decision also clarifies that Board Members may be remunerated for additional services provided over and above their normal duties as Board Members (through fees or expense reimbursements, salaries, bonuses, etc.). However, no remuneration shall be payable merely for attending Board meetings.Exception
- s to Rules on Priority Subscription Rights in Capital Increases
The CCL grants shareholders priority rights to subscribe for shares newly issued by a PrJSC, with certain exceptions, as outlined below. The Decision elaborates on the means for implementing these exceptions.Strategic Partners: The CCL provides that a PrJSC may admit, with no pre-emption right exercisable by the existing shareholders, a strategic partner whose contribution to the PrJSC results in the provision of technical, financial, operational or marketing support for the benefit of the PrJSC (a “
Strategic Partner
- “). The Decision also specifies that a Strategic Partner can be a company or a government entity, and must be independent of the PrJSC group (including holding companies and subsidiary companies). The General Assembly must approve the admission of a Strategic Partner to the PrJSC. Its stake in the PrJSC cannot be less than 10%, and its shares must be locked up for at least a year. Pursuant to the CCL, the Ministry and the relevant competent authorities may veto the admission of a Strategic Partner if it is determined to be in violation of UAE law or against its public interest.Conversion of Cash Debts into Equity:The CCL allows a PrJSC to convert its cash debts into equity, with no pre-emption right exercisable by other shareholders in respect of the newly issued capital (a “Conversion
- “). The Decision stipulates that a PrJSC can only convert its debts into equity if the issued capital is fully depleted and the debts are cash. The Board must submit to the Ministry a request for approval and also present to the PrJSC’s general assembly the rationale behind the Conversion. The PrJSC may approve the conversion by special resolution, specifying the amount of the converted debt as well as the increased share capital. The Board must then request the written consent of the holders of debts that are to be converted. This approval must be submitted to the Registrar, along with other required documents, for the registration of new shares. Incentive Plans: The CCL provides that a PrJSC may issue, free from pre-emption rights, shares to employees pursuant to an approved incentive plan (an “Incentive
- Plan“), provided that Board members do not participate in such Incentive Plan. According to the Decision, participation is restricted to employees of a PrJSC, excluding its parent company, holding company, or subsidiaries. Shares issued under an Incentive plan are considered treasury stocks and do not have voting rights until they vest in the employee. The Board must ensure the rules of any Incentive Plan that is adopted by a PrJSC does not restrict the voting rights of employees after the vesting of shares. Mergers and Acquisitions : The Decision specifies that a PrJSC that intends to merge with or acquire another company (pursuant to the statutory provisions of the CCL and the Decision) must comply with, inter alia, the provisions of Federal Decree-Law No. 36 of 2023 on the Regulation of Competition (in particular, its merger control provisions).Treasury Shares
: The Decision requires a PrJSC intending to purchase or sell treasury shares to establish a formal treasury share program to be approved by the general assembly. Such program shall have a maximum duration of five years, and shall furthermore be subject to the detailed procedural requirements set out in the Decision regarding filings, approvals, voting procedures, and timing.Governance Rules
Delegation of Authority:The Board of a PrJSC must establish written policies governing the delegation of authority to the PrJSC’s representatives with respect to contractual and financial matters.
Whistleblowing
- : The Board must also establish secure channels for reporting violations, with a direct channel to the general assembly.Board Composition
- : Pursuant to the Decision, diversity is a key factor in the selection of Board members. A PrJSC should ensure that the Board reflects diverse backgrounds, skills, and experiences relevant to their industry. The Decision requires that at least a third of the Board be independent members, and that a majority of the Board be non-executive. This is to ensure that these members can effectively contribute to PrJSC decision-making and overseeing. Furthermore, the Decision mandates appointing at least one female member to the Board.Committees
- : Pursuant to the Decision, the Board must establish a nomination and remuneration committee and an audit committee (the “AC
- “) as permanent committees reporting directly to the Board (the “Committees“). Each Committee must consist of at least three members (the majority shall be non-independent), and be chaired an independent member. The Chairman of the Board cannot be a member in the Committees. The Board must appoint members who are not executive officers to the Committees in order to perform duties that could lead to conflicts of interest. The Board must appoint non-executive members to the Committees for duties that may result in conflicts of interest (e.g. reviewing financial statements or vetting transactions involving related parties). Specifically, AC members must have relevant experience in financial and accounting matters, and at least one such member must have been previously employed in such sectors.Internal Audit: The Decision requires the Board of a PrJSC to establish an internal audit policy aimed at assessing the risk management procedures and legal compliance of the PrJSC. Such policy must be implemented by an independent internal audit department that reports directly to the Board.[2]Governance Report
- : Pursuant to the Decision, the PrJSC must submit a governance report, signed by the chairman of the Board, to the Registrar prior to the annual general assembly meeting for the preceding financial year. The governance report should be made available to all PrJSC shareholders. Key TakeawaysOverall, the Decision reflects the UAE’s commitment to effecting digital transformation and administrative efficiency at the level of its local and federal government authorities.
- The governance rules in the Decision will also enhance transparency and accountability within UAE PrJSCs, and the UAE’s legal and business framework generally, which further solidifies the UAE’s position as a global business hub. The Decision was published in the UAE Official Gazette No. 781 dated August 15, 2024, and entered into force on the same day.
