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Study: New Companies Law Enhances Markets’ Transparency
Date: 09 April, 2016
Source: Amel El-Menshawy – Abu Dhabi
A study emphasized that the new Companies Law is in line with the latest international laws. It will increase the capital markets’ transparency, put an end to false practices, and give an impetus to the family markets to be transformed to public joint stock companies. Accordingly, subscriptions and listings can gather steam.
The study published yesterday by Truth Economic Consultancy Company titled “Features of the New Companies Law” said that the most important articles, which have been amended or introduced in the new law, are: The penalty shall be toughened for whoever rigs capital markets; he will punished by imprisonment for a period not more than six months and a fine not less than AED 1m and not more than AED 10m or either of these penalties.
The previous companies Law was issued in 1984 and remained in force for the past 30 years and there were constant demands for enacting a new law compatible with the UAE’s economic development and openness.
The new Companies Law defined the strategic partner as the partner, whose partnership in a company shall result in providing it with technical, operational, or marketing support holding great interest for it. Subject to the new Law, a company may, under a special decision, increase its capital by allotting shares to a strategic partner. The Board of Directors of the Securities and Commodities Authority (ESCA) shall issue a decision outlining the conditions and procedures whereby a strategic partner can be a shareholder in the company, provided that a study shall be submitted by the board of directors of the company to the General Assembly of ESCA indicating the benefits to be gained by the company when a strategic partner holds shares therein.
The “Features of the New Companies Law” study indicated that particular provisions on holding companies are introduced in the new Law keeping pace with the status quo and in line with the best international practices, namely in articles (266-270) of the Law. The holding company is defined in the Law as a joint-stock company or a limited liability company that incorporates companies affiliated thereto locally and abroad or that controls existing companies by holding shares giving it the right to manage the company or affect its decisions.
In detail, the “Features of the New Companies Law” study said that the new Law provided that the percentage of the shares issued to the public shall be decreased. Hence, family companies will be encouraged to transform to public joint stock companies according to article (117); by so, a major demand in the local stock market will be responded to.
Furthermore, the Law provided that the founders are entitled to subscribe for shares, which represent not less than 30% and not more than 70% of the company’s issued capital before the remaining shares of the company are issued to the public. The old Law curtails family companies’ ability to be transformed to public joint stock companies, as it has a stipulation that the shares issued to the public shall not be less than 55% and founders’ quota shall not exceed 45% of the public joint stock company’s capital.
In addition, decreasing the percentage of the shares issued to the public shall enable family companies to keep controlling interest in such companies. Accordingly, the number of companies, whose shares are issued to the public, will be increased, and so the rate of listing on the capital markets will soar. As a result, the capital market sectors will witness increasing diversity. The new Law regulates membership in boards of directors of joint stock companies, and strictly regulates their duties. Furthermore, it closely organizes performing activities, competing the company’s business, by board directors and their relatives in such a manner that combats conflict of interests.
Improving the Economic Atmosphere
The General Manager of Truth Company, Reda Mosallam, in a press conference held yesterday in Abu Dhabi to announce the study, said that “the Companies Law, in its final form, is deemed one of the most important laws regulating economic life in the UAE,” and added that “the new Law will spur the foreign investment in the UAE.”
He also pointed out that the law is in line with the latest international laws, and will increase the capital markets’ transparency and abolish corrupt practices. He indicated that setting a penalty for hiding the company’s financial position, banning distribution of fictitious profits upon shareholders, and obligating the shareholder with returning the dividends he got in violation of Law shall take part in the markets’ transparency.
Mosallam foretold that the new Companies Law will be a springboard for the UAE to promote its rank on the global competitiveness indices, enhance the economic atmosphere, and lay a solid ground for investment attraction.
He hinted that “the new Companies Law is a great achievement by the UAE which will promote the investment in the local economy, increase the attraction and effectiveness of local capital markets, as an important tool for boosting the local economy, maximizing the role of the enormous investments capable of development, competition, growth and achieving sustainability. In addition, the Law enhances the local companies’ ability to develop their works.”
Mosallam added that the Law contains many articles, which are generally flexible and strengthen the market position and promote the investment especially in the capital markets.
According to the study, the Law contributes to improve the state’s competitiveness to reach high ranks in terms of easily practicing activities among the 10 world best economies. In addition, the Law will positively affect other three indices by reaching high ranks, which are “starting business index” on which the UAE ranked 58, “investor protection index”, and “contract enforcement index”.
Increasing the Penalty
The study chose a number of articles, which were amended or introduced in the new Law, the most important of which is increasing the penalty imposed on whoever rigs prices of securities (Article 370). A sentence of imprisonment for a period not exceeding six months and a fine not less than AED 1m and not more than AED 10m or either of the two penalties shall be imposed on any chairman or board director of a company or any worker therein, who participated, either directly or indirectly, with any entity that performs operations intended to affect the prices of the securities issued by the company.
As per the study, the Law granted the existing companies, which shall be governed by the new Law, a term not more than one year after the new Law comes into force to accord its status with the new Law. This term may be renewed for similar terms by virtue of a resolution issued by the Cabinet upon a suggestion of the Minister of Economy.
The study indicated that the Law has not fixed a term for issuing the executive regulations of the Law and provided that the regulations and decisions promulgated by Federal Law No. 8/1984 on Commercial Companies shall remain in force without prejudice to this new Law, until the Ministry and the ESCA – each in its own respective field – issue the systems, regulations, and decisions necessary for implementing the new Law provisions.
The “Features of the New Companies Law” study indicated that the Law permits for one person to incorporate and own a company. The holder of the company’s capital will be accountable only for its obligations within the limits of the capital amount mentioned in its memorandum of association, and shall be subject to the legal form provisions contained in this Law without prejudice to its nature. If the owner of one-man company, mala fides, liquidates it or suspends its activity prior to its expiry or before achieving the purpose contained in its memorandum of association, he shall meet its obligations on his own expense.
Commercial Companies Law No. 2/2015 limited the form of the companies permitted to be incorporated to five forms only. It deleted the “joint venture” and “company limited by shares” mentioned in the previous Law; the approved forms are general partnership, limited partnership, limited liability company, public joint stock company, and private joint stock company.