Corporate, Mergers & Acquisitions and
Securities Alert
9 September 2009
Authors:
+971.4.401.9820
UAE Corporate Law: Minimum Share Capital
Requirements for UAE Limited Liability
Companies abolished
Richard Dollimore
A Mixed Blessing?
Paul De Cordova
paul.decordova@klgates.com
richard.dollimore@klgates.com
+971.4.401.9821
Pursuant to a decree issued by President, His Highness Sheikh Kalifa bin Zayed Al
Nahyan, limited liability companies (LLCs) in the United Arab Emirates (UAE)
are no longer required to meet the minimum capital requirements of AED300,000
(in Dubai) and AED150,000 (in Abu Dhabi and the other emirates).
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The move had been broadly welcomed as a method of increasing investment into
the UAE by supporting small and medium sized enterprises and reducing the
administrative and financial burden of establishing a new company in the region.
However, whilst a prescribed minimum amount of capital has been removed,
capital requirements have not been abolished completely. Instead, the decree
makes clear that a newly incorporated LLC must have sufficient initial capital to
achieve its objectives.
This new test of "sufficient capital" will be adjudged by the UAE's local licensing
authorities and whilst formal guidelines have not been issued by the authorities it is
expected to include consideration of a business' size and planned activities. As
such, founders may find that a greater initial capital investment is actually now
required than under the previous rules. In addition, whilst the change is hoped to
speed up the process of incorporation, the new rules may add a further delay to the
incorporation process as a subjective decision is likely to be required from
licensing officials as to the adequacy of an LLC's initial capital (although, as at the
date of this memorandum, instructions have not been given to officials as to how to
apply such a test).
The move has also been welcomed as the previous minimum capital requirements
were seen as relatively meaningless anyway in terms of creditor protection. Whilst
a new company required a bank certificate confirming the capital amount was in an
account, once the company was licensed the money could simply be withdrawn.
Other consequential effects of the decree will be on the provisions of Articles 255
and 289 of Federal Law No 8 of 1984 (UAE Companies Law). Under Article 255,
an LLC must retain as savings 10% of its yearly net profits until such time the
reserve is equal to half of the LLC's capital. Accordingly, under the new regime,
where an LLC's capital is now lower than the previous minimum requirements, the
amount that needs to be retained will be reduced and the LLC will be able to
increase the distributions made to its members. Although, thinly capitalised
companies might be unattractive to trading parties.
Corporate, Mergers & Acquisitions and Securities Alert
Article 289 states that if an LLC sustains losses
amounting to half of its capital, the directors must
put a resolution to its members regarding
dissolution of the company. This Article has
taken increased prominence during the recent
economic troubles and if the capital of LLCs is
reduced, this will make it easier for LLCs to be
wound up by their shareholders.
It should be further noted that the decree is silent
on whether existing LLCs can avail themselves of
the new position and be able to reduce their
current capital levels to below the previous
minimum requirements. It will therefore be
interesting to see if this does become possible as
a potential method for releasing retained profits.
The decree will also not have any effect on
specific sectors where there is a minimum capital
requirement, such as banking.
In conclusion, the move to abolish minimum
capital requirements for LLCs has been greeted
by the local business community as a step to
assisting entrepreneurs to establish new
businesses in the region. However, the changes
may have their own knock on effects which
actually reduce the effectiveness of what at first
instance should be a welcomed deregulatory
move by the UAE authorities.
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9 September 2009
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