Dr. Hisham Fawzi’s observations on the federal law project concerning companies in the UAE – Part 1

As part of the committee’s review of its studies on the draft law, it has concluded the following:

1. Retaining the Title of the Draft Law: The committee suggests keeping the title of the draft law as is, without changing it to “Commercial Companies” as per the current law’s naming convention. This is to avoid legislative gaps regarding civil companies, as the current regulation does not cover many aspects such as decision-making processes, partners’ right to transfer their shares, other partners’ right to reclaim the sold share, and the procedure for amending the company’s contract. The scope of the draft has been broadened to include all civil or commercial companies, with an added safeguard ensuring the law’s applicability to civil companies and avoiding adverse effects like declaring bankruptcy.

2. Rectifying Constitutional Defects: Provisions that were found to violate the constitution have been adjusted to make them constitutional. This includes empowering the administrative body to reconcile only concerning imposed fines, refraining from initiating criminal cases except upon its request to the public prosecution after reconciliation attempts fail, and making necessary amendments in this regard.

3. Elimination of Holding Companies: All texts related to holding companies have been removed from the project. The deficiencies of such companies outweigh their advantages, necessitating their elimination to prevent their misuse in contravention of the law.

4. Board Member Definition: The term “board member” includes the president as a member in the original articles of the project, with governance standards applicable to all. However, this does not preclude the president from having specific provisions when explicitly stated, as in Article 129.

5. Securities and Commodities Authority: The authority to issue decisions has been transferred to the authority’s board of directors to enhance collective work and decision accuracy.

6. Timeframe Adjustments: The specified time periods for taking actions have been changed from days to working days to extend the permissible period for taking action.

7. Nature of Partner’s Contribution: Specifying the nature of the partner’s contribution confirms that their share in the company cannot be considered labor unless they are a solidarity partner.

8. Minimum Requirement Exemption: The minimum requirement for establishing a public joint-stock company has been reduced to five founders for the case of transforming an existing company into a public joint-stock company, with the cancellation of Article 277 concerning the investment company.

9. Investment Funds Authority: Investment funds are assigned the conditions and regulations issued by the Securities and Commodities Authority, affirming their personal and financial independence.

10. Legal Personality: The legal personality of the company is confirmed in the principle of company transformation.

11. Authority Deletion: The competent authority in Article 292 regarding approval of mergers has been deleted, along with any ministry jurisdiction in Article 298 concerning violation of merger rules and procedures.

12. Foreign Company Agent: Article 331 has been amended to prevent foreigners from holding the position of foreign company agent.

13. Accounting Records: Article 323 imposes penalties for not keeping accounting records for up to two years, with a stricter penalty in the following article for failure to keep records for the specified period, replacing penalties to eliminate contradictions and impose the severest penalty for the severest violation.

14. Temporal Limitation: A temporal limitation has been set to avoid absoluteness, with the addition of the phrase “within the five years preceding the appointment decision” in Article 313 concerning liquidation appointment.

15. Article 278 Amendment: Article 278 has been amended to confirm the company’s legal personality.

16. Authority Deletion (Repetition): The competent authority in Article 292 regarding approval of mergers has been deleted, along with any ministry jurisdiction in Article 298 concerning violation of merger rules and procedures.

17. Foreign Company Agent (Repetition): Article 331 has been amended so that foreigners are not allowed to hold the position of foreign company agent.

18. Cancellation of Article 277: Article 277 concerning investment companies has been canceled because its name overlaps with others and has no direct relevance to the type of activity.

Remarks by Dr. Hisham Mohamed Fawzi (Legal Advisor to the Council): Excellency, Mr. President, even as we read the introduction of the definitions article, we find it states: “In applying the provisions of this law…” From a technical perspective, when considering whether a specific definition needs to be added, we look at whether this term appears in the provisions following this article. Upon reviewing the entire law, you will not find the terms “sibling” or “ally,” thus there is no need to define them. Therefore, thank you.

Would you like to proceed with the second item, Mr. Chairman? Oh, sorry, Mr. Chairman, Ms. Amal, do you have anything to add?

Her Excellency Dr. Amal Abdullah Al Qubaisi (First Deputy President): Excellency, Mr. President, with due respect to the point raised by Member Ahmed Al Shamsi, I specifically mentioned that we know that at the beginning of each chapter or specific section, the definitions of companies were mentioned. However, between mentioning the types of these companies in detail from the definitions and the remaining articles related to the principles of companies, the names of companies were mentioned without their definitions in the introduction of the article talking about them. This is one. The second part, which we discussed, is civil or professional companies, for which there is no definition at all. Therefore, this is very necessary. This is the Companies Act, and we will include them in it, so we must define them here. Where is the definition of civil or professional companies mentioned? Also, what Rashid Al Shariqi mentioned, yes, there was a previous definition in the committee’s basic proposal for free zones, and now there is no definition for free zones. This must be specified. This definition was mentioned in the Financial Free Zones Act, and also in Article 121 of the Constitution, which stipulates this law. Therefore, I think it is preferable to specify it here, especially since civil and professional companies have no definition at all. If we want this law to include them and to be under its umbrella, we must define them. Thank you.

Mr. President: The floor is yours, Dr. Hisham.

Dr. Hisham Mohamed Fawzi (Legal Advisor to the Council): Mr. President, this is indeed a good idea. If we include these definitions, all issues regarding law divisions will be clear. Now, from the beginning, we will know that the companies addressed by the law are “partnership companies,” “simple recommendation companies,” “liquidation,” “public and private joint-stock companies,” and companies of special form. This will give us a complete idea of the law’s division. Perhaps if we include them in the definitions article, it would be appropriate even if we keep them in their place as well. Thus, we take the existing definition in the article inside the law and place it in the definitions article, keeping both. This achieves both goals: from the moment you read the beginning of the law, you understand its details. Then, when delving into the details, we also have the existing definition. Thank you.

Mr. President: Thank you. Now, does the Council agree to the second item? Mr. Ahmed Al Amash, please.

Her Excellency Dr. Amal Abdullah Al Qubaisi:
Mr. President, with all respect to the point raised by Member Ahmed Al Shamsi, I specifically mentioned that we know that at the beginning of each chapter or specific section, the definitions of companies were mentioned. However, between mentioning the types of these companies in detail from the definitions and the remaining articles related to the principles of companies, the names of companies were mentioned without their definitions in the introduction of the article talking about them. This is one. The second part, which we discussed, is civil or professional companies, for which there is no definition at all. Therefore, this is very necessary. This is the Companies Act, and we will include them in it, so we must define them here. Where is the definition of civil or professional companies mentioned? Also, what Rashid Al Shariqi mentioned, yes, there was a previous definition in the committee’s basic proposal for free zones, and now there is no definition for free zones. This must be specified. This definition was mentioned in the Financial Free Zones Act, and also in Article 121 of the Constitution, which stipulates this law. Therefore, I think it is preferable to specify it here, especially since civil and professional companies have no definition at all. If we want this law to include them and to be under its umbrella, we must define them. Thank you.

His Excellency / Ahmed Mohammed Rahma Al-Shamsi:
Or should we say – Your Excellency the President – before the two clauses “without violating the provisions of this law, this law shall not apply to companies established outside… and therefore… the Cabinet issues” should we place it as a primary condition and beneath it the first and second clauses, so at the beginning of the discussion we say: “without violating the provisions of this law: .1 this law shall not apply to companies established in free zones” and then “.2 the Cabinet issues… if the legal advisor formulates it, we can resolve this ambiguity, thank you.

Your Excellency the President: Thank you, Ahmed, but I think it’s clear from the context. Please proceed, Your Excellency the Counselor.

Professor / Dr. Hisham Mohammed Fawzi: (Legal Advisor to the Council)
 It is effective, Your Excellency the President, when you read the article, Clause .1 talks about “the application of provisions if… if it wishes to conduct its activities outside the free zone” we are stuck with its laws or regulations whether they allow or not, this is a matter specific to it, so the proposal at this point is to say: “if it wishes to conduct its activities outside the free zone”, and the second part we were discussing relates to how to eliminate the contradiction, because half of the members understood that the Cabinet would issue exemption decisions, and the other half understood that the decisions the Cabinet would issue relate only to registration and recording, thus to confirm the meaning we want, we say: “In accordance with Clause .1 of this law, the Cabinet shall issue a decision specifying the conditions to be considered for the registration of companies operating”, so what do we consider? We consider that these companies, if they operate outside the free zones, will be subject to the law – as you mentioned, Your Excellency – thank you.

Excellency the Rapporteur:

Article 7 has been amended to become Article 2

Definition of a company

“.1 A company is a contract whereby two or more persons commit to participate, each with a share of capital or work, and to share in the resulting profit or loss.”

Without amendment

Your Excellency the President:

Does the Council approve this clause as proposed by the government? The floor is for Mr. Marwan Bin Ghalita.

His Excellency Marwan Ahmed Bin Ghalita:

Your Excellency the President, I wonder, is it possible to read the clause as follows: without the word “economic”:

“.1 A company is a contract whereby two or more persons commit to participate in a project aiming to achieve profit…” So I propose deleting the word “economic” because as we see in Clause 2, we separated the issue of “economic”, and there are many things that will enter into the issue of projects, so if we say “project” and delete Clause 2, does this align with the law? I don’t know what the opinion of the Ministry and the advisors is, because in Clause 2 we said that the economic project refers to commercial, financial, industrial, agricultural, real estate, professional, or other economic activities, so can we delete it and stick to the phrase “a project aiming to achieve profit…” This is my first intervention, and I have another one, thank you.

Your Excellency the President:

Please proceed, Your Excellency the Counselor.

Professor / Dr. Hisham Mohammed Fawzi: (Legal Advisor to the Council)

No, Your Excellency the President, we cannot delete this and stop at the word “project”, the whole issue is that to avoid civil liability or to involve civil companies. However, we must be clearer in defining what constitutes an economic project in Clause 1, broadly referring to it, and then providing details in Clause 2. And of course, if civil companies will not enter or this issue is suspended, we will have to correct this issue. This is among the third articles that deserve amendment if we exclude civil companies, but so far they are still considered to be included and the matter remains pending, thank you.

His Excellency, the Chairman:

“.2 Exception from the provisions of Clause 1 of this Article by the Cabinet upon the proposal of the Minister in coordination with the competent authorities:

A. To issue a decision specifying the category of activities limited to citizens of the State.

B. To issue a decision specifying the forms of companies, activities, or categories that may be fully owned by a foreign person or where the share of the foreign partner may exceed forty-nine percent of the capital of the company.”

No amendments.

His Excellency, the President:

Does the Council approve Clause 2 of this Article as proposed by the Government?

His Excellency, the President:

Please, Counselor.

Dr. Hisham Mohamed Fawzi (Legal Counsel at the Council):

Your Excellency, the exception stated is as follows: “Companies exempted from the provisions of this law under special federal laws,” thus the entire company can be exempted under law. The exception may also cover a specific part of the company, namely the ownership by foreigners that cannot exceed 49%. Therefore, a law allowing foreigners to own 51% can be issued, making this text effective, but concerning Clause (B) and not Clause 1, which relates to the category of activities limited to citizens of the State. The wording can be changed here to respect that the citizen is the origin, so we say: “that a foreigner may not engage in,” in paragraph (A) of the first clause.

As for paragraph (B) of this clause, it can be deleted based on Article 3, thank you.

His Excellency, the President:

Thank you. Your Excellency, please.

Dr. Hisham Mohamed Fawzi (Legal Counsel at the Council):

Your Excellency, the intended meaning is after establishing the company and before commencing the activity, as it is not reasonable for these committees to exist before the establishment of the company. Therefore, the meaning proposed by the Honorable Member is the most accurate in terms of language, and the wording would be as follows: “and upon these companies after their establishment and before commencing their activities obtaining the approval of the Shariah Supervisory Committees.” If we include the word “internal,” perhaps it would be better to confirm that it is internal supervision and not external. If the Ministry agrees to that, then we all agree, thank you.

His Excellency, the Chairman:

“.1 If the partner’s share is his work, all earnings resulting from this work shall belong to the company unless otherwise agreed, with consideration to what is stipulated in the Copyright and Related Rights Law and the Industrial Property Regulation and Protection Law for Patents, Designs, and Models.”

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There is an amendment adding the last sentence to the paragraph and this legal link number (17) for the year 2112 with patents.

His Excellency, the President:

Does the Council and the Government agree to this clause with this amendment?

(Agreed)

His Excellency, Sultan bin Saeed Al Mansouri (Minister of Economy):

Your Excellency, concerning the proposal, I suggest that we begin the sentence as follows: “with consideration to what is stipulated in the Copyright and Related Rights Law and the Industrial Property Regulation and Protection Law for Patents, Designs, and Models, if the partner’s share is his work…” and then continue the paragraph, or perhaps all of this should be in the preamble because the texts of the laws, Copyright and Related Rights Law and Industrial Property Regulation and Protection Law for Patents, Designs, and Models are all supposed to be in the preamble, thank you.

His Excellency, the President:

Your Excellency, please proceed.

Dr. Hisham Mohamed Fawzi (Legal Counsel at the Council):

Your Excellency, Minister’s first proposal is very precise in terms of legislative drafting. When excluding laws, you put them at the beginning of the clause, i.e., in Clause Four, you say: “with consideration to such and such… if the partner’s share…” because you are referring to other laws and not this law. Therefore, the Minister’s proposal is the best, thank you.

His Excellency, the Chairman:

“.2 If the partner’s share in the company is represented by shares, his creditor, in addition to the rights referred to in Clause (1) of this Article, shall file a lawsuit before the competent court to sell these shares to obtain his share of the proceeds from the sale.”

No amendments.

His Excellency, the President:

Thank you, Mr. Ahmed Al Zaabi, please proceed.

His Excellency, Ahmed Ali Al Zaabi:

Thank you, Your Excellency, in the second paragraph, in the case of selling the partner’s share represented by shares, wouldn’t this reduce the company’s capital and thus affect the overall capital? Therefore, there might be an issue, thank you.

His Excellency, the President:

Thank you. We will get clarification from the Counselor.

Dr. Hisham Mohamed Fawzi (Legal Counsel at the Council):

Your Excellency, if you notice, the paragraph says “represented by shares,” it refers to joint-stock companies, which are fundamentally meant for selling shares. Therefore, the creditor stepping into the shoes of the debtor is very appropriate, and everyone buys and sells in this company, but the capital remains unchanged whether by sale or by the creditor taking the debtor’s place, thank you.

His Excellency, the President:

Thank you, Mr. Ahmed Al Shamsi, please proceed.

His Excellency, Ahmed Mohamed Rahma Al Shamsi:

Your Excellency, the Counselor has already stated what I was going to say. The sale process is the transfer of shares from one person to another, while the company’s capital remains unchanged, thank you.

His Excellency, the President:

Thank you. Now, does the Council agree to this clause and the article as a whole?

(Agreed)

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