Growing the family: proposed changes to the UAE Agency Law provides opportunity for relevant local family businesses to pursue an IPO
On 18 January 2020 it was announced that the United Arab Emirates (UAE) Cabinet approved certain proposed amendments to Federal Law No. 18 of 1981, known as the “Agency Law”, that regulates commercial agency and distribution agreements within the UAE.
Under the existing Agency Law, UAE companies wishing to operate a commercial agency as part or all of its business must be wholly owned by UAE nationals to qualify for registration at the UAE Ministry of Economy. Many of those companies which are registered under the Agency Law are a part of the business portfolio of local UAE family businesses.
This acts as a natural impediment to such local family businesses registered under the Agency Law seeking an initial public offering (IPO) because any offering would have to be restricted to UAE nationals only to continue to comply with the 100% UAE ownership requirement under the Agency Law.
The potential for PJSCs
Our understanding is that the proposed amendments to the Agency Law will allow registered companies under the Agency Law to become public joint stock companies, enabling them to further grow while ensuring sustainability for future generations. The draft law is not yet available and so it is difficult to tell if there will be specific provisions that relax the local ownership requirements but the fact that the UAE Cabinet has stated that family-owned companies will be given the opportunity to turn into public joint stock companies demonstrates a clear commitment to encourage such companies to come to market. The specific changes to the Agency Law that would allow this are yet to be seen. The UAE Cabinet further stated that it wished to encourage UAE nationals to invest in public shareholding companies while protecting their interests. This gives optimism to both potential issuers and investors.
Whilst the conditions required to allow family businesses with commercial agency portfolios to convert to a public joint stock company are not yet available, it is undeniable that the proposed amendments will significantly boost the appetite of such family-owned businesses to join the UAE’s financial markets. This constitutes a landmark development in the UAE legal field and, in particular, for IPOs.
A boost for the IPO market
This major step adds to the consistent efforts made previously by UAE legislators to boost the local IPO market and such enhancements were embedded in the new federal law on commercial companies, the Federal Law No (2) of 2015 (the “CCL”), mainly:
- decreasing the minimum offering threshold to 30% (from 55% previously);
- allowing the conversion of private companies to public companies through the sell down of the founders shares in addition to the usual method of raising capital in a public subscription;
- recognizing book building as a valuation tool for public subscriptions; and
- embedding the importance of corporate governance of joint stock companies in the body of the CCL and enhancing the liability of the board of directors in this regard in an effort to boost market confidence and enhance transparency in the local markets.
Overall, it is believed that the amendments to the Agency Law as publicized by the UAE Government constitute a landmark step towards encouraging local IPOs. By easing existing restrictions, the appetite of local companies to access the financial markets can only increase. This not only benefits local businesses, but will also positively boost the trading activity of the local financial markets.