As we witness the evolution of the regulatory landscape across the MENA region, it was timely for us to investigate and lift the lid, on what is keeping the region’s legal decision-makers awake at night.
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Federal Law No. 32 of 2021 on Commercial Companies (the “New Companies Law”) will come into force on 2 January 2022, to entirely replace Federal Law No. 2 of 2015 on Commercial Companies, as amended (the “2015 Law”). The New Companies Law introduces a number of amendments to the provisions of the 2015 Law relating to limited liability companies and public joint stock companies (“PJSCs”) and also certain additional new provisions.
The New Companies Law, among other things, reflects legislative changes required in order to encourage United Arab Emirates (“UAE”) companies to pursue initial public offerings (“IPO”), to address developments in global capital markets and respond to dynamic business needs in the UAE. We address the key amendments in the New Companies Law as they relate to IPOs below. For wider consideration of the procedural and practical implications of the New Companies Law please see our Client Alert of 7 December 2021 from here.
The New Companies Law introduces a new corporate vehicle, being a special purpose acquisition company (“SPAC”), which is defined as a public joint stock company (“PJSC”) established for the sole purpose of acquiring and merging with another company. This reflects the recent popularity of SPACs as a listing and acquisition vehicle which have been a feature of the capital markets landscape, particularly in the United States, for some time. Further, the UAE Securities and Commodities Authority (“SCA”) is currently in public consultation on the regulatory framework for the listing of SPACs on the UAE’s securities markets but, importantly, there is now a legal basis for the corporate vehicle in order to create a SPAC in the UAE. SPACs are exempt from the provisions of the New Companies Law but will be governed by provisions to be issued by the SCA.
The New Companies Law has amended the provisions relating to the subscription to shares in a PJSC, enabling PSJCs to have more control over their IPO process and structure. The New Companies Law has scrapped the minimum and maximum limits to which the founders of a PJSC may subscribe to new shares upon IPO thus creating greater flexibility in the offering design. The Founders are no longer required to subscribe to a minimum of 30% and a maximum of 70% of the new shares on conversion but may now subscribe to new shares up to the percentage specified in the prospectus but subject to the requirements of the SCA (Article 117). This means that the SCA’s approval is now required to agree on the free float for an IPO whereas previously UAE Council of Ministers approval would be required for an exemption to the minimum 30% offering size.
Further, the New Companies Law (Article 281) no longer sets a maximum limit on the percentage of shares that can be offered for sale (not to be confused with subscription to new shares (Article 117)) as part of an offering. The 70% limit on a sale of shares (old Article 279 of the 2015 Law, as amended) has been removed and now the percentage/ratio of sale shares and new shares being offered as part of an IPO on conversion is to be determined by the SCA.
To create further flexibility in the offering process, the New Companies Law has introduced amendments to the offering subscription period as follows:
The New Companies Law also provides further flexibility by permitting a PJSC, with the approval of the SCA and pursuant to a special resolution, to issue shares at a discount where the market price of its shares falls below the nominal value (Article 198). Further, there are no longer any statutory limits on the nominal value of shares (old Article 207 of the 2015 Law, as amended, stated a minimum of one dirham and a maximum of one hundred dirhams). The nominal value of shares is now simply as set out in the Articles of Association (Article 209).
Additionally, the New Companies Law (Article 281(4)) removes the restrictions on the founders of a PJSC from trading their shares once the converted company is listed. This is an exception to Article 217 which provides for a statutory lock-in on founders from trading their shares for two years from registration of the company. There is no such statutory lock-in once the converted company is listed.
Notably, one of the eligibility requirements for converting to a PJSC has been removed; Article 277 (old Article 275 of the 2015 Law, as amended) no longer requires a 10% net operational profits test for the two years prior to conversion.
In addition to the introduction of SPACs, the New Companies Law introduces another new form of corporate vehicle, being the special purpose vehicle (“SPV”). This new corporate vehicle allows the incorporation of an SPV with the aim of separating the obligations and assets relating to a specific financing from the obligations and assets of its parent entity. This new amendment allows the transfer of risks associated with certain business operations through business segregation and carve-outs. SPVs are also exempt from the provisions of the New Companies Law but will be governed by provisions to be issued by the SCA.
Business segregation has also been enabled by the introduction of new provisions governing the division of the assets, obligations and rights of a joint stock company into two or more separate companies with separate legal personality (Article 294).
Such a division or divestiture may either take the form of a horizontal division where the shares of the new companies are owned by the same shareholders or a vertical division where part of the existing company is carved out and transferred to a newly established subsidiary entity owned by the parent company.
The board of directors of the company under division is entrusted with preparing the division plan (which must be done at book value) and overseeing the implementation of the same.
The more detailed conditions, controls and procedures of the divestiture process will be issued by the Ministry of Economy or the SCA, as the case may be.
The New Companies Law addresses many of the issues that the market and IPO advisers consistently sought exemptions or waivers from during an IPO. The IPO process and procedures are now much clearer and the changes have streamlined the IPO process for potential issuers making a listing on the UAE’s securities markets more attractive.
Our capital markets team is fully available to assist UAE companies, and their advisers, looking to conduct an IPO or secondary fundraising under the New Companies Law. We can help to navigate the requirements of the New Companies Law together with the regulatory requirements of the SCA and the chosen securities exchange on which the issuer is to be listed. We can also assist foreign listed companies looking to do a cross or secondary listing on the UAE’s securities exchanges.