With the publication of Federal Law by Decree No. 26 of 2020 (the
“Amending Law”), significant changes have been introduced concerning
corporate governance and compliance requiring onshore Limited Liability
Companies (“LLC(s)”), also known as mainland LLCs, to consider reviewing
their constitutional documents
Federal Law by Decree No. 26 of 2020
Following the amendment of the Foreign Direct Investment Law and its long-standing foreign
ownership restriction (which you can also read about here), the Amending Law has also made
key amendments to the governance of corporate structures, particularly onshore Joint Stock
Companies (“JSC(s)”) and LLCs.
The key changes made by the Amending Law relate to its applicability to JSCs and LLCs, the
process and initiation of shareholder meetings, quorum requirements, a requirement to add a
dispute resolution clause in the company’s constitutional documents and many more.
Amendments
The following are the significant amendments made by the Amending Law concerning onshore
companies’ corporate governance:
Applicability to JSCs and LLCs
According to Article 104 of Federal Law No. 2 of 2015 on Commercial Companies Law (“CCL”),
all CCL provisions applicable to JSCs are likewise applicable to LLCs provided that there is no
provision in the CCL stating otherwise. To provide some clarification on Article 104, the Ministerial
Decision No. 272/2016 on the Implementation of Some Provisions of the Public Joint Stock
Companies to Limited Liability Companies (“Ministerial Decision”) also listed down the
provisions specifically applicable to both JSCs and LLCs and those that are excluded.
In aims to further align the corporate governance of JSCs and LLCs, the Amending Law amended
Article 104 to the effect that all LLCs will be subject to the same provisions applicable to JSCs to
the extent that such provisions are suitable to the nature of LLCs and provided that the CCL does
not have explicit provisions stating otherwise.
Following the amendment, it remains to be seen whether the government will provide some sort
of clarification on the specific provisions applicable to both JSCs and LLCs. Additionally, since
the Ministerial Decision was initially based on the previous Article 104 of the CCL, it is still unclear
if the Ministerial Decision is still accurate following the amendment.
Dispute Resolution Clause
Article 73 of the CCL has been amended by the Amending Law and now requires onshore LLCs
to include a dispute resolution mechanism in their Memorandum of Association (“MOA”). Such a
clause will govern disputes arising between the company and its managers, directors or
shareholders.
Shareholder Meetings
Originally, Article 92 of the CCL states that for a general assembly meeting to be called,
shareholders owning at least 25% of the company’s share capital must issue the request.
Following the Amending Law, shareholders who hold at least 10% shares in the company may
now request a general assembly meeting.
Moreover, general assembly meeting invitations can now be sent through any means prescribed
by the company’s MOA. Also, the invitation can now be sent at least 21 days (previously 15 days)
before the scheduled date of the meeting.
Meetings can now also be held through “modern technological means” as a response to COVID19.
Quorum Requirements
According to Article 96 of the CCL, quorum requirements must be of shareholders holding at least
75% of the company’s share capital, which the Amending Law has reduced to 50%. Note that this
is the minimum and is still subject to any higher requirements if so prescribed by the company.
Furthermore, in case that the quorum requirement is not met in the first meeting and a second
meeting is required, the Amending Law states that the quorum will be valid “no matter the number
of attendees,” whereas previously the threshold was shareholders holding at least 50% of the
company’s shares. However, note that this is still subject to whether the company has a
prescribed quorum for their second meeting.
Additionally, calling a second meeting must be within at least 5 to 15 days from the date of the
first meeting,
Auditor Rotation
Another welcomed amendment by the Amending Law is the increase of the auditor rotation from
3 years to 6 years. A new auditor may then be appointed 2 years after the initial appointment’s
expiry date. This is notably one of CCL’s provisions that apply to both JSCs and LLCs.This is notably one of CCL’s provisions that apply to both JSCs and LLCs.
Incorporation Liability
As per the CCL, shareholders, consultants, delegates and any other parties who participated in
the incorporation of the company shall be held liable for the accuracy and completeness of any
documents or reports provided to authorities throughout the company’s incorporation. This liability
has been amended by the Amending Law to solely include the company’s shareholders, also
known as the founders’ committee.
Next Steps
With a deadline of 31st December 2021, companies are now required to take all necessary steps
to comply with the amendments introduced by the Amending Law. Unlike the CCL, the Amending
Law has made no mentions of implying such amendments into companies’ existing constitutional
documents.
Thus, in most cases, it is suggested that companies review their MOAs as soon as possible and
adopt amended or restated MOAs to ensure compliance with the Amending Law and avoid the
risk of sanctions.
How We Can Help
With AM Legal Consultancy’s in-depth knowledge of the region, we are well-placed to provide
tailored advice for any legal inquiries you may have. If you require legal assistance in drafting,
reviewing or amending your company’s MOA, you can reach out to us by emailing
corporate@amlegalconsultancy.com.
Disclaimer
This article is for informational purposes only and shall not be considered as legal advice or
opinion.
