UAE: Legal Analysis, Business Structures & Forms
The legal system of the UAE is based on its constitution that was approved by the Federal National Council in 1996. This replaced the provisional documents which had been renewed every five years since the country’s creation in 1971. The Constitution establishes the principal instruments of Federal authority as follows:
- The Supreme Council of the Federation – composed of the seven sheikhs of the seven Emirates – has the power to enact legislation, establish policy, appoint persons to office and to assume supreme supervision of the Federation's affairs. Decisions should be approved by a majority of five, which must include the votes of the sheikhs of Abu-Dhabi and Dubai.
-The President and Vice President of the Federation are elected by the Supreme Council from among its members and have overall responsibility for the administration of federal laws and affairs.
-The Council of Ministers performs the function of a cabinet.
-The Federal National Council has advisory authority.
-The Federal judiciary.
The constitution provides a rather detailed list of citizen rights and liberties and lays down the rules of priority between federal and Emirate legislation. Under Article 151 of the constitution, federal law has precedence over legislation of the Emirates.
The Federal judicial system in the UAE consists of Federal Courts of First Instance, two Federal Courts of Appeal in Sharjah and Abu Dhabi and a Federal Supreme Court in Abu Dhabi, the latter composed of five judges including a President of the Court. The Supreme Court has both appellate and original jurisdiction. The individual Emirates retained their own Islamic Shari’a courts which exist parallel to the Federal Courts. Dubai, however, has not merged its courts with the federal judiciary and the rules for admission to the Dubai bar are different than those for admission to the federal bar.
Most advocates in the UAE were, and primarily still are, expatriates. But the government has begun to enforce Law No. 21 of 1991 under which only UAE nationals can represent clients in local courts. Expatriate lawyers may only serve as legal consultants.
Alternative Dispute Resolution and Arbitration
UAE courts usually enforce the intention of the parties to arbitrate disputes as expressed in a contractual arbitration clause. The courts, however, sometimes substitute clauses providing for arbitration outside of the UAE for local venue. UAE courts will often not enforce foreign judgments or honor contractual choice of law provisions.
Arbitration proceedings are usually carried out by the individual Emirates though their respective Chambers of Commerce and Industry which are quasi-state organizations. The Dubai Chamber of Commerce has published Rules of Commercial Conciliation and Arbitration which are used by its Commercial Conciliation and Arbitration Center.
In this context, it should also be noted that according to Dubai Law No.4 of 1997 (amending and clarifying a 1996 law), the government of Dubai must consent to being sued. According to a July 1992 Directive, however, no such consent is required if an arbitration clause in any contract to which the government is a party is invoked.
Business Structures and Forms
Under Federal Law No. 8, business organizations may take one of seven forms: 1) Public Shareholding Companies; 2) Private Shareholding Companies; 3) Limited Liability Companies; 4) General Partnerships; 5) Limited Partnerships; 6) Partnerships Limited by Shares; and 7) Shareholding Companies. Companies not taking one of these forms are not legally recognized, and persons contracting in their name will be jointly and severally liable for the obligations arising from such contracts. Exceptions apply only for companies located in a Free Trade Zone. There are also requirements determining minimal capital contributions, the number of directors and shareholders, and incorporation procedures. Provisions concerning mergers and dissolution or conversion of companies are also included in the same law. Each entity must be registered and licensed with the UAE Federal Ministry of Economy and Commerce and with the appropriate authority in the Emirate in which its office will be located.
Furthermore, the law states the general rule that participation of UAE nationals should never be less than 51 percent in any commercial enterprise. Some Business Structures and Forms are generally not available to foreign investors, as will be elaborated below.
Public Shareholding Companies
A minimum of 55 percent of the shares of a public shareholding company must be offered to the general public. The minimum amount of capital for a public shareholding company is DH 10 million, of which a minimum of 25 percent must be settled on subscription. A shareholder's liability is limited to the nominal value of his shares in the company's capital. A PSC must have at least 10 founders, unless a government entity is involved, in which case the number may be lower. Shares are registered in a share register and cannot be issued at a price lower than nominal value; all shares have equal rights. This type of company must a minimum of 3 and maximum of 12 board of directors. The chairman, as well as a majority of the board, must be UAE nationals.
If a public shareholding company loses half its capital, its board of directors is required to call a general meeting of shareholders to consider the continuation or dissolution of the company. If the board fails to call such meeting or if the meeting fails to reach a decision on the subject, any interested party may file a lawsuit seeking the dissolution of the company.
Private Shareholding Company
A private shareholding company must have a minimum of three shareholders. The minimum capital of a private shareholding company is DH 2 million. Shares may not be offered to the public. The private shareholding company's incorporating documents must preclude public offering of shares.
Limited Liability Company
A limited liability company can be formed by a minimum of two and a maximum of 50 people. Shareholder liability is limited to the value of shares held in the company's capital. The minimum capital required to establish a limited liability company is DH 150,000 in Abu Dhabi and DH 300,000 in Dubai. Management is handled by no more than five designated managers, who are not necessarily members of the company. Non-UAE nationals may own up to 49 percent of an LLC.
The Companies Law provides that an LLC may engage in any lawful activity except insurance, banking and investment of money for others.
General partnerships are formed by two or more UAE nationals who are jointly and severally liable for its debts. This form is generally not available to non-nationals. Only the names of actual partners can be included in the company name, but the company may have a special trade name.
Interests of a partner can be transferred as stipulated in the partnership agreement or with the approval of all partners. The management may include one or more managers who are UAE nationals and who may or may not be partners in the company. The dissolution of a partnership may occur on the death, insanity, bankruptcy or withdrawal of one of the partners. The remaining partners, however, may unanimously decide to continue the partnership, provided that such decision is registered in the commercial register.
A limited partnership is composed of one or more general partners who are jointly and severally liable for all of its debts, and one or more limited partners who are liable for the limited partnerships debts only to the extent of his capital contribution. A limited partner may not participate in the management or have his name appear in the name of the partnership. All general partners must be UAE nationals.
Partnership Limited by Shares
A partnership limited by shares has both general partners with unlimited liability and partners whose liability is limited by their shares in the capital. General partners must be UAE nationals while participating partners may be non-nationals. The capital must be at least DH 500,000 and has to be divided into negotiable shares of equal value. Some formalities regarding the incorporation of a joint stock company are also applicable to a partnership limited by shares.
A joint venture is formed by agreement between two or more natural persons or legal entities, and its objectives and terms are governed by the joint venture contract. This agreement is not subject to registration in the Commercial Register.
A joint venture may be carried out only in the private name of one of the UAE national partners.
Structures Available to Foreign Investors
A foreign investor may chose to participate with up to 49 percent in a company formed in one of the structures open to foreign investors. Despite the requirement that the majority of shares must be held by UAE nationals, it is still believed by some to be the easiest solution to carry out business in the UAE. Other available methods are the establishment of a branch or the use of commercial agency agreements. Special attention should also be paid to the possibilities offered by the Free Trade Zones where businesses are exempt from most requirements applicable in the regular UAE territory.
A foreign company may establish a branch in the UAE but a local sponsor or agent is required who must be either a citizen of the UAE or a company wholly-owned by citizens of the UAE. A branch must be registered with the local chamber of commerce and the municipality. Since February 1990, branches of foreign companies (including those already in existence) are also required to register with the Ministry of Economy and Commerce. Exceptions are made pursuant to government approval.
Under Commercial Law No. 8 of 1984 and Ministerial Decision No. 69 of 1989, a branch office of a foreign company does not have a separate legal entity. It merely represents the mother company and carries out business under its name. A branch office is usually permitted to promote and to market the products of its parent and enter into transactions and offer service to customers in its name. The UAE agent will render the necessary services for obtaining of licenses, visas and other permits and run the business of the office without assuming any financial obligation.
In order to make use of and conduct commercial agency activities, a foreign business is required to appoint an agent (an UAE national or a company owned by UAE nationals) for doing business in the UAE. Commercial agencies are governed by the Federal Commercial Agencies Law, Federal Law No. 18 of 1981, as amended by Law No. 14 of 1988. According this law, all commercial agency agreements have to be registered with the Federal Ministry of Economy and Commerce.
The Federal Commercial Agencies Law grants a commercial agent certain statutory rights which cannot be waived by contract. The most important are (1) any agent is entitled to territorial exclusivity in at least one Emirate and, accordingly, will receive infringement commissions on transactions concluded by the principle himself or by others within his territory; (2) the agent is entitled to prevent products subject to their agency from being imported into the UAE, if the agent is not the consignee; and (3) it is not permissible for a principle to terminate an agency agreement without the agent's approval except for reasons accepted by the Commercial Agencies Committee of the Ministry of Economy and Commerce, even if the term of the agreement has been initially limited by agreement. In absence of a justifiable reason, the failure to renew an agreement may entitle the agent to compensation.
It is possible to appoint an agent with rights to the entire UAE or for each or more than one of the single Emirates. The agents may themselves appoint distributors or sub-agents.
According to the Court de Cassation (Federal Court of Appeal) in Abu Dhabi, any dispute arising out of commercial agencies must be submitted first to the Commercial Agencies Committee and any judgment of the courts given without such first submission will be null and void.
All of the Emirates regulate both foreign and domestic business activity by requiring that any office for the conduct of business located in an Emirate must be properly licensed by the municipal authorities where located. The following kinds of business activities involve different kinds of licenses which allow the licensed business to conduct business as provided below: Representative Office License Activity of a representative office is limited to business or sales promotion activities and may be used as regional headquarters or a liaison facility. It may not import goods, effectuate sales or make contractual commitments.
Trade licenses allow the holder to import, sell, export and conduct general business with regard to certain identified goods or product lines. General trade licenses, which allow the import and export of all types of products and unrestricted engagement in a general trading business are rarely issued.
An industry license is required for the establishment and conduct of industrial activity with regard to the specific kind of manufacturing, processing or other industrial activity to be undertaken.
Service License authorizes various specified forms of service activity to be conducted.
Architects, engineers, business consultants, doctors, legal and accounting firms and other professionals and consultants are required to obtain professional licenses.
There are several kinds of construction licenses relating to different fields of construction activity. A general construction license, which authorizes the licensee to carry out all types of construction, including civil, mechanical, electrical, petroleum and other related activity, is also available.
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