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Every shareholder of a Limited Liability Company (LLC) is the owner of a part of the business. In case they decide to sell their shares or increase or reduce the percentage of their ownership or maybe add some new shareholders, then the process of transferring those shares which are already in existence is termed as a Share Transfer.
To ‘change local partner’ one needs to do a share transfers of 51% of a company’s shares to some new local partner. Presently, as per the UAE law, a Local Emirati National should hold at least 51% of the shares of an LLC or 100% shares of an Emirati company, which means the 49%:51% ratio of shareholding should be maintained. Please note that the new FDI rules would now allow to apply for a higher percentage or share of foreign ownership.
In case of an LLC that is located in the mainland of UAE, then please note that the mainland companies in the UAE are managed under the provisions of Federal Law 2 of 2015 and its amendments (the ‘Commercial Companies Law’).
In the scenario, if this company is an LLC, then there should be a Memorandum of Association (MoA) and its contents should be in agreement with Article 42, 43 and Article 73 of the Commercial Companies Law. The Memorandum of Association of an LLC specifies the provisions regarding the transfer of shares and the process of liquidation of a company. In addition, Article 79 of the Commercial Companies Law enables a partner to transfer his or her shares to other partners or maybe to some other third party. It mentions that:
Depending on the above-mentioned provisions of law, in case your uncle’s partner is not eager to buy the shares that are owned by him, then he could sell the shares in the company to some third party. Additionally, the company can be liquidated according to the provisions specified in the Memorandum of Association of the company. This is as per Article 306 of the Commercial Companies Law, which says that if the Memorandum of Association or Articles of Association of the company stipulates the procedure to liquidate or the partners agree or else upon the dissolution of the company, then the provisions of this law would apply to the liquidation of the company.
Conversely, the company may also be liquidated depending on a court order. This is as per Article 308 (2) of the Commercial Companies Law, which says that in case liquidation is done as per a judgment, then the competent court would point out the method of liquidation and also appoint the liquidator. In all such events, the job of the liquidator would not be terminated by the death, in case of declaration of bankruptcy, insolvency or interdiction instructed against the partners, even if he has been appointed by the partners. It is further advised to approach the concerned Economic Department in the Emirate and also the Amicable Settlement Center of the competent court that has the relevant jurisdiction for hearing this matter for any more clarifications. In case the right of pre-emption is utilized by more than one partner, then the share(s) that have been put up for sale would be divided among such partners on a pro rata basis to their respective shareholdings.
The JAFZA has recently announced the New Regulations regarding share transfer. Though the New Regulations do not set out the exact enforcement date, the JAFZA has given a verbal confirmation that a specific date would be announced in the updated version of the New Regulations. The recent New Regulations have introduced some reformist and liberal new legislative provisions and repeal the JAFZA Offshore Companies Regulations 2003 (“Old Regulations”).
The New Regulations offer foreign investors with various new and attractive methods of structuring their investments in the UAE and enable in mitigating against some probable risks related to carrying out business in Dubai.
A change that is likely to be of interest to global investors is that a limited liability company (LLC) that is incorporated under the New Regulations (“Offshore Company”) is given the ability to set up different classes of shares after the approval of the JAFZA registrar of companies (“Registrar”). The JAFZA has given a verbal confirmation that provisions in the New Regulations that are associated with classes of shares would be applicable in practice, which isn’t always true in other Dubai free zones.
This enhanced flexibility should help the shareholders to allocate economic and voting rights across changing share classes in whatever way they consider suitable. By way of example, founders of companies possess the option of using diverse share classes allowing them to uphold the management control of the Offshore Company (that is, by issuing shares to all the silent investors who have no or minimal voting rights attached to them). This offers an additional tool to safeguard the interests of a global investor and positions the Offshore Company in an ideal position regarding their onshore corporate structuring solutions, which are more vigorous and cost effective.
A subtle modification has been made under the New Regulation to the process for transferring shares, that is, a transfer is now dependent on the approval of the Registrar and any such transfer would not be complete till the applicable fee is paid to the JAFZA.
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