Dubai International Financial Centre (DIFC) overhauls legal framework

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Gervais Nicholson
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1 Insights Tax and Legal Services PwC Middle East Dubai International Financial Centre (DIFC) overhauls legal framework November 2018 In brief The DIFC has repealed their Companies Law (DIFC Law No.2 of 2009) and Companies Regulations (the Previous Companies Law ). The Previous Companies Law is replaced by the Companies Law (DIFC Law No.5 of 2018) (the New Companies Law ) which, along with new Companies Regulations, came into effect on 12 November The DIFC has also introduced the following new laws and regulations relevant to companies located within the DIFC: 1. Operating Law (DIFC Law No. 7 of 2018) and Operating Regulations (the Operating Law ) 2. Ultimate Beneficial Ownership Regulations (the UBO Regulations ) (together the New Laws and Regulations ). The purpose of revising the laws and regulations is to bring them in line with international best practice and the global trends towards increased transparency and accountability. These significant changes will impact any business currently conducting or intending to conduct business within the DIFC. In Detail Below is a high-level summary and comparison of the Previous Companies Law and New Companies Law. Previous Companies Law New Companies Law Company Types Companies limited by shares Limited liability companies Recognised Companies (i.e. branch of foreign company) Public companies Private companies Recognised Companies (i.e. branch of foreign company) Share Capital Minimum share capital USD 50,000 Public companies are required to have a minimum share capital of USD 100,000 - at least 25% of which must be fully paid upon subscription Private companies no longer have a prescribed minimum share capital Shareholders Minimum of one (1) shareholder No maximum number of shareholders Minimum of one (1) shareholder Maximum of 50 shareholders for private companies

2 no limit on the number of shareholders for public companies as shares can be offered to the public) Directors Minimum two (2) directors Minimum one (1) director for private companies two (2) directors for public companies Company Secretary Every company is required to have a company secretary who can not be a director of that company No longer required for private companies Required for public companies (must have requisite knowledge and experience to discharge the function of the Secretary of the Company and have held office for at least 3 years at a public body corporate) Annual Accounting Requirements Annual audited accounts must be prepared and for companies regulated by the DIFC Financial Services Authority, a copy of the accounts and the auditor s report to be filed with the Registrar. Every company must prepare and sign their annual accounts. The accounts must be signed by at least one (1) director within six (6) months from the end of its financial year, which is determined by the articles of association of the company. Companies that do not meet the requirements of a small private company must have their annual accounts audited. The audited report together with the auditor s report must be filed with the Registrar within 30 days after being circulated to the shareholders. N.B. small private companies are defined as companies with no more than 20 shareholders and an annual turnover of less than or equal to USD 5 million. Annual Return File annual return File a confirmation statement which must be submitted at the time of the license renewal.

3 Annual General Meeting Annual general meetings required Not required for private companies unless otherwise provided for in their articles of association. Required for public companies. Issue of Shares for Non-cash considerations The board of directors to determine the reasonable cash value of the consideration for the shares. Public companies must have an independent valuation completed for non-cash considerations. Reduction of Share Capital Ordinary resolution of the shareholders and subject to a newspaper publication and a solvency statement. Public companies must pass a special resolution of the shareholders and may be subject to a DIFC court order confirmation process involving consultation with creditors. Private companies may reduce its share capital by passing a special resolution and signing a solvency statement. Payment of Dividends Dividends may be declared subject to the board of directors resolving that on reasonable grounds, the company will be able to pay its debts as they become due in the normal course of business immediately after issuing the dividends. Public companies may only make a distribution in the event of the following: (a) if the amount of its net assets is not less than the aggregate of its share capital and undistributable reserves; and (b) if, and to the extent that, the distribution does not reduce the amount of those net assets to less than that aggregate. Automatic conversion of existing DIFC Companies By operation of law and automatically under the New Companies Law as at 12 November 2018: limited liability companies - automatically converted into private companies; and companies limited by shares - automatically converted into: public companies which had over 50 shareholders or were listed companies; or private companies in all other cases

4 Directors Duties The New Companies Law has enhanced directors duties and expanded on the previous position so that directors have seven discrete duties: 1. duty to act within the powers conferred by the company s constituent documents 2. duty to promote the success of the company 3. duty to exercise independent judgement 4. duty to exercise reasonable care, skill and diligence 5. duty to avoid conflicts of interest 6. duty not to accept gifts from third parties capable of creating a conflict of interest 7. duty to declare interest in a proposed or existing transaction or arrangement. Directors remain subject to the additional obligations in their capacity as fiduciaries under DIFC Law of Obligations (Law No. 5 of 2015). Individuals who were previously managers of limited liability companies will automatically become directors as a result of the automatic conversion of limited liability companies into private companies. Directors who breach their directors duties may be subject to fines under the New Companies Law. Mergers and Scheme of Arrangements Another significant change that the New Companies Law has implemented is in relation to mergers and the scheme of arrangements provisions. The New Companies Law allow for arrangements with creditors and/or shareholders to be carried out, subject to approval from the DIFC court. The merger provisions are broadly modelled on the Jersey regime and is only applicable to public companies. The scheme of arrangement provisions are also modelled on the Jersey regime and are applicable to both private companies and public companies. Powers of the Registrar The Operating Law has provided the Registrar with increased powers, some of which are outlined below: extends the Registrar s powers in respect of recognised companies enables the Registrar to take action against the company or any officer of a company (both existing and former) for a period of three (3) years from the date the Registrar becomes aware of an alleged contravention of DIFC law based on the information found by an inspector strengthens the powers of the Registrar relating to inspections and investigations enables the Registrar to apply to the DIFC court to disqualify a director from being involved in the management of a company. These additional powers provide the Registrar with the ability to inspect documents to ensure they are kept up-to-date and in accordance with the Operating Law. There is no guidance as to the frequency of such inspections, however, it is recommended to keep records up-to-date at all times and made available to the Registrar as and when requested. Whistleblowing Protection The Operating Law has also introduced new protection regarding whistleblowing made in good faith. Whilst there is no clear guidance as to what constitutes to be good faith, the Operating Law outlines the requirements that must be satisfied in order to be protected. It is important to note that a fine of USD 30,000 can be imposed for failure to comply with the whistleblowing requirements of the Operating Law.

5 UBO Regulations In light of the international focus to identify and disclose details of a company s UBO, the DIFC now requires all entities operating within the DIFC to establish its own UBO register. Under the UBO Regulations, a UBO is defined as a natural person who ultimately owns or controls (directly or indirectly) 25% or more of the DIFC entity. Entities are now required to provide details of their UBOs on the DIFC client portal and ensure that the information is up-to-date within 90 days of the UBO Regulations enactment date (12 November 2018). Any subsequent change to the register of UBOs maintained by the entity must be reflected on the DIFC client portal within 30 days of such change. There are stringent penalties for failure to comply with UBO Regulations, which may result in a fine up to USD 25,000. How it will work? As mentioned above, existing companies have automatically converted to either a public company or a private company, and should have received a notification from the DIFC in this regard. There is a twelve month grace period in which entities are expected to have transitioned and updated their statutory documents accordingly. If statutory documents remain out of date following the deadline, there will be sanctions and penalties imposed on those companies. In respect to compliance matters, there are additional requirements to keep records and information up-to-date in accordance with the New Laws and Regulations. The Registrar will be carrying out inspections to ensure that companies are adhering to the New Laws and Regulations accordingly. The takeaway The New Laws and Regulations have imposed significant changes on companies in the DIFC with a real focus on increased accountability and transparency. Any person who conducts business in the DIFC or is looking to conduct business in DIFC should ensure they are fully aware of the new requirements and are compliant with them. The increased powers provided to the Registrar will enable the Registrar to carry out regular inspections to ensure data and records are being kept up to date in accordance with the New Laws and Regulations. PwC Middle East Tax and Legal contacts Darren Harris, Dubai Middle East Legal Services Leader T: +971 (0) darren.harris@pwc.com Ben Sims, Dubai Senior Manager T: +971 (0) E: ben.sims@pwc.com Kristofer Charik, Dubai Director T: +971 (0) E: Nadia Taousi, Dubai Manager T: +971 (0) E : nadia.taousi@pwc.com 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers (Dubai Branch), its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

DIFC LAWS AMENDMENT LAW

DIFC LAWS AMENDMENT LAW In this document, underlining indicates new text and striking through indicates deleted text. *Note that some text set out in the Appendix is not being amended, but is included for context. DIFC LAWS AMENDMENT