Global asset management quarterly - The Middle East

Proposed change the DIFC Companies Law

Author: Jane Clayton

The DIFCA is consulting on proposals that will enhance its current Companies Law. The proposals include the introduction of a distinction between “Public” and “Private” companies to facilitate a proportional level of regulation for the different types of company.

The Dubai International Financial Centre Authority (DIFCA) has issued a Consultation Paper relating to its proposal to enhance its current Companies Law to bring it into line with International Best Practice. The deadline for providing feedback was 19 June 2017. In formulating the proposed changes, DIFCA has focused, in particular, on the UK and Jersey models, on which the current DIFC regime is modelled.

Set out below are some of the proposed changes

• Introducing a distinction between “Public” and “Private” companies to facilitate a proportional level of regulation for the different types of company.
• Removing “Limited Liability Companies” as an option for company set up, on the basis that a lighter touch regulatory regime is now available to a small private company.
• Enhancing the current provisions on directors duties; the proposal introduces seven discrete heads (following the UK model) which can apply independently or in combination. These are: the duty to act within the powers conferred by the company’s constitution, the duty to promote the success of the company, the duty to exercise independent judgement, the duty to exercise reasonable care, skill and diligence, the duty to avoid conflicts of interests, the duty to not accept gifts from third parties capable of creating a conflict of interest and the duty to declare an interest in a proposed or existing transaction or arrangement.
• Enhancing the current provisions relating to company accounting and audit requirements; Public companies will be required to produce a director’s report and a small private company (not more than 20 shareholders and with an annual turnover which does not exceed US$4 million) will be exempted from the requirement to audit and file its accounts with the Registrar of Companies (Registrar).
• Enhancing the Registrar’s inspection and enforcement powers, so that they are more effective in these roles, including, giving express powers to the Registrar enabling inspectors appointed by the Registrar to obtain information and documents.
• Requiring companies to disclose the beneficial ownership of a company to the Registrar to mitigate money laundering risks but not requiring such information to be publicly available to respect the privacy of family wealth management.
• Introducing “whistle–blower” protections, provided disclosures are made in good faith.
• Removing the requirement to seek a legal opinion that proposed amendments to a company’s articles of association meet applicable requirements; this will be replaced by a certificate signed by at least one director of the company, confirming the same (this may reduce a company’s external legal costs if it has an in house legal function that can advise the directors on this).
• Removing the requirement for private companies to have a fully paid up minimum share capital of US$50,000; and amending the requirements for public companies, such that the minimum subscription is US$100,000 with only 25 per cent having to be fully paid up at the time of subscription.
• Introducing more formal preemption rights for existing shareholders but including appropriate exclusions, for example, in respect of employee share schemes, and permitting the removal or modification of such restrictions in a company’s articles of incorporation.

We welcome the proposed changes which address a number of issues which we and our clients have encountered since the Companies Law came into force in 2009. In the Consultation Paper, DIFCA expressly refer to the fact that UK jurisprudence relating to directors’ duties could be resorted to in interpreting the new duties. Obviously the consultation process affords an opportunity to clarify a number of points to hopefully avoid the need for this. One point we have raised with DIFCA is why they have only expressly included the possibility of shareholder ratification in the case of “an interest in an existing transaction or arrangement” and have not included a general provision regulating the decisions of shareholders to ratify other breaches of directors’ duties. We will update this information when the new DIFC Companies Law comes into effect.

Intermediate SPVs

Author: Ola Al Kadi

The DIFC has recently introduced a new Intermediate SPV regime.

The Dubai International Financial Centre (DIFC) has relatively recently introduced a new regime allowing “Qualifying Applicants” to set up “Intermediate SPVs” in the DIFC.

This is the first time, outside the DIFC’s Special Purpose Company regime, that is has been possible to establish a nonregulated special purpose vehicle in the DIFC without it having a substantive presence in the DIFC.

To establish an Intermediate SPV (ISPV), a Qualifying Applicant must be either

• A holding/proprietary investment company or single family office already registered in the DIFC or
• A collective investment scheme established in the DIFC or
• A collective investment scheme established outside the DIFC but managed by a fund manager or asset manager that is regulated by the Dubai Financial Services Authority.

In practice, therefore, ISPVs are likely to be used by DIFC funds, DIFC fund managers, DIFC holding companies, and DIFC family offices for the purposes of structuring and ring-fencing downstream investments in operating companies. The new regime reflects the DIFC’s belief that its substantive presence approach does not serve any real purpose with respect of ISPVs, as the primary entity involved already has a substantive and/or regulated presence in the DIFC.

The key benefits to setting up an ISPV (as opposed to a holding company with a substantive presence in the DIFC) are as follows

• The ISPV may use the premises leased by the Qualifying Applicant as its registered office, thereby removing a significant overhead expense.
• There is a simplified and expedited establishment process, including a simplified business plan.
• Lower registration fees (US$1,000 as opposed to US$8,000).
• Lower annual fees (US$3,000 as opposed to US$12,000).

Each Qualifying Applicant will need to provide sufficient assurances to the DIFC Registrar of Companies that the ISPV will only be used for purposes that: (a) fit into the overall objectives of the DIFC; and (b) if applicable, are in line with the Qualifying Applicant’s regulatory status (including AML requirements) and the UAE’s obligations under the OECD’s Common Reporting Standards. An ISPV may not be used as an ultimate holding company within a group structure, and nor may it be used as an operating company.

Although the DIFC Companies Law and Regulations have not yet been amended to reflect the new ISPV regime, the above has been implemented on an interim basis since 19 September 2016 (having received the requisite DIFC waivers and amendments to the DIFC Companies Regulations and DIFCA Operating Regulations). Amendments are expected to be made to the DIFC Companies Law and Regulations in the next few months to formalise the regulation of ISPVs.