The UAE recently made changes to the Commercial Companies Law that align mainland law more closely with common English law — and bridge the historical divide that has existed between onshore and freezone companies. The amendments finally bring tools like multi-class shares and drag-along rights into the mainland LLC framework, and offer more flexibility for companies looking to move between different jurisdictions.

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We sat down with Hani Naja, partner at Baker McKenzie, to dive into how the new amendments will shape transactions and company structures moving forward, how fast he sees companies making changes, and how he sees the amendments impacting freezones. Edited excerpts from our conversation:

ENTERPRISEAM: You mentioned on LinkedIn that this is the most important update to the commercial companies law since the foreign ownership relaxation introduced a few years ago. What are the three major positive implications of these changes?

Hani Naja: The new changes give companies the flexibility to relocate or redomicile from one jurisdiction to another — [whether within the UAE or from outside the UAE into the country] — without losing their entire history as a company that they’ve established in another jurisdiction. Previously, it was like a company would have to close down and reopen onshore in order to relocate.

The introduction of different classes of shares in basic limited liability companies outside of freezones also gives shareholders — even those with the same amount of shares — different rights to vote, collect dividends, decide on management, etc. This flexibility will allow companies to attract different types of investors. This is especially relevant to startups.

The final major change in my view is the introduction of rights such as drag-along and tag-along rights for minority shareholders. This allows companies to establish harmony across all of their documents, and to bake those rights into their memorandum of association, instead of having to sign a shareholders’ agreement that in most cases is not subject to local law, but rather to English law, New York law, or arbitration.

This has potential, but it’s all about the interpretation of the amendments. Once we see the implementation, this might change how transactions are governed.

E: Are the changes likely to encourage more companies to move to the mainland rather than stay in freezones?

HN: The UAE’s freezones offer a lot of benefits to companies — they’re hubs in and of themselves, and they cater to companies that care not just about being in the UAE, but about being connected to other countries and trade hubs, so I don’t think this will change. What the amendments do, however, is offer more options to companies and investors.

E: Do you see companies acting fast to make changes to their company structures or to move ahead with re-domiciliation? Or is it more of a wait-and-see thing?

HN: The re-domiciliation and the different share classes — we will see quick movement on those. This is something they can apply immediately and it’s something companies have already been thinking about for a while. This update was likely a response to plenty of requests from companies. We have a lot of companies that want to move their headquarters from Asia and Europe to the UAE, to benefit from the UAE ecosystem and the tax regime, so this will only encourage them.

If these changes are fully implemented as designed, lawyers are going to be encouraged to have all transaction documents be subject to local law and local jurisdiction, because not only does it create more harmony across documentation, it will create more predictability going forward. It will also avoid having to launch separate disputes — in the UAE on articles and memorandums of association, and then a separate one elsewhere for shareholder agreements — and will keep everything under one main umbrella.

Some other changes — like moving shareholder agreements into local jurisdictions to benefit from the new drag-along and tag-along rights — could take a little longer, because companies and lawyers would want to see how the courts will handle relevant cases before confidently advising clients to move all documents under local law. It’s a stepping stone, but a very good one.

Most global transactions follow English or New York law. Why? Because it’s easy to predict the outcomes. If I agreed on something in a contract that is subject to English law and English court or arbitration, I know exactly what will happen if an issue arises. That predictability is extremely important in transactions. What will happen now with this new amendment is that once it’s tested and we are able to predict what will happen, then the UAE will also become a very good jurisdiction for regional and global transactions.

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