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The National Partner Controlling the Majority of the Voting Rights in LLC’s
Part of our solution is to have a National Partner as an actual 51% shareholder of the LLC that entitles him to hold the majority of the votes in the general assembly, which gives him the power to control very critical matters concerning the management of the company. These matters shall include, appointing and dismissing managers as per article 94 of the Federal Companies Law. It seems that this risk can be eliminated by transferring the voting rights of the National Partner to Foreign Investor which cannot be challenged or revoked as per the existing laws.
The Risk Associated with the Voting Rights of the National Partner
The National Partner being the majority shareholder of the LLC, inevitably will have 51% of the voting powers as the law states that each partner will have a number of votes equal to the number of shares in the company as per article 95 of the Federal Companies Law. This shall entitle him to affect the decision of the general assembly and its power granted under the law.
Article 95- General Assembly Meeting Attendance:
“Any partner shall have the right to attend the meetings of the General Assembly whatever the number of shares owned thereby and he may delegate by a special authorisation another non-manager partner or any other third party permitted by the memorandum of association to be appointed for the representation of the partner in the General Assembly. Each partner shall have a number of votes equal to the number of shares owned or represented thereby.”
The voting rights of the National Partner entitles him to complete the voting quorum required by the law at the second meeting of the general assembly according to article 96 of the Federal Companies Law, which states as follows;
- The meeting of the General Assembly shall not be valid unless attended by a partner or more owning no less than 75% of shares in the company capital.
- If the quorum is not available as prescribed by Clause 1 of this Article, the partners shall be called for a second meeting to be held within 14 days following the first meeting date, providing that the ratio of attendance shall not be less than 50% of the capital.
- If the legal quorum is not available as prescribed by Clauses 1 and 2 of this Article, partners shall be called for a third meeting held after the lapse of 30 days of the date of the second meeting and it shall be valid by those attending it.
- Resolutions of the General Assembly shall not be valid unless if issued by the majority of votes by partners, whether attending or represented, in the meeting, unless a greater majority is stipulated by the memorandum of association.
As per point 4 of article 96 mentioned above, if the Foreign Partner applied for a higher majority for all decisions of the company, he will not be able to take or make any decision without the vote of the National Partner leading to freezing the decision making process of the company which is a part of the problem.
The Limitations of the solutions provided under the Side Agreements to control the risk of Voting Rights of the National Partner
The general practice of providing the Side Agreements will always include the clause pertaining to the waiver of the voting rights of the National Partner in favor of the Foreign Investor or issuing Power of Attorney (“POA”) and incorporating other clauses that are illegal and will not be valid under the laws considering that the entire Side Agreement is invalid.
Below are few limitations pertaining to such clauses for your reference:
- Invalidity of Waiving the Voting Rights of the National Partner.
It is a common practice to waive voting rights of the National Partner, but the voting rights attached to the shares of the National Partner cannot be waived as per article 95 as well as article 91 of the Federal Companies Law which states as follows;
“The partners who are not Managers of the Limited Liability Company, where there is no Supervisory Board, shall have all the rights associated with the description of the partners as provided by this Law or the Memorandum of Association. Any agreement to the contrary shall be void.”
Any instrument or understanding between the partners waiving the voting rights of the UAE National Partner is considered as null and void. The National Partner will always have the right to exercise all the voting rights attached to his shares in the company and the UAE courts will reject any instrument or agreement to the contrary.
- Revocability of the Power of Attorney granted by the National Partner.
Obtaining a Power of Attorney from the National Partner to vote on his behalf as a partner in the company, can be revoked by the National Partner at any time by following the due process the law to terminate the POA.
An Irrevocable POA granted by the National Partner will become worthless for the Foreign Partner, if the National Partner decides to attend the general assembly by himself as per the article 924 of the Federal Civil Transactions Law. Nevertheless, obtaining such POA from the Notary public is almost impossible. Further, a notice of termination of the irrevocable POA from the National Partner will put all the actions undertaken by the Foreign Investor via the revoked POA under legal scrutiny.
In addition, all POAs are automatically terminated upon the death of either the principal or his agent and upon their ceasing to have legal capacity as per Article 954 of the Civil Transactions Law.
- Invalidity of Foreign Partner’s vote in the General Assembly on behalf of the National Partner, if he is a General Manager or Director of the LLC.
It is invalid for the Foreign Partner to vote on behalf of the National Partner if he is the managing partner of the company, neither can he exercise the voting powers given to him under the POA or delegation instrument (if any). Therefore, the vote of the Foreign Partner in the general assembly will be considered as invalid as per article 95 of the Federal Companies Law.
- The Rights of the General Assembly under the laws are wide and critical to the Foreign Partner.
The General Assembly has critical rights granted under the law, which are mandatory and cannot be waived from the General Assembly against the law. The General Assembly have the following important rights as per article 94 of the Federal Companies Law:
- The Managers’ report regarding the activity and the financial position of the company during the end of the financial year, the auditor’s report and the Supervisory Board’s report;
- The balance sheet and the account of profits and losses and the approval thereof;
- The profits to be distributed among the partners;
- To appoint the Managers and to determine their remuneration;
- To appoint the members of the Board of Managers (if any);
- To appoint the members of the Supervisory Board (if any);
- To appoint the members of the Internal Shariah Control Committee and the Shariah Controller if the company conducts its activity in accordance with the provisions of the Islamic Shariah;
- To appoint and determine the remuneration of the auditor(s); and
- Any other matters within the powers of the General Assembly in accordance with the provisions of this Law or the Memorandum of Association of the company.
To eliminate the aforesaid risks, we suggest the following solution as stated in the following steps:
Step 1: State the Mortgage Rules in the MOA and Mortgage the Shares
First, we must establish the mortgage rules governing the mortgage of the partners’ shares in the MOA of the company to enable the assignment of the voting rights with the mortgaged shares as per article 79 of the Federal Companies Law and then mortgage the shares to the Foreign Partner or his trustee.
Article 79 Assignment or Mortgage of the Partner’s Share in the Company
- It shall be permissible for any partner to assign or mortgage the share thereof in the company to any of the other parties or a third party. Assignment or mortgage shall be made in accordance with the conditions stipulated by the company memorandum and by an official document authenticated in accordance with the provisions of this Law. Assignment or mortgage shall not have probative force against the company or a third party unless as of the date of the registration thereof in the Commercial Register at the competent authority.
- It shall not be permissible for the company to abstain from the registration of the assignment or mortgage in the Register unless such assignment or mortgage violates the provisions of the memorandum of association or the provisions of this Law.
Step 2: Signing Mortgagee Agreement for Transferring the Possession (but not Ownership) of the Mortgaged Shares and the Voting Rights Attached to the Shares to Foreign Partner or his Trustee.
The National Partner shall execute mortgagee agreement with the Foreign Investor thereby transferring the possession (but not Ownership) of the mortgaged shares as immovable alongside with the voting rights attached to the shares as per the mortgage rules provided in Step 1. The mortgagee has the obligation to take care of the mortgaged shares as per article 1469 of the Civil Transaction Law and the practices of the courts including the commercial cassation case no 596 and 634 of 2013 of the Dubai high court.
Step 3: Appoint a Representative for the Mortgaged Shares to vote in General Assembly.
In most common cases the Foreign Investor acts as the manager of the LLC therefore he cannot vote in the General Assembly on behalf of other partners as per the law. In order to deal with this scenario we suggest that in the mortgagee agreement Foreign Investor shall put a clause for the appointing a representative for the mortgaged shares to attend the General Assembly meetings of the LLC, where the National Partner will not hold his right of vote regardless of his attendance or not. In accordance to article 77 of the Federal Companies Law, preventing more the one person to represent a set of shares, the representative shall be the only person having voting rights as per the shares.
Finally, there are a lot of requirements for the mortgage of shares. Stating the rules of mortgage in the MOA as well as the process of registering movable properties and fulfilling all the formalities of the mortgage along with other parts of our solution will lead to the ultimate solution for all the concerns as per our expertise and internal practice on such matters.
Lawyer & Legal Consultant
Mr. Mohamed Nouredin