Every entity is formed by a certain number of shareholders (owners) and a share can be defined as the amount of percentage of the company owned by each of the shareholders of the entity. However, the number of shareholders can be increased or decreased as per each companies’ requirements by a way of selling or transferring the shares.
Some of the common reasons that the entity might want to sell or transfer the share are as follow:
Federal Law Number 2 of 2015 on Commercial Companies as amended by Federal Law Number 7 of 2018 (the Companies Law), governs all the relevant aspects of the companies established in UAE. However, article 5 and 6 of the Companies Law lays down the entities which are exempted from falling under the purview of the provisions of this law.
Article 9 of the Companies Law provides the forms of companies that one may prefer to establish their business in UAE. The forms of companies available by the provisions of Companies Law are, joint liability company, limited partnership company, limited liability company, public joint stock company and private joint stock company.
This article intends to elucidate on the provisions on the sale of share in the Limited Liability Company (LLC) in UAE and also provide with relevant details on the procedure involved to carry out such transfers or sale of the share (or shares) in an LLC.
The memorandum of association (MOA) and the articles of association (AOA) are the company’s fundamental documents, as they lay down all the vital details of the company, like the MOA covers the objectives of establishing the company, the type of company, date of incorporation and details and numbers of shareholders and percentage of shares held and other such foundational aspects of the company.
Whereas, the AOA specifies the conditions required to carry out the transfer or sale of the share, rules regulating the corporate governance, division of shares and dividends, voting rights among various other such relevant aspects of the company. Article 209 of the Companies Law stipulates that the shares can be disposed of only in line with the provisions as specified by this law, the implementing regulations and decisions as decreed by the competent authority and as prescribed in the AOA of the company. Article 209 further states that, such disposal of shares shall not contravene with the article 10 of this law; where it mentions that except for joint liability companies and limited partnership companies, all other companies established under UAE and are governed by the provisions of this law, shall have one or more UAE national partners holding a share of fifty-one (51) percent of the company’s capital.
Article 79 of the Companies Law covers the sale or transfer of share of a limited liability company established in UAE. It stipulates that the shareholders may transfer or sell, or pledge their shares in the company to another shareholder of the company or to a third party. However, it is pertinent to note that such transfer or sale of the share shall be carried out in line with the terms specified in the MOA of the company and the provisions of this law. The transfer or the sale of the share shall become valid from the date when such sale or transfer of share has been duly registered in the commercial register by a competent authority. Thereafter, such registered transfer or sale of share shall remain valid, unless such sale or transfer of share is found contravening with the terms of the MOA or the provisions of this law.
However, it is necessary for the sale or transfer of the share be executed before a competent authority like the notary public before being registered in the commercial register.
Article 80 of the Companies Law lays down the procedure in which a shareholder of the company may carry out the sale or transfer of his shares with a third party (the one who is not a partner to the company). Any shareholder who intends to sell or transfer his share to a third party is first required to seek the consent of other shareholders of the company. The shareholder seeking to sell or transfer his share shall notify the other shareholders of all the relevant details of the person intending to buy the share or person to whom such share is being assigned to along with the terms of the agreement of such sale, through the manager of the company. Thereafter, if the pre-emptive rights have not been exercised by the shareholders, then the party intending to sell the shares may initiate the process and successfully accomplish the sale of shares, by following the steps mentioned below:
However, by virtue of the right to demand the pre-empt shares, the shareholders may exercise their pre-emptive rights on the shares within a period of thirty (30) days from the date when they have notified the manager of their agreed price. A pre-emptive right can be explained as a right which allows the shareholders to have the option to purchase any new shares that come up in the company before it can be sold to any other outsiders, who are not partners to the company. In simple terms, the shareholders are bestowed with the right to buy the new shares first, before any party who is not a shareholder in the company. Where any dispute arises regarding the price of purchasing the share, then the parties exercising their pre-emption rights may request the competent authority to nominate a team of one or more experts who are well experienced in analyzing the technical and financial aspects of the subject matter of the share.
The partners applying for this request shall bear all the expenses followed by such a request of nomination of an expert team. If there is more than one shareholder exercising their pre-emption right, then the share or shares shall be divided among such shareholders, proportional to their respective shares and in accordance with article 76 of this law. The right to demand preempt on the shares shall lapse in the event if the shareholders failed to notify of their intentions before the expiry of the thirty (30) days as mentioned above.