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ME-ALLIANCE LEGAL INSIGHT
Corporate Governance of Limited Liability Company L.L.C
The governance framework for Limited Liability Companies (LLCs) in the UAE is governed by both Federal Decree-Law No. 32/2021 on Commercial Companies (“Commercial Companies Law” or “CCL”) and Cabinet Decision No. 77/2022 Concerning LLCs (“Cabinet Decision”).
In the context of governance for LLCs under UAE law, it is crucial to note the distinction between governance frameworks for Joint Stock Companies (JSCs) and LLCs. While JSCs are subject to more detailed regulatory controls, including governance and compliance obligations, LLCs enjoy more flexibility, primarily governed by their Memorandum of Association (MOA) and internal resolutions.
The Commercial Companies Law, along with the Cabinet Decision, outlines certain foundational principles for LLC governance, management, and operational conduct. Some of the major aspects to consider include:
MOA as the Governing Document
Unlike Joint Stock Companies, LLCs are predominantly governed by their Memorandum of Association (MOA), which outlines the structure, management, and operations of the company. The MOA must include detailed information about the company’s capital, partner contributions, profit-sharing ratios, and management structure, as specified under Articles 42 and 101 of CCL.
Manager’s Duties and Liabilities
The managing director of an LLC is expected to act with due care and preserve the rights of the company, performing actions within the scope of their authority (Article 22, CCL). The company is also bound by the actions of its manager, provided they are conducted in a regular manner and within the scope of their authority (Article 23, CCL).
Accounting and Auditing Requirements
LLCs are required to maintain accurate accounting registers and prepare annual financial accounts in accordance with International Accounting Standards (IAS), ensuring transparency and accuracy in financial reporting (Article 27, CCL). A statutory auditor must audit these accounts annually (Article 102, CCL), and the company is required to keep these records for a minimum of five years (Article 26, CCL).
Profit Distribution and Capital Management
The distribution of profits must be genuine, with a clear prohibition on the distribution of fictitious profits, and any such violations hold the managers accountable (Article 30, CCL). LLCs are also required to maintain sufficient capital to achieve their objectives, and any changes in capital must be handled in accordance with the law (Articles 76, 101 of CCL).
General Assembly and Partner Rights
LLCs must hold general assembly meetings annually, where partners review the company’s financial statements, appoint auditors, and discuss management actions. These meetings serve as a critical control mechanism in LLC governance (Articles 94, 95 of CCL). Partners in an LLC that does not have a supervisory board retain all rights associated with governance and oversight (Article 91 CCL).
Liability and Accountability of Managers
While LLCs provide managers with significant leeway to act in the company’s best interest, they are still held accountable for any fraudulent acts, abuse of power, or gross errors that cause harm to the company, its partners, or third parties. Article 84 of the Decree-Law emphasizes that managers can be held personally liable for such actions. This liability extends beyond internal mismanagement and includes damages caused to third parties due to managerial negligence or misconduct. The dismissal or replacement of managers in the event of misconduct is also governed under strict provisions, ensuring accountability.
Related Party Transactions and Conflict of Interest
LLCs must ensure transparency and fairness in transactions involving related parties. The Cabinet Decision mandates that any transaction exceeding 5% of the company’s capital must be approved by the general assembly, with the related party refraining from voting on such decisions. This reflects a critical governance mechanism that mitigates potential conflicts of interest, ensuring that managers and related parties do not benefit unfairly from their position within the company (Article 20, Cabinet Decision).
Supervisory Board and Partner Oversight
If the number of partners in an LLC exceeds 15, the company must appoint a Supervisory Board, which is tasked with examining the company’s books, overseeing the management’s activities, and reviewing financial statements before presenting them to the general assembly (Articles 88 and 89 of CCL). This governance structure ensures an additional layer of oversight, especially in larger LLCs, contributing to greater transparency and accountability.
Corporate Governance in Single-Member LLCs
The introduction of corporate governance standards for Single-Member LLCs under Cabinet Decision further solidifies the need for discipline, even in companies with a sole owner. These standards ensure that even when there is a single decision-maker, controls are in place to manage the business prudently. For instance,, the manager or board of a Single-Member LLC is required to prepare and present detailed financial reports, including profit and loss statements, to the shareholder for approval within a set timeframe (Articles 14 and 17, Cabinet Decision). This requirement enforces financial transparency and accountability, even in smaller, more concentrated ownership structures.
Capital Protection and Profit Distribution Safeguards
Protecting the company’s capital and ensuring that profits are distributed lawfully is another key focus of LLC governance. Article 30 of the CCL explicitly prohibits the distribution of fictitious profits, holding the managers liable for any unlawful distributions. In case of capital inadequacy or if the company risks liquidation, Article 101 provides for legal measures to increase the capital, ensuring the company’s continued operation and ability to meet its obligations.
Partner Rights and Dispute Resolution
Partners in an LLC are provided with the right to examine the company’s financials and obtain copies of the audited accounts (Article 27, CCL). Additionally, partners have the right to file lawsuits against the company, its management, or the board if they believe the company is being managed in a manner detrimental to their interests (Article 166, CCL). This right to challenge decisions ensures that minority partners can seek redress through legal channels if their interests are compromised.
Auditor’s Role and Independence
Auditors play a crucial role in the governance of LLCs by ensuring that the company’s financials are accurate and free from misrepresentation. The auditor must have access to the company’s books, records, and documents, and they are required to submit an independent report to the general assembly detailing the company’s financial position (Article 102, CCL and Article 13, Cabinet Decision). This safeguard ensures that financial transparency is maintained and that any discrepancies or violations are flagged by an impartial third party.
This framework creates a flexible but structured approach to LLC governance in the UAE, allowing companies to operate within the parameters of their MOAs while adhering to basic governance and compliance standards which maintain the rights of the dealers with these companies.
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