A Subtle Shift in the Court's Approach Towards Nominee Arrangements in the UAE

Legal Reforms and Disputes in Foreign Ownership of Onshore Companies in the UAE

Recent legal reforms in the United Arab Emirates (UAE) have significantly reshaped the framework in relation to the foreign ownership of onshore registered companies. Prior to 2020, foreign investors seeking to establish companies in the UAE were required to partner with a UAE national, who had to hold at least 51% of the company’s shares (the “Old Law”). This arrangement often involved nominee agreements, where the local sponsor held the shares in trust for the foreign investor in exchange for sponsorship fees.

However, the introduction of the Commercial Companies Law No. 32 of 2021, Cabinet Resolution No. 16 of 2020, and the Commercial Transactions Law No. 50 of 2022 (the “New Commercial Law”) ushered in a significant change by allowing foreign investors to fully own and control their onshore companies in the UAE, with some exceptions for strategic sectors which still require UAE local participation. While these reforms present new opportunities for foreign investors, they also have brought about legal challenges for both investors and local sponsors.

In the wake of these changes, many foreign investors have sought to have their local sponsors relinquish their 51% shareholding, particularly where the foreign investor is the ultimate beneficial owner. This transition can often disrupt long-established relationships, sometimes spanning generations, and can test partnerships built on trust.

Case Law and Post-Legislative Changes

In the UAE, there is no definitive jurisprudence or binding precedent on the enforcement of nominee arrangements under the new legal framework. While earlier decisions upheld such arrangements, declaring companies void and ordering their liquidation, the legal landscape remains uncertain.

Dubai Cassation No. 342/2024 Commercial – A Landmark Decision

A recent judgment in Dubai Cassation No. 342/2024, rendered on 30 September 2024, has significantly altered the handling of nominee arrangement disputes. Traditionally, when nominee arrangements were upheld by the UAE courts, the company was declared void, and its liquidation proceeds were typically distributed to the true beneficial owners. However, in this case, the contested issue was the liquidation itself.

In this instance the defendants argued that the court incorrectly declared the constitutional documentation of the fifth, seventh, and eighth companies invalid, treating the partnership as misrepresented under the Old Law, which required a UAE local to hold 51% of the shares. They contended that the Old Law’s restriction had been abolished by the New Commercial Law, which the court failed to apply. Furthermore, they argued that the court’s decision to liquidate the companies based on invalidation was flawed, as nullity and misrepresentation have distinct legal meanings. Nullity refers to the invalidation of an agreement, while simulation denotes the absence of a real agreement.

The appellants' argument was supported by Article 112 of the UAE Constitution and Article 4 of the Civil Transactions Law, which state that new laws apply prospectively unless specified otherwise. The New Commercial Law (Federal Decree Law No. 32 of 2021) had abolished the requirement for a local partner to hold 51% of shares, and the court’s failure to apply this law to ongoing contracts was deemed an error. Consequently, the Court of Cassation annulled the judgment and referred the case back to the Court of Appeal for a renewed deliberation.

Conclusion

1. Appeal Argument: The appellants argued that the judgment wrongly declared the constitutional documents of the companies invalid, treating the partnership as simulated under the old law. They contended that the old law’s restriction was abolished under the New Commercial Law, and the partnership should be declared simulated.
2. Legal Distinction: The appellants emphasised that nullity and simulation are distinct legal concepts. Nullity refers to invalidating an agreement, while simulation refers to the lack of a real agreement. They argued that liquidating the companies based on invalidation was incorrect.
3. The New Commercial Law: The appellants pointed out that the New Commercial Law, which abolished the 51% local shareholder requirement, should apply prospectively to ongoing contracts. The failure to apply this law was an error justifying the annulment of the judgment.

Ultimately, the Court of Cassation’s decision to annul the judgment and refer the case back for reconsideration represents a significant development in resolving disputes arising from nominee arrangements and the evolving legal landscape for foreign ownership in the UAE. One key aspect highlighted by this decision is the nuanced approach towards the liquidation of a company. While liquidation has traditionally been the default remedy when nominee arrangements are contested, this judgment recognises that not all parties may wish for such an outcome. In many cases, foreign investors seek merely to have the court acknowledge their entitlement to the beneficial interest in the company, rather than pursue the liquidation of the business itself. This shift emphasises the importance of considering the broader context and intentions of the parties involved, signalling a more flexible and balanced approach to disputes involving nominee arrangements in the UAE.