UAE share pledges – a secure solution?

Although the Economic Department (DED) in Dubai would accept the registration of notarised pledge instruments over LLC shares in favour of UAE Central Bank regulated financial institutions, in practice, given the uncertainties around legality and enforcement, most lenders did not rely upon such a pledge as part of their security package.

The new UAE Commercial Companies Law 2015 (New Law) now expressly permits shareholders to pledge their LLC shares. Any pledge must be made in accordance with the LLC’s memorandum of association (MoA), under a notarised document and entered into the Commercial Register maintained by the DED in the relevant emirate.

This provides welcome clarification as to the legality of pledges of LLC shares. However, several issues remain outstanding:

• Perfection – As was the case under the 1984 Law, the New Law does not require a share certificate to be issued which may be retained by the creditor. The fact that there is no document which represents title to the LLC share interest means that it is unclear how an LLC share pledge fits with the types of pledges available under the UAE Commercial and Civil Codes, which require actual or constructive possession. From a practical perspective, however, the MoA may require a note of the security to be made in the company’s internal register of shareholders as some protection for the creditor in relation to the creation of competing security interests and unauthorised share transfers.
• Notarisation and registration – We understand that the DEDs across the UAE are currently putting into place systems to enable registration of pledges. However, it is not yet clear whether the public notaries and the DED will permit the registration of pledges in favour of any party, not just UAE Central Bank regulated institutions. There is no plan for the Commercial Register to be open to public inspection and, unless this situation changes, it will be difficult for a prospective creditor to be certain as to prior competing interests without the co-operation of the LLC.
• Priorities – The question of priorities as between pledges is not clear. Is it the date of creation or the date of registration which will determine priority?
• Enforcement – A creditor commencing attachment may agree the method and terms of the sale, otherwise the shares are subject to a court-controlled public auction. The shareholders have the right to buy back the shares within 15 days of the auction on the same terms and conditions. This does not constitute a self-help remedy as the agreement of third parties is required in order to obtain the shares or the cash equivalent to recover the debt due. It is also unclear how the statutory pre-emption provisions (which apply for the benefit of other shareholders in the LLC in respect of share transfers) and the UAE’s foreign ownership restrictions will operate in this context.
• Financial assistance – The New Law introduces a prohibition on joint stock companies (JSCs) and their subsidiaries providing financial assistance to fund the acquisition of their own shares, which may include assistance by way of security such as a share pledge. There is some discussion on the application of this prohibition, in particular because the New Law applies all of the JSC provisions to LLCs unless the Law provides otherwise, although the wording of the financial assistance prohibition refers in Arabic to JSC shares, not LLC interests.

Furthermore, under the New Law, the board of directors of a JSC may not have the inherent power to pledge its shareholding in an LLC. In order to pledge movable property, the power to do so must be in the MoA or one of the objects of the company – otherwise specific shareholder approval is required.

In conclusion, although it is now clear that pledges of LLC shares are possible and can be registered, various matters remain to be clarified before pledges of LLC shares will constitute a valuable security.