By Michael Earley, Mohamed Fouad, and Mahmoud Abuwasel
Demonstrating its awareness of the ever-evolving economic landscape of both the region and the world, Qatar recently enacted a new commercial companies law in order to facilitate local business growth and promote foreign investment in the country. Law 11 of 2015 (New Commercial Companies Law) was published recently in the Official Gazette in July and came into force in August of this year.
The New Commercial Companies Law seeks to raise Qatar’s global ranking as a hub for investment, support national SME initiatives, and simplify the business incorporation process. Encompassing 340 articles distributed amongst thirteen chapters, the New Commercial Companies Law replaces in its entirety the previous commercial companies’ legislation 5 of 2002 (Previous Law).
This article looks at some of the more significant changes introduced by the New Commercial Companies Law, and where applicable briefly analyses the implications of those changes. It should be noted that although the New Commercial Companies Law introduces a number of significant changes, many of the previous provisions remain in place. A complete analysis and exhaustive listing of all of the changes introduced by the New Commercial Companies Law is beyond the scope of this article.
Furthermore, the foreign investment limitations set out in Law 13 of 2000 (Foreign Investment Law) are unaffected and accordingly with some exceptions foreign investors will still be required to have a majority Qatari shareholder in their locally established companies.
Finally, the New Commercial Companies Law does not apply to companies established in special economic zones such as the Qatar Financial Centre and the Qatar Science and Technology Park, which have their own set of regulations and will be unaffected by its legislative changes.
Chapter One: Permissible Company Forms
The first chapter of the New Commercial Companies Law generally defines the permissible company forms, types of shareholding, and corporate governance. Article 4 specifically sets out the seven available company forms which are:
1. General Partnership
2. Limited Partnership
3. Joint Venture Company
4. Public Shareholding Company (PJSC)
5. Private Shareholding Company
6. Partnership Limited by Shares
7. Limited Liability Company (LLC)
Significantly, references to sole proprietorships have been removed and Article 263 clarifies that such entities are now permissible as a type of LLC that has only one shareholder – the single person LLC; additional changes to LLCs are discussed in more detail under Chapter Eight.
The New Commercial Companies Law also removes references to Holding Companies as a type of company form, stipulating that such companies are not in and of themselves an independent corporate form but rather should take the form of either a shareholding company or an LLC. Regardless of the company form it takes, a requirement for a company to be treated as a holding company is that they maintain financial and administrative control via a minimum of 51% shareholding of the held company(s).
Pursuant to the rules and regulations governing commercial companies and financial institutions such as Law 8 of 2012 governing the Qatar Financial Markets Authority (QFMA) and Law 13 of 2012 (Qatar Central Bank Law), Article 18 of the New Commercial Companies Law has further organised the principles of governance for financial institutions. According to Article 18, commercial companies that are under the supervision of the Qatar Central Bank (QCB) are exempt from the governance regulations of the New Commercial Companies Law. Similarly, public shareholding companies are subject to the rules and regulations of the QFMA. Private shareholding companies are subject to future regulations that may be issued by the Minister of Economy and Commerce.
In order to streamline the incorporation process, Article 19 lays out the development of a “One-Stop-Shop” to expedite the establishment process of new companies. The One-Stop-Shop will not only provide services on behalf of the Ministry of Economy and Commerce, but will also do so on behalf of other authorities as well, such as the Qatar Chamber of Commerce and Industry. However, immigration related documentation, such as the immigration “computer card”, will continue to be processed by the Ministry of Interior.
Chapter Two: General Partnerships
General partnerships are organised in Chapter Two of the New Commercial Companies Law between Articles 21 to 44. Article 30 in particular stipulates that a shareholder in a general partnership may not be a shareholder in a competing company without the approval of the remaining partners. Also notable is Article 38 where a minimum notification period of thirty days has been set for a director’s notification to withdraw from the board.
Chapter Five: Public Shareholding Companies
The New Commercial Companies Law has introduced numerous changes to PJSCs, which are covered by Chapter Five in Articles 62 through 205. In terms of capital, Article 65 maintains the required QR 10 million start-up capital under the previous legislation. Article 67 requires that a PJSC offer its share for public subscription within 60 days of its incorporation. If the shares are not offered publicly then the company expires, unless the founders amend the company’s Articles of Association and convert the company into another permissible form. Significantly, the founders remain liable for the company’s liabilities during this period.
Under the Previous Law, foreign or national parties were permitted to form an “Article 68 Company” taking the form of a public or private joint stock company in which a governmental authority held a percentage of that company’s shareholding. Although the New Commercial Companies Law has amended Article 68, the concept of such a company has been retained in Article 207 with one important distinction discussed in more detail below.
The newly revised Article 68 provides an exemption to the requirement that a PJSC have a minimum of five shareholders where a governmental or quasi-governmental shareholding amounts to a simple majority control of the company (i.e. 51%). Furthermore, even if the government entity does not hold a simple majority, the exemption may still be applicable upon approval by the Council of Ministers.
Under Article 68 of the Previous Law, government private and public shareholding companies were exempt from certain corporate governance laws to the extent provided by their articles of association. This exemption has been relocated, and now the only exemption provided by Article 68 of the New Commercial Companies Law is that related to the minimum number of shareholders in a PJSC. Pursuant to the New Commercial Companies Law, PJSCs having government shareholding are no longer entitled to the flexibility of being able to stipulate provisions in the constitutive documents that do not comply with the usual corporate law requirements (see Article 207 for additional details).
Article 78 of the new law provides that the administration and processing of initial public offerings (IPOs) are no longer limited to banks in Qatar, but rather may also be administered and processed by companies that are licensed to conduct such activities.
Article 94 states that where a public shareholding company is not publicly listed within one year from the date of its incorporation, or the date of its transformation from another company form into a public shareholding company, then such company shall by default revert to a private shareholding company and shall be responsible for all costs associated for its restructuring.
Article 95 limits the tenure of board members to three consecutive years, unchanged from the Previous Law. However, the members of the first board initiated for the shareholding company at its establishment may hold a tenure of up to five years. The New Commercial Companies Law further provides that up to a third of the board of directors may be independent members exempt from the requirement to hold shares in the company.
A new corporate governance provision of the New Commercial Companies Law broadly addresses certain insider-trading concerns by prohibiting for a maximum of three years subsequent to their leave of office any ex-board members from utilizing for personal benefit any information that was attained during their tenure. This provision extends to the member’s fourth-degree relatives. The law also prohibits ex-members or their relatives from having any direct or indirect benefit from the issuance of the company’s listing.
With respect to the remuneration of board members of shareholding companies, Article 119 limits such payments from 10% to 5% of the net profit of the company after legal deductions. However, bonuses can only be distributed to board members after the company has fulfilled its 5% reserve of capital.
Notably, the new law does not stipulate any deductions to the remuneration of board members where the shareholding company does not attain profits. Article 152 provides that share value denomination may vary from between QAR 1 to QAR 100, substituting the minimum figure of QAR 10 under the previous legislation. As had been stipulated in the Previous Law, Article 155 of the New Commercial Companies Law provides that the capital must be paid-up within a maximum of five years. Where it is not paid-up, the share capital must be reduced.
Regarding the calculation method for shares or in-kind contributions, Article 158 provides that the founders may request the Ministry of Economy and Commerce to appoint an expert(s) from the registered financial and commercial experts’ listings to ensure that the shares or in-kind contributions have been duly appraised. This replaces the prior requirement that experts assigned to value such shares or in-kind contributions were appointed via the civil courts, which was a much lengthier and time-consuming process.
Article 162 sets out new provisions relating to pledged share requiring that certificates of shares issued by the company at the depository should be marked to reflect that they are pledged.
Addressing the popular success of the Sukuk instrument in the financial market, Article 181 requires companies issuing Sukuk must comply with Shariah requirements for such an instrument, while at the same time abiding by the general requirements of bond issuances. Such an issuance also requires the approval of a General Assembly.
Chapter Six: Private Shareholding Companies
The sixth chapter addresses private shareholding companies within Articles 205 to 208. Article 205 permits the establishment of a private shareholding company with a minimum of five shareholders, but prohibits such entities from offering their shares to the public. The New Commercial Companies Law retains the QR two million minimum capital requirement from the Previous Law for such companies.
Perhaps one of the most interesting changes the New Commercial Companies Law introduces relates to shareholding companies in which the government or a quasi-governmental entity owns 51% of the company’s share capital. Under Article 68 of the Previous Law, a public or private shareholding company established under that provision could be exempted from the requirement that the constitutive documents comply with the otherwise mandatory provisions of corporate laws where the government owned a simple majority (or less by approval of the Council of Ministers) of the company’s shares. Such a company was generally exempt from the provision of the Previous Law. Article 207 of the New Commercial Companies Law sets out a similar provision, but the option to establish a public shareholding company, which was previously permitted, has been removed and this now applies only to private shareholding companies.
Furthermore, Article 207 also introduces a novel corporate form: private shareholding companies established by non-profitable organisations established via Emiri Decree. Such organisations are allowed to establish a private shareholding company either independently or in partnership with another domestic or international entity, or natural, public, or private juristic person. Companies that are established by such non-profitable organizations are not subject to the new law, except where its Article of Association or other constitutional documents are in violation of the law. The reasoning behind this new legal mechanism is to establish non-profit private organizations that address public benefit through the establishment of private shareholding companies.
Chapter Eight: Limited Liability Companies
Chapter Eight covers the legal provisions for LLCs within Articles 228 to 263, and introduces a number of significant changes. Two of the most significant changes relate to the minimum number of permissible shareholders in an LLC, and the capital requirements for a company start-up. Furthermore, the New Commercial Companies Law removes the former Single Person Company / Sole Proprietorship under the Previous Law and replaces it with the single shareholder LLCs.
The changes introduced by the New Commercial Companies Law lower the minimum number of shareholders, enabling the establishment of an LLC with one or more (up to 50) shareholders. Furthermore, the New Commercial Companies Law, in contrast to the Previous Law, has not designated a minimum capital requirement to be deposited for an LLC to be established. The Previous Law required an LLC to have a minimum establishment capital of QR 200,000.
In deciding to remove the minimum capital requirement for an LLC, the authorities considered global rankings and indexes of countries with respect to the ease of establishing and undertaking a business, thereby increasing Qatar’s appeal for local start-ups and foreign investment. By eliminating the minimum capital requirement, Qatari nationals will require less starting capital to establish new businesses.
Chapter Nine: Holding Companies
Articles 264 to 270 of Chapter Nine revamp the legislation governing holding companies. In order to comply with international accounting standards, Article 296 requires all subsidiary companies of a holding company to maintain accounting records that are consolidated and then submitted as part of the holding company’s annual budget report.
Chapter Ten: Conversions, Mergers, and Divisions
Chapter Ten replaces the former provisions of the Previous Law and reorganizes the processes and requirements for the conversion, merger, and division of companies within Articles 271 to 290. Where a company is seeking to convert to a PJSC, it must have been registered for at least 2 years. This period is shorter than the previous period which required a company to have been registered for at least 3 years.
Acquisitions are described in Article 287 as instances where:
1. A company acquires, directly or indirectly, shares of another company that provide the former with majority voting rights;
2. A company controls the majority of voting rights of another company via an agreement with the partners or other shareholders, which does not conflict with the purpose and objective of the latter company;
3. A company has voting rights in another company that allow the former to exert actual control over the decision making of the latter’s General Assembly. A minimum figure of 40% has been set to reflect the sort of figure that can be applied in this situation; or
4. A company controls voting rights of another company that provide the former with the ability to hire and dismiss the majority of the board of director, or the supervisory board, or the appointed managers.
Article 288 requires the acquiree to protect the right of the minority shareholders, which includes the right of first refusal to purchase the shares at a share price not less than that offered to the acquirer, or at a price valuated by an appointed expert as per Article 158.
Chapter Twelve: Company Supervision
Chapter Twelve stipulates the provisions of company supervision at Article 322 to 333, updating specific requirements, especially where the QFMA is the supervisor of publicly listed shareholding companies (Article 323).
The enforcement of managerial penalties for contravention of the New Commercial Companies Law provisions occurs through the Ministry of Economy and Commerce. Pursuant to Article 324, those penalties are:
1. Issuance of a warning.
2. Issuance of a reprimand.
3. Prohibiting the violator from undertaking a position on the board of directors or as a manager to any company.
4. Issuance of a fine not exceeding QR 10,000 for each day the breach continues.
5. Issuance of a lump sum fine not exceeding QR 1,000,000.
The designated department at the Ministry of Economy and Commerce is responsible for the issuance of any notification, and where necessary, its publication. That department may also resolve a contravention through conciliation with the company as per the bylaws and/or regulations issued by the Minister of Economy and Commerce.
Although the New Commercial Companies Law has only recently come into force, it is anticipated to have a positive effect on the local market, and not only improve Qatar’s “ease of doing business” rankings, but also promote economic growth by encouraging both foreign and local participation in the market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your particular circumstances or legal issues. Any questions may be directed to Michael Earley (mearley@qatarlaw.com), Mohamed Fouad (mfouad@qatarlaw.com), or Mahmoud Abuwasel (mabuwasel@qatarlaw.com).
0+
