UAE updates the Federal Commercial Companies Law - a deep dive into what's changed

Background

The dominating challenge for investors in the UAE over the past few decades has been the incompatibility of UAE Federal Commercial Companies Law (“CCL”) with the kinds of corporate mechanisms that most investors require as part of their transactions. The CCL did not, for example, permit multiple share classes and nor did it cater for things like drag or tag rights; essential tools without which it can be challenging (if not impossible) to align a shareholder’s legal position with the commercial intent of the parties.

Historically, the solution to this was to structure co-investment and joint venture arrangements using BVI or Cayman companies. However more recently, the UAE’s two financial freezones - Abu Dhabi Global Market (“ADGM”) and Dubai International Financial Centre (“DIFC”) – stepped into that structuring jurisdiction role, each having adopted a companies law similar to English law, which enables the use of such tools. Crucially, ADGM and DIFC also formed their own Court systems based on common law principles of binding precedent, and appointed a bench of judges with a track record of hearing cases involving investment tools such as these, and through the passage of time and track record of reported court cases, demonstrated an ability to deliver verdicts that aligned with the underlying documents.

This solution from ADGM and DIFC enables shareholders to put in place documents which accurately reflect their commercial deals, and gives confidence that those documents will be enforced as expected. As a result, it has become market practice to use ADGM or DIFC holding vehicles to structure joint ventures and co-investments in the region.

New Changes

In a major shift, the CCL has recently been amended by Federal Decree Law 20/2025, the effect of which is to modernise entirely the CCL and bring it much closer into line with international standards.

The key changes introduced are:

• Drag and Tag Rights are now possible provided the mechanisms are clearly documented in the MoA (Article 14(4)(a), CCL).
  
  This is a major change to the CCL and how courts and authorities should treat engagement between shareholders on matters regarding share transfers. In the past, minority shareholders have held a material strategic advantage, effectively being able to hold M&A deals to ransom in order to drive the price for their shares upwards. This (unwelcome) reality can now be addressed in the company’s MoA giving majority shareholders the ability to achieve an exit more easily without terms being dictated by minority shareholders. On the other hand, this will also enable minority shareholders the ability to participate in an exit on equal terms to a majority investor (although the previous dynamic under the old CCL already did give minority shareholders an “effective” tag right as they could simply refuse to sell unless their shares were purchased for the same price).
  
  Careful drafting will need to be included in the MoA for this to be effective, including very clear “specified conditions” which should also include steps which can be clearly evidenced from a UAE Courts and DED perspective (e.g. a notice of transfer issued via a notary public).
  
  While there is no positive recognition towards call options yet, arguably the Drag Right could also apply to a sale to an existing shareholder or their affiliates (which would effectively become a Call Option), which is something to keep an eye on. Alternatively, structuring could be built under the multiple share classes framework (see below) to support a call option exit route (for example, a scenario where shares could be subject to redemption for [AED1] in the event the shareholder breaches a call option notice).
   
• Multiple Share Classes are now possible provided the rights are clearly set out in the company’s MoA (Article 76, CCL).
  
  This can include different nominal values, voting rights, redemption rights, economic rights (for distribution or liquidation/winding up), “or other rights, privileges or restrictions”. This is very open ended so it will be interesting to see what the relevant Emirates’ DEDs and Notaries will permit in this regard.
  
  Note the structure for redemption rights is an interesting feature here, which may enable management incentive schemes and generally more fragmented share ownership structures at LLC level now, based on recognised good leaver/bad leaver scenarios.
   
• Redomiciliation is recognised for transfer of foreign companies into and out of the UAE (onshore areas), as well as transfer of companies between UAE onshore and any UAE freezone area (subject to the relevant freezone regulations). As the UAE continues to attract foreign investment, this additional tool may also facilitate international businesses redirecting to the UAE.
   
• Non-profit organisations will become easier to form. This has been a long-term challenge in the UAE, where forming charities or other non-profit organisations (e.g. student unions for Universities) has been challenging. The new CCL paves the way for this to become easier in future.
   
• All UAE Freezone Companies are formally recognised as “UAE Companies”. Historically there was a question over whether freezone companies held full UAE Company status, which resulted (for example) in some UAE Federal organisations not being willing/able to recognise freezone companies as “UAE Suppliers” for Procurement purposes. This question has now been answered through the amendment to the CCL giving firmer standing to freezone companies in the UAE.

CMS Commentary

These changes to the CCL, which come as part of a wider legislative reform package introduced over Q4 2025/Q1 2026, will be warmly welcomed by the UAE business community and investors in the UAE. They give rise to many opportunities and freedoms to businesses and investors in the UAE which historically were not available, and support a more sophisticated business environment generally. However they are also long overdue, and arguably, do not go far enough to really bring the UAE onshore realm on par with ADGM and DIFC.

To recap using a holding company in ADGM or DIFC offers two major benefits: first, the law allows shareholders to build in a much broader range of provisions – drag and tag, put and call, multiple share classes, waterfall of financial returns, redemption rights, conversions and so on, not all of which are (clearly) permissible under the CCL; but second, and perhaps more importantly, both ADGM and DIFC have independent court systems familiar with these legal provisions, with a comprehensive publicly searchable record system, and which have now grown a track record that demonstrates their ability to deliver decisions that will encourage investors.

Onshore LLCs will default to UAE Federal Courts which will take time to acclimatise to the new CCL changes. There will also remain the challenge that, as a Civil Law environment without a comprehensive case reporting system or binding system of precedents, onshore courts may struggle to match the transparency and predictability of ADGM and DIFC Courts when assessing cases involving these corporate mechanisms. Query therefore how much confidence international investors may place in the new CCL changes - in the short term, at least.

Conclusion

What do these changes to the CCL mean in practice?

• For any LLC with multiple shareholders, investors can now at least shape the MoA towards the kinds of provisions joint venture partners would like to include in their arrangements, which will give the respective shareholders a better chance of enforcing their rights as written;
   
• Equity-based management incentive schemes and a more fragmented shareholder base generally could start to feature in onshore LLCs, without the need to look at offshore structuring;
   
• Intestacy scenarios for natural shareholders can be better managed to avoid business continuity challenges and shareholder balance;
   
• Redomiciliation of entities into and around the UAE may become more commonplace; and
   
• Non-profit entities will become easier to set up and manage.

But…don’t expect the world to change just yet. The UAE courts will need to adopt a similarly transformational approach to their handling and reporting of these situations in order to give investors the confidence to use LLCs  for UAE co-investment structures. Until then we should expect to see ADGM and DIFC solutions within to dominate co-investment structures.

Click here for a more in-depth review of the changes made to the CCL.