No LLC manager of a UAE company Shall have eternal dominion -

The entrenchment of absolute power in the statutory managers of UAE LLC companies entrenches. All over the world, corporate governance is highly concerned with limiting managerial entrenchment and ensuring that management acts to benefit the firm’s shareholders. When management power is absolute and extremely difficult to take back, the Company is run by a dictator – not a manager and not the shareholders.

In UAE law, corporate entrenchment is a deeply ingrained feature of UAE companies with roots dating back 5 decades. Moreover, it met the cultural, social, and economic needs of the country and the UAE’s national shareholders, many of whom believed that an expat, educated, and experienced manager could better run the company than they could.

Maybe it was even true 30 or 40 years ago. To vest full managerial power in experienced, hard-working expats served the interests of commerce. Shareholders provided the capital, and the manager managed the company. In order for any manager (of a company or country) to do a good job, their governance must be stable and not prone to being easily dismissed. The difficulty in removing managers in UAE laws was somewhat offset by the chaos that would ensue if management was changed based on shareholders’ whims.

All that has changed now.

Firstly, the Emirati shareholder is more knowledgeable, but he also wants to, and he is capable of managing the company just as well as anyone else. Two, the expats who have invested sweat equity and promised not to question the passive shareholders’ right to profit from an investment that was made decades ago are neither silent nor satisfied with the arrangement.

The law is both socially and economically outdated.

In what ways is management entrenched?

When statutory managers are appointed under the Articles of Association, removing their service contract will require an amendment to the articles of association – which means super majority voting, if not unanimous, and lots of hindrances.

Three factors solidify the manager’s dictatorship:

  • The articles of a limited liability company may appoint a director for an indeterminate duration, but he or she must maintain their position for at least their term. A company’s articles of association constitute a contract between the company and its directors. Therefore, a manager appointed by the Articles can only ever be terminated if the shareholders change the Articles.
    By the specific voting methods specified in the articles for amending the articles, it may never be possible to remove a director who is a shareholder.
  • In a case where the Articles do not specify the voting requirement for amending them, the law requires a unanimous vote to remove a director. An impossibility that, at first, causes significant losses for shareholders and ultimately makes getting rid of a company more convenient than changing management.
    What is so wrong about it?

This state of the law is unacceptable for two reasons:

  • In essence, it works against the basic tenets of a limited liability company, whereby a manager is appointed and removed by shareholders, and where shareholders own the business. Directors manage the business to maximize shareholder value.
  • Ownership and management are logically separated. However, when LLC managers are appointed or removed, the manager is almost always a shareholder as well. Thus, one shareholder manages the company only for his own benefit – and to make matters more complicated, he cannot be removed. LLLPs do not operate as companies, but as dictatorships.
    As a practical matter, shareholders are being exploited and, like any dictator, managers’ tyranny cannot even be ended.
 

Types of abuse

When a Company abandons shareholders, doesn’t report profits, or doesn’t earn profit, the author witnessed the following destructions:

To the banks, they had given personal guarantees. The manager, however, refuses to repay his debt, so the shareholders have two options:

  1. The bank can dissolve the personal guarantee or
  2. A new guarantee is issued to extend the lender’s facilities, hoping that the situation will have improved by then. However, the crisis continues.
  3.  

Some shareholders wish to sell their shares, but how are they to do this? There is no way to purchase and sell these items on the open market, so a private buyer will assume the warranty from the seller. The buyer’s due diligence and eventual disclosure of the company’s state will only expose the shareholder to a legal action for fraudulent sale

1. The shareholders are ready to give up on the business and take a loss. They want the company to be liquidated. However, the manager refuses to allow this to happen because:

  1. The Company is profitable according to the manager’s financial statements.
  2. There are no deadlocks among shareholders. There is no conflict between shareholders, rather there is a conflict between the manager vested with absolute power and exercising it.

What is the solution?

Because the cure is an expensive legal battle, prevention is the best solution. My general recommendation is:

  1. Limit the term of a manager appointed in the articles of association to three years.
  2. Inject an article that any change to that AOA’s provision affecting the manager appointments will require a simple majority vote, and the manager will not vote on that.
  3. By law, a manager cannot vote on matters in which he has an interest. However, explain to the notary that the manager’s vote on the amendment to the articles should not count since this is a matter of interest to him.
  4. Establish a culture where financials are vetted by forensic analysts from the beginning. In this way, a random request for forensics will not exacerbate a broken relationship, and a stern eye from the get-go will align the manager’s attitude and intentions.

While shareholders may have limited liability, a poorly run company becomes a liability to them.

Should his actions shift from self-serving to illegal, seek the assistance of a criminal lawyer in the manager’s home country and have him extradited.