Emerging flexibility

Elhassan Abdelrazek, partner at NHB Legal, explores key legal insights in management remuneration for UAE onshore Limited Liability Companies. He takes a closer look at the evolving landscape and its implications for companies and their leadership.

When it comes to compensating managers and directors in UAE (onshore) Limited Liability Companies (LLCs), the rules have traditionally been straightforward but strict. Article 171 of the Federal Decree-Law no. (32) of 2021 on Companies Law (the “Companies Law”) outlines the standard approach for remuneration of LLCs’ management. While the said article addresses the remuneration of the directors of public shareholding companies (PSC), it applies by extension to LLCs by the operation of the law. Nevertheless, recent regulatory updates, especially the Minister of Economy’s Decree No. 137 of 2024 regarding the Corporate Governance Rules for Private Joint Stock Companies (the “Corporate Governance Rules”), have introduced some new options for private joint stock companies (PJSCs) that may allow for greater flexibility. However, whether these updates apply to LLCs remains uncertain. This article sheds light on the core requirements, emerging options, and practical takeaways for management remuneration in LLCs.

1. The Foundation: Article 171 of the Companies Law

 Article 171 of the Companies Law governs board remuneration and, while aimed at PSCs, is often applied to LLCs as well by operation of the Companies Law:

• Profit-Based Remuneration: According to Article 171(1), board members’ remuneration must be capped at 10 per cent of the company’s net profits for the fiscal year, with all depreciations and reserves deducted. This means that the board of directors’ compensation is directly tied to the company’s financial success, incentivising them to prioritise profitability for the benefit of shareholders.
• Exceptional Circumstances: Article 171(2) provides some flexibility if a company does not turn a profit or if a board member’s share of the profits is less than AED200,000. In these cases, the company may pay a lump sum fee, capped at AED200,000. This ensures a level of fairness, allowing for board remuneration when profits are minimal while still protecting shareholders’ interests. It is worth mentioning that this exceptional remuneration must be expressly allowed by the company’s Memorandum and Articles of Association and approved by its General Assembly.
• Deductions for Violations: To encourage responsible management, Article 171(3) mandates that fines imposed on a company due to board violations be deducted from the board’s remuneration. This provision aligns board members’ accountability with the company’s financial outcomes, reinforcing good governance and ethical standards.

(“Public Joint Stock Companies Remuneration Scheme”)

2. Ministerial Decree No. 137 of 2024 on Corporate Governance Rules: New Flexibility for Private Joint Stock Companies

The introduction of the Corporate Governance Rules has expanded compensation options for directors in private joint stock companies (PJSCs). The decree permits PJSCs to pay directors a fee, expense, or even a monthly salary as the board of directors determines if such director(s) perform additional roles or functions beyond their board duties. For instance:

• Compensation for Additional Roles: Directors who take on roles like the chairperson or head of a committee or perform additional managerial functions in the company could receive extra remuneration, subject to decision by the board of directors. This option allows companies to offer tailored compensation aligned with each director’s responsibilities. Such compensation would be determined by the board of directors (as opposed to the general assembly) and may include an additional compensation to the director(s), which may be interpreted as potentially increasing the aggregate compensation to the board of directors (as determined by the general assembly) to more than 10 per cent of the net profits cap.While this added flexibility is a significant shift, the regulation is currently limited to PJSCs. For LLCs, it is unclear whether these provisions can apply, especially since the Corporate Governance Rules do not explicitly include LLCs in the decree’s scope.

  It is also worth noting that the Cabinet of Ministers Decree number 77 of 2022 regarding Limited Liability Companies (“LLCs Regulations”), which was issued in late 2022 (i.e., before the Corporate Governance Rules), does not address the remuneration of the LLCs’ management, which implies that the Public Shareholding Companies Remuneration Scheme would continue to apply to LLCs.

3. Could Decree No. 137 Apply to LLCs?

Without clear guidance, LLCs face a grey area regarding their ability to adopt the same remuneration flexibility outlined in the Corporate Governance Rules:

• LLC Governance Structures: Some LLCs, particularly those with multiple shareholders, have boards of managers or boards of directors that closely resemble those of private shareholding companies. This could suggest a basis for considering the directors’ remuneration flexibility provided in the Corporate Governance Rules in LLCs, though this interpretation has not been formally confirmed.
• Interpretative Challenges: With the lack of explicit language extending the decree’s rules to LLCs, companies should proceed cautiously, as applying these rules could invite questions from regulators or shareholders. For now, the safest approach for LLCs may be to adhere strictly to Article 171’s guidelines unless or until further clarification is issued.

4. Practical Takeaways for LLCs

In light of these considerations, here’s how LLCs can approach manager and director remuneration effectively:

• Stick to the Profit-Based Model: For the time being, many LLCs may find it prudent to follow the Public Joint Stock Companies Remuneration Scheme. This helps ensure compliance with the Companies Law and the LLCs Rules and provides transparency for shareholders.
• Monitor Regulatory Updates: As UAE regulations evolve, there may be further guidance or new decrees that clarify the applicability of flexible remuneration options for LLCs. Companies should stay informed about these developments to take advantage of future regulatory changes.

Conclusion

At present, LLCs primarily need to adhere to the Public Joint Stock Companies Remuneration Scheme. While the Corporate Governance Rules hint at potential flexibility with remuneration options, there’s still no clear indication that this applies to LLCs. Given this uncertainty, the prudent course for LLCs is to stick closely to the Public Joint Stock Companies Remuneration Scheme and keep an eye on any future regulatory updates. By doing so, companies can maintain a compliant approach that is ready to adapt if the Corporate Governance Rules evolve.

Text by:

Elhassan Abdelrazek, partner, NHB Legal