The Tyranny of the LLC Statutory Manager in the UAE

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.

Corporate entrenchment roots in UAE companies' law goes back to 5 decades ago, and it is a profoundly ingrained dynamic of UAE Companies. It suited the country's cultural, social, and economic needs and the UAE national shareholders, many of whom believed that an expat, educated and experienced manager could run the Company better than them.

Perhaps it was even true 30 or 40 years ago. It was in the interests of commerce to vest full managerial power to experienced, hard-working expats. Shareholders brought the capital, and the manager ran the business. With obligation should come authority, and if any manager (of a company or a country) is to do a fine job, their governance must be stable and not prone to be easily dismissed. Thus the difficulty in removing managers in UAE laws was somewhat offset by the chaos that would ensue if management changed based on shareholders' whim.

This has all changed now. Firstly the Emirati shareholder is more knowledgeable, but he also wants to, and he can manage the Company just as well as anybody else. Secondly, the expats given sweat equity and promised never to question the passive shareholders' continued right to profit from an investment made decades ago are neither silent nor happy with the arrangement.

This law is highly outdated from both a social and economic standpoint.

How is management entrenched?

As is customary, statutory managers are appointed under the articles of association, making their employment agreements just as hard to amend or terminate the articles of association and the Company itself.

Three factors solidify the manager's dictatorship:

1. If a limited liability company's director is appointed in its articles for an indeterminate period, he or she must remain at least until their term expires. The articles of association are a contract between the Company and any directors who have been appointed. Accordingly, a manager appointed by the Articles can only ever be terminated if the shareholders can change the Articles.
2. If the director also happens to be a shareholder of the Company, then depending on his shareholding and the specific voting specific in the articles to amend it, it may never be possible to remove him.
3. The Articles do not specify a majority requirement for amending them. Therefore, 100% of the votes would be required to remove a director. An impossibility that, at first, causes significant losses for shareholders and ultimately makes liquidating a company more convenient than changing its management.

What is so bad about it?

This state of the law is unacceptable for two reasons:

• It defies the basic principle foundation of a limited liability company - where a manager is appointed and removed by shareholders, where shareholders own the Company. The manager manages it to create value and return for shareholders. Management and ownership are logically and legally kept separate. But in the case of appointment and removal of LLC managers, the manager is almost always a shareholder as well. Thus one shareholder is managing the Company for his sole benefit - the cherry on top - he cannot be removed. LLCs are not companies; they are dictatorships.
• On a practical scale, shareholders are being abused and, as with any dictator, cannot even exit the manager's tyranny.

Types of abuses

Some of the prevailing destructions the author experienced when the Company has abandoned shareholders, don't receive profit or reporting are:

1. They had issued personal guarantees to the banks. However, the manager refuses to repay the debts, so the shareholders have two options:
2. the bank dissolves the personal guarantee, or
3. A new guarantee is issued to extend the lender's facilities, hoping that the situation will have improved by that time. However, the crisis continues.
4. Owners of shares are seeking to sell their shares, but how? It is impossible to purchase and sell these items on the open market, and a private buyer will assume the warranty from the seller. Due diligence conducted by the buyer and eventual disclosures of the Company's state will only expose the shareholder to legal action for fraudulent sale.
5. Shareholders are ready to surrender to loss and get out of the business. They want the Company liquidated. However, the manager refuses to allow this to occur:
6. According to the manager's financial statements, the Company is profitable.
7. There is no deadlock among the shareholders. It is not the shareholder who is at odds with the other shareholders, but the manager vested with absolute power and exercising it.

What is the solution?

The solution is prevention because the cure is an expensive legal battle. My general advice is:

1. If a manager needs to be appointed in the Articles of Association, limit his term to three years.
2. Stipulate under amendments to AoA provision that an amendment of the provision regarding manager's appointment will require a simple majority vote, and the manager will not vote on that.

The law states that the manager cannot vote on matters in which he has an interest. But try explaining to the notary that amendment to the articles was a matter of interest to the manager, on which his shareholder vote shouldn't be counted.

Shareholders may have limited liability, but a poorly run company becomes a liability on them.

From day one, have a culture where forensic analysts vet financials. 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.

For anything worse, consult a criminal lawyer in the manager's home country and get him extradited, should his actions shift from self-serving to criminal.