Dismissing the Manager of a Limited Liability Company (LLC) from Management

A Limited Liability Company (LLC) is managed by one or more managers, as determined by the partners in the company’s Memorandum of Association. The manager(s) may be appointed from among the partners or externally. If no manager is appointed in the Memorandum of Association, the General Assembly of Partners is responsible for appointing one. The manager holds full authority to manage the company, and their actions are binding unless the company’s Memorandum of Association or internal regulations impose restrictions on their powers. In practice, many partners in LLCs often have objections or concerns regarding the way the company is managed. In some cases, these objections escalate to the point where some partners seek to dismiss the company’s manager. However, most partners encounter legal obstacles, as the General Assembly’s approval is generally required to pass a dismissal resolution.

In practice, dismissing the manager of a Limited Liability Company (LLC) becomes particularly challenging if the manager is also a partner and was appointed through the company’s Memorandum of Association. In such cases, the remaining partners seeking to remove the manager shall secure the majority required to amend the Memorandum of Association at the General Assembly meeting. Article (101) of UAE Federal Law No. (2) of 2015 on Commercial Companies states: The Memorandum of Association of the company may not be amended and its capital may not be increased or decreased other than with the consent of a number of partners representing three quarters of the shares represented at the meeting of the General Assembly. This requirement may be difficult to meet if the manager is also a partner and holds a stake large enough to block any decision by the General Assembly regarding their dismissal.

The Dubai Court of Cassation has ruled that: “If the manager of an LLC is appointed in the Memorandum of Association for a specific period, they remain in their position until the end of that period. However, if they are appointed without a specified term, they cannot be dismissed by the other partners. This is because the agreement to appoint them in the Memorandum of Association is considered an integral part of the company’s contract and is binding accordingly. If the Memorandum of Association allow for the manager’s dismissal, then such dismissal shall be carried out by the majority required to amend the company’s Memorandum of Association, unless another majority is stipulated in the Memorandum of Association.” (Appeal No. 81/2005 – Commercial Appeal).

Article (85/1) of UAE Federal Law No. (2) of 2015 states: “Unless the Memorandum of Association of the company or the contract appointing the manager provides otherwise, the Manager shall be dismissed by Decision of the General Assembly, whether the Manager is a partner or not. The Court may dismiss the Manager at the request made by one or more partners in the company if the Court deems that such dismissal is justified.” This means that any partner, regardless of their shareholding percentage, is entitled to file a lawsuit before the competent court seeking the dismissal of the manager if there are serious reasons justifying the request. Such a lawsuit shall be filed through formal legal proceedings. The partner filing the case shall name the manager as the defendant and clearly state the reasons supporting the dismissal request.

The assessment of legitimate grounds for dismissal falls under the discretion of the court, which varies depending on the nature of the case. The law does not limit dismissal to specific reasons but leaves it to the court’s judgment on a case-by-case basis. The Dubai Court of Cassation has established that: A breach of trust committed by the manager against the company constitutes a valid reason for dismissal, engaging in a competing business without the approval of the company’s General Assembly also justifies dismissal, a manager is prohibited from managing another competing company or a company with similar business activities, conducting competing transactions on behalf of themselves or a third party and any such violations justify dismissal and may even lead to the manager being held liable for damages caused to the company. (Article 86 of the Commercial Companies Law).

A manager’s violation of the company’s Memorandum of Association or the law, as well as engaging in fraudulent activities, constitutes valid grounds for dismissal. Additionally, gross mismanagement, negligence that results in significant financial losses for the company, the manager’s illness or incapacity affecting business operations, or prolonged imprisonment may also justify removal. Certain administrative breaches by the manager during their tenure, such as failing to convene the General Assembly, neglecting to prepare annual financial statements and profit and loss accounts, failing to submit an annual report on the company’s activities and financial position, or preventing a partner from accessing accounting records, can further justify dismissal.

Can a partner resort to court to request the dismissal of a manager based on these breaches?

In my opinion, when a court receives a request for the dismissal of a company manager, it examines the nature of the violation committed and assesses its severity and the extent of the harm caused to the company or its partners. If the violation is minor and does not cause damage to the company or its partners, the court is likely to reject the dismissal request. However, if the violation is serious, the court will undoubtedly intervene and issue a ruling to remove the manager. The Dubai Court of Cassation has previously ruled to dismiss a manager who deliberately made incorrect accounting entries in the company’s financial records and unlawfully distributed profits without a General Assembly resolution and in violation of the agreed-upon distribution ratios in the company’s contract. Additionally, the court dismissed a manager who misused company funds and refused to comply with legal management requirements.

The court’s intervention is typically limited to issuing a dismissal order, leaving it to the company’s partners to hold a General Assembly meeting to appoint a new manager in place of the dismissed one. The court does not interfere in selecting a new manager or impose one upon the company without the partners’ approval. Finally, it is important to note that a court ruling dismissing a manager from their position does not affect their rights as a shareholder if they are also a partner in the company. A dismissed manager cannot be expelled from the limited liability company as long as the company remains operational and they retain their ownership shares. This is because a partner’s relationship with the company and other partners is not based on personal considerations, and the company does not suffer from having a non-managing shareholder as long as they are not involved in management.