Overview (June 2001)

Joint Ventures
Mergers and Acquisitions
Privatization

The framework for the incorporation and financing of companies in the United Arab Emirates is provided by Federal Law 8 of 1984 concerning commercial companies, as amended. Although this is federal legislation, its application may vary between emirates and certain aspects of commercial registration continue to be governed by emiri legislation.

Joint Ventures

All corporate entities in the United Arab Emirates in which inward investors are shareholders may be regarded, in effect, as joint ventures. The effect of the Companies Law is that it is impossible for non-UAE nationals to be engaged in business through a corporate vehicle except by way of an appropriate arrangement with a UAE national. An exception to this is entities in free zone establishments where 100% foreign ownership is permitted.

With approval of the Executive Council a foreign company may establish a branch or office in the United Arab Emirates provided that a national agent is appointed. Where the agent is a company, it must be a national company with 100% UAE national ownership.

Part 4 of the Companies Law permits the formation of a joint participation "between two or more partners to share the profits or losses of one or more commercial businesses being performed by one of the partners in his personal name". The contract for joint participation is not registrable with the authorities.

Mergers and Acquisitions

Acquisitions may be of shares or assets. Share acquisitions tend to be the exception, not only due to the requirement under the Companies Law that at least 51% of a company's shares must be held by UAE nationals, but also because statutory rights of pre-emption on the transfer of shares may create difficulties.

Due diligence is of particular importance in the case of an asset acquisition. The starting point is to regard the acquisition of a business as the prospective acquisition of a bundle of assets and liabilities, which may not be readily assignable in terms of other jurisdictions, whether as a matter of contract, by conduct or otherwise.

The following points should be considered when conducting due diligence:

• confirmation of all relevant registers and licences, to ensure that reputed and actual ownership coincide;

• consideration of each contract and arrangement in contemplation of its novation, rather than assignment, and of the attendant negotiation with the relevant third party. The transfer of a lease of office premises is no different and, in most instances, is likely to require the negotiation of a surrender; and

• there is no automatic transfer of employees. An acquisition will involve new offers of employment to employees who are required to transfer. Once satisfied that all emoluments due to employees in respect of the period prior to the transfer date have been paid, the transfer of sponsorship and the issue of new work and residence permits in the name of the transferee company will be required. The latter must hold an appropriate trade or other licence issued by the relevant authority, and be in a position to take on the sponsorship of transferring employees.

Duplication of arrangements locally can arise on a multinational merger or acquisition. There will be trade licences and chamber of commerce memberships to be cancelled and, because every commercial presence in the United Arab Emirates requires an appropriate arrangement with a local interest (whether as a shareholder or sponsor) there will be termination arrangements to be negotiated.

There may be important local implications on a merger or acquisition even where the companies in question have no presence in the United Arab Emirates, but have conducted their business through agencies. Agency law does not permit two agencies to be registered in respect of the same product. Termination of an agency is also difficult (even for an apparently good cause), and can be a time-consuming and costly exercise.

Privatization

There is no privatization law as such. In considering any privatization, it is necessary to look at the Constitution, and federal and emiri legislation. Each industry sector requires careful review of the legislation applicable to it in order to determine whether authority lies at federal or emiri level. To date, privatization of infrastructure has been limited to the Emirate of Abu Dhabi where it is a cornerstone in the development of the water and electricity sector. For example, the water and electricity sector in the Emirate of Abu Dhabi is governed by Law 2 of 1998 concerning the Regulation of the Water and Electricity Sector in the Emirate of Abu Dhabi. That law established the Abu Dhabi Water and Electricity Authority and vested it with the authority to take the steps necessary to implement the government's privatization policy. In Dubai, where privatization is not central to government policy, the Dubai Electricity and Water Authority established under Decree 1 of 1992 (as amended) is authorized to own, run and operate the infrastructure of the water and electricity sectors.

For further information on this topic please contact Peter Michelmore at Al Sayegh Richards Butler by telephone (+971 2 6313010) or by fax (+971 2 6312155) or by e-mail ([email protected]).