Promotion of foreign funds in the UAE mainland (outside of the freezones)
In the November 2012 edition of the Middle East Exchange, we highlighted Resolution No. 37 of 2012 on Investment Funds issued by the Securities & Commodities Authority ("SCA") of the UAE on 22 July 2012 (the "Resolution").
The Resolution formalises SCA requirements for foreign funds wishing to promote their units in the UAE mainland (outside of the freezones). The Resolution came into force on 27 August 2012, the day after it was published in the Official Gazette.
Previously, the offer of units in a foreign fund was subject to the supervision of the UAE Central Bank. Under the UAE Central Bank Board of Directors' Resolution No. 164/8/94, both the person making the offer of units and the offer itself had to be authorised by the UAE Central Bank. However, in practice, the offer of units in a foreign fund to a limited number of known sophisticated investors in the UAE on the basis of discreet marketing or on a reverse inquiry basis (i.e. where the offer to acquire units into a fund is driven by and originates from the investor rather than the fund manager or promoter) was tolerated without triggering any licensing and registration requirements with the UAE Central Bank.
In 2009, the responsibility for issuing approvals for the promotion of foreign funds in the UAE shifted to the SCA from the UAE Central Bank. Since then and since the issue of the Resolution in particular, it has been unclear whether reverse inquiry/marketing strategies could still be used without requiring SCA approval.
SCA orally confirmed at the occasion of the SCA Funds Regulations seminar held in Dubai on 20 November 2012 and presented by Dr. Mounther Barakat PhD, CFA (Senior Studies & Research Advisor, SCA) and by Dr Mazhar Farghaly, PhD (Legal Advisor, SCA) that reverse inquiry/marketing falls outside the scope of the Resolution. If an investor contacts the foreign fund's promoter and invites it into the country to present its foreign fund, neither the fund, nor the fund promoter nor the potential investor need to register with SCA. When contacting a fund promoter and inquiring about its foreign funds, an investor is considered as "managing its own investment portfolio", which activity falls outside the scope of the Resolution (see Article 2).
The Resolution has been recently adopted. Its interpretation can change, as can the regulatory policy around its implementation. Therefore, please do not hesitate to contact us if you have any queries or need updated advice on this topic.
Key issues when undertaking M&A in the Middle East
We set out below some considerations to bear in mind when undertaking M&A in the GCC:
- Beware foreign ownership restrictions
- Most GCC countries have laws which require some local ownership of investments.
- The UAE, Kuwait and Qatar require 51% local ownership and permit 49% foreign ownership and Oman permits 70% foreign ownership and requires 30% local ownership. Saudi Arabia has no general foreign ownership restrictions, instead there is a "negative list" of sectors which are restricted to Saudi nationals. Bahrain is the exception with no general foreign ownership restrictions.
- Foreign ownership restrictions are often reinforced by laws which criminalise attempts to avoid these restrictions.
- Planning, preparation and structuring
- Finding the right local partner is key especially if entering into a joint venture.
- Even where foreign ownership rules apply, careful structuring can sometimes give the foreign investor lawful control of its local company for example often board control is permissible, shareholder "blocking rights" on mandatory shareholder resolutions, the foreign investor can have a higher proportionate share of profits and losses than its legal shareholding and intra-group arrangements on return of profits to the foreign group may be put in place. However this does vary from jurisdiction to jurisdiction with the UAE for example offering more flexibility in this regard than for example Qatar.
- Tax is an issue in some Middle East jurisdictions; currently, with the exception of oil companies and financial institutions, there is no corporate income tax in the UAE but there is in Saudi Arabia for foreign investors.
- Obtain relevant consents and approvals
- Transactions in the GCC often require prior approval from the relevant ministries and authorities.
- In some cases this is primarily an administrative process, but in some it can be a more detailed process. For example, in Saudi Arabia, foreign investors will require a licence from the Saudi Arabia General Investment Authority ("SAGIA") before any investment can be made.
- Often transaction documents, if executed outside the relevant Middle East country will need to be notarised and legalised for use in the relevant country or if executed in a Middle East country, will be executed before a Notary Public.
- Choice of law and dispute forum
- Foreign investment will be based on contractual obligations such as shareholder agreements with the local partner.
- Generally choice of a foreign law will be respected in the Middle East.
- Local courts may accept jurisdiction, regardless of the parties' agreement, if a foreign court is chosen and there is a connection to the Middle East country.
- Agreements to arbitrate are generally respected by the local courts. Enforcement of foreign arbitral awards and judgments depends on applicable treaties and consideration should be given to where the assets are.
- Injunctions are rarely granted or enforced in Middle East courts, remedies are usually financial.
- Proposed changes to the UAE Commercial Companies Law
- A draft new companies law was approved by the UAE Cabinet of Ministers in November 2011 with the aim of improving corporate governance of companies in the UAE.
- The draft still contains the basic 51% local ownership and 49% foreign ownership split in the UAE, but provision is made for Cabinet Resolutions to give exemptions for certain forms of companies, activities or classes. This may either be a full exemption or an increase on 49% foreign ownership.
- The existing foreign ownership restrictions do not apply to companies in UAE free zones but there are restrictions on free zone companies operating outside of the free zone. The draft new companies law envisages that free zone companies may be able to operate outside of the free zones in mainland UAE.
- Some other key developments in the draft new companies law include an expansion of directors duties making the duties clearer and removal of the requirement for a local sponsor for branch and representative offices of foreign companies.