Comparison of Abu Dhabi global market (ADGM) and Dubai international financial centre (DIFC)

Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), October 2015 1 Established pursuant to Abu Dhabi Law No. 4 of 2013, the ADGM is currently in the process of establishing itself as an alternative financial centre to the DIFC. It is intended that over time the ADGM will become a recognised international financial centre alongside the DIFC and other regional financial centres in Qatar, Bahrain and Saudi Arabia. The founding structure of the ADGM is already in place and several areas of law have already been provided for in ADGM legislation. However, at the moment, the ADGM legal system is still far from completed. For example, the court procedure rules have not been determined and a key practical point has not yet been decided – namely whether ADGM court judgments will be directly enforceable in the local Abu Dhabi courts. However, even looking at the relatively few pieces of legislation that have already been enacted, the following key differences to the DIFC stand out: • the possibility of establishing ‘restricted scope companies’; • the fact that generally speaking the English common law will be directly incorporated into ADGM law; • the restriction of the ‘financial assistance’ rules to just public companies (as in the United Kingdom); • the incorporation of a legal regime for schemes of arrangement and statutory mergers; and • the application of the UNCITRAL Model Law on Cross-Border Insolvencies. Clearly, though, it still remains to be seen how the above mentioned legal concepts will be applied in practice. The below table summarises some of the key similarities and differences between the current legal systems of the ADGM and the DIFC. Topic ADGM DIFC Status and legal structure Al Maryah Island has been established as a free zone within the Emirate of Abu Dhabi. The general position of ADGM laws vis à vis Federal law is set out in Article 3 of Federal Law No. 8 of 2004, where it is stated that free zones will be subject to provisions of Federal law except for Federal civil and commercial laws. It is anticipated that an extensive body of civil and commercial law will be developed within the ADGM in order to fill the gap left by the absence of Federal law. Similar: The DIFC is also situated within a demarcated geographical location and, due to the application of Article 3 of Federal Law No. 8 of 2004 and the fact that it has enacted quite extensive legislation, it also has its own civil and commercial laws which take precedence over Federal law within the free zone. However, as per the ADGM and other free zones, the criminal laws of the Emirate and Federation will apply. Jonathan Rees T +971 2 652 1730 E [email protected] Adam Gallagher T +44 20 7427 3685 E [email protected] Haris Meyer Hanif T +971 4 509 9149 E [email protected] Comparison of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) 2 Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), October 2015 Topic ADGM DIFC Status and legal structure (continued) Primary legislation (referred to as Regulations) can be enacted by a board of directors (who are appointed by the Abu Dhabi Executive Council). Secondary legislation (referred to as Rules) can then be enacted pursuant to the terms of the Regulations. The regulation of the free zone is delegated to three authorities: • the registration authority; • the financial services authority; and • the ADGM court. The ruler of Dubai has the power to enact primary and secondary legislation, and regulation is delegated to three main authorities, which are: • the registration authority; • the financial services authority; and • the DIFC courts. Legal entities New companies can be incorporated and registered in the ADGM and they will be subject to the laws of the ADGM. Companies incorporated in the ADGM may be 100 per cent owned by non-UAE entities. They also have the benefit of a 50-year tax exemption on profits arising out of business performed in the ADGM, and are not restricted in sending capital to other jurisdictions. Companies and legal entities that are not incorporated in the ADGM may also choose to operate within the ADGM, but must first obtain a licence from the registration authority or financial services authority before doing so. It is possible to incorporate a ‘restricted scope company’, which will have fewer disclosure and compliance requirements than other companies. A ‘restricted scope company’ may be incorporated by: (a) entities which publish annual accounts that consolidate the relevant company; (b) entities formed by Emirati decree; or (c) a single person or group of people in the same family (ie a single family office). Under certain circumstances, it may also be possible for a foreign company to apply for a transfer of its jurisdiction of incorporation to the ADGM. Similar: New companies can also be incorporated and registered in the DIFC and they will be subject to the laws of the DIFC. The types of company that can be incorporated in the DIFC differ to some extent. The DIFC also allows some companies to be incorporated by a single family office. Companies incorporated in the DIFC may also be 100 per cent owned by non-UAE entities. They also have the benefit of a 50-year tax exemption on profits and are not restricted in sending capital to other jurisdictions. Similarly to the ADGM, companies and legal entities that are not incorporated in the DIFC may also choose to operate within the DIFC, but must first obtain a licence from the registration authority or financial services authority before doing so. It is also possible for foreign companies to apply to transfer their jurisdiction of incorporation to the DIFC. Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) 3 and Dubai International Financial Centre (DIFC), October 2015 Topic ADGM DIFC Courts The ADGM courts have not yet been established. However, it is anticipated that courts of first instance and appeal will be established, which will be presided over by a chief justice. It is intended that the ADGM courts will have jurisdiction over all commercial and civil disputes which occur on the territory of the ADGM and regarding entities established under the laws of the ADGM. The ADGM may in the future enter into a memorandum of understanding with other judicial authorities in Abu Dhabi for the reciprocal enforcement of court judgments. Due to the fact the ADGM to a large extent directly incorporates English law common law, it is then implied that precedents set by the English courts will be either binding or at least persuasive on the ADGM courts regarding matters which are deemed to incorporate English laws. However, this has not yet been conclusively determined. There is at present no right of appeal from the ADGM courts to the UK Supreme Court. The language used for court operations, judgments and the publishing of laws is likely to be English. However, the procedure rules for the ADGM courts have not yet been enacted. Similar: In the DIFC, courts of first instance and appeal have been established, which are presided over by a chief justice. The DIFC courts have jurisdiction over all commercial and civil disputes which occur on the territory of the DIFC and regarding entities established under the laws of the DIFC. The language used for court operations, judgments and the publishing of laws is English. The procedure followed by the DIFC courts is modelled on the English civil procedure rules, and DIFC courts will follow precedents set by previous decisions made by the DIFC courts. Different: The laws of the DIFC do not directly incorporate English common law, and therefore they do not follow precedents set by the English courts (although such precedents may be persuasive if the particular circumstances call for the application of English law (see the order of priority for applying laws in the ‘Application of Law’ section below)). In contrast, the ADGM will in many cases presume the direct application of English law, and hence it is implied that they will find English court judgments to be at least persuasive (if not binding). The procedure for the ADGM courts has not yet been determined, and it has not yet been decided whether a protocol will be entered into between the ADGM courts and the courts of Abu Dhabi, so as to ensure enforcement of ADGM court judgments through the Abu Dhabi courts (although this has been alluded to in the foundation law of the ADGM). The DIFC courts have established such a protocol with the Dubai courts, and this has allowed effective enforcement of DIFC judgments throughout the Emirate of Dubai. It remains to be seen whether a similar approach will be taken by the ADGM courts. The DIFC has also established a set of arbitration rules which closely follow the London Court of Arbitration Rules, and hence allow for international arbitration to take place in the DIFC. It also remains to be seen whether the ADGM takes a similar approach. 4 Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), October 2015 Topic ADGM DIFC Application of English law Pursuant to the ‘Application of English Law Regulations 2015’, it is stated that the ADGM will apply the English common law and the laws of England enacted under an exhaustive list of approximately 50 selected pieces of legislation subject to: • such laws being applicable to circumstances existing in the ADGM; • modifications that may be required by the particular circumstances of the ADGM; • any amendments made by ADGM laws; and • any UK legislation passed after the date of the Regulations being disregarded unless ADGM legislation expressly adopts such legislation. The qualification regarding ‘modifications that may be required by circumstances’ is potentially an important qualification, and it remains to be seen how wide the ADGM courts will interpret this. It is expressly stated that ADGM law will recognise English equitable legal principles and the concept of trusts. Different: The laws of the DIFC do not directly incorporate the English common law. Instead, the applicable law in any given circumstance in the DIFC will be determined by the following order of priority: • so far as there is a regulatory content, the DIFC law or any other law in force in the DIFC; failing which, • the law of any jurisdiction other than that of the DIFC expressly chosen by any DIFC law; failing which, • the laws of a jurisdiction, as agreed between all the relevant persons concerned in the matter; failing which, • the laws of any jurisdiction which appears to the court or arbitrator to be the one most closely related to the facts of and the persons concerned in the matter; failing which, • the laws of England and Wales. The ADGM therefore places a stronger emphasis on the application of English law and often presumes its application, which is in contrast to the DIFC where its application is the final ‘fall back’ option. Companies law The ‘Companies Regulation’ is at least partly based on the UK Companies Act 2006. Similar: Although mainly based on the earlier UK Companies Act 1985, the DIFC ‘Companies Law’ is still quite similar to the ADGM ‘Companies Regulation’, being based on UK companies law and legislation. Different: The ADGM ‘Companies Regulation’ is more up to date (and more comprehensive) in the sense that it is influenced by the 2006 Act rather than the 1985 Act. One example of this is that ‘financial assistance’ is only relevant with respect to public companies in ADGM (cf. public and private companies in DIFC). Another difference is that the ADGM regulations allow for schemes of arrangement and statutory mergers. However, the provisions on schemes and mergers differ somewhat from the UK Companies Act 2006. For example, schemes of arrangement do not require a numerical majority of shareholders or creditors (just 75 per cent of voting rights), and mergers can be performed by private as well as public companies. Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) 5 and Dubai International Financial Centre (DIFC), October 2015 Topic ADGM DIFC Insolvency law The ‘Insolvency Regulations’ are largely based on UK insolvency legislation and, as such, include the option of appointing an administrator and of restructuring a company using a ‘deed of company arrangement’. This latter concept more closely resembles the Australian law concept rather than the UK law concept of company voluntary arrangements. Depending on the circumstances, an administrator may be appointed by the court, the holder of a qualifying charge or by the company itself (or the directors of a company). When the company or the directors of a company appoint an administrator they may do so by sending notice to those affected (ie not via the court), although a copy of such notice should be filed with the court. Regarding cross-border insolvencies, a foreign company which is registered in the ADGM may be wound up under the Insolvency Regulations if the following three criteria are met: • the relevant company has a ‘sufficient connection’ with the ADGM; • there is a realistic prospect that winding up will benefit those that are petitioning for a winding up order; and • the court has jurisdiction over one or more persons interested in the distribution of the assets of the company. If a winding up occurs under the Insolvency Regulation, then there shall be a winding up of the worldwide assets of the relevant company. If concurrent proceedings are taken in another jurisdiction, then the liquidator may apply to court for directions. Furthermore, the UNCITRAL Model Law on Cross-Border Insolvencies is incorporated into the Insolvency Regulation (with certain amendments being made thereto), and hence the liquidator of the relevant company under concurrent insolvency proceedings taking place in another country can apply to the ADGM courts for the recognition of such proceedings. If the ADGM courts consider the ‘centre of main interests’ of the relevant company to be in the country of the foreign proceedings, then those proceedings will be recognised as ‘foreign main proceedings’ and accordingly the proceedings taking place in the ADGM will be stayed. Different: The DIFC ‘Insolvency Law’ is similar to UK insolvency legislation in that it includes the concepts of liquidation, receivership and company voluntary arrangements, and these are set out in a form similar to the UK legislation. However, DIFC law does not include the concept of administration and hence does not provide for this rescue tool. Under sections 83 and 84 of the Insolvency Law, a foreign company which is registered in the DIFC may be wound up (but not voluntarily wound up) under the DIFC Insolvency Law notwithstanding any concurrent proceedings in its place of incorporation. Such a foreign company may be wound up under the Insolvency Law if: • the relevant company is unable to pay its debts, has been dissolved or deregistered in its place of origin, has ceased to carry on business in the DIFC or has a place of business in the DIFC only for the purpose of winding up its affairs; or • the court is of the opinion that it is just and equitable that the relevant company should be wound up. There does not appear to be any ‘sufficient connection’ test or any application of the UNCITRAL Model Law. 6 Freshfields Bruckhaus Deringer LLP Comparison of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), October 2015 Topic ADGM DIFC Financial regulation Under the ‘Operating Regulations’, there is a system of commercial licencing for ‘controlled activities’, such as financial services, legal services, real estate services, etc. The ‘Financial Regulations’ are currently subject to open market consultation and are due to be enacted in the third quarter of 2015. It is envisaged that a financial regulatory body will be established along the lines of the former British Financial Services Authority (FSA). Hector Sants, the former head of the FSA, is one of the advisors to the ADGM. Similar: The DIFC has a body of financial regulations governed by the Dubai Financial Services Authority. There is a similar system of licensing for financial services. Other Under the ‘Real Estate Regulations’, the ownership and transfer of land is stated to be subject to the laws of Abu Dhabi, but in the ADGM certain English law concepts will be recognised and enforced, such as leasehold interests in land and easements. The ‘Employment Regulations’ have codified provisions for employers and employees, which shall apply instead of Federal Law. However, this Regulation does not provide for enforcement of employment disputes; these will be dealt with by separate employment tribunals. Similar:: The ‘Employment Law’ sets out codified provisions for employers and employees, which shall be in place instead of Federal Law. Different: Under the ‘Real Property Law’, the ownership and transfer of land is subject to the laws of the DIFC. Easements are recognised under the law. This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP, October 2015, 04020 freshfields.com For more information please contact: Jonathan Rees Partner T +971 2 652 1730 E [email protected] Adam Gallagher Partner T +44 20 7427 3685 E [email protected] Haris Meyer Hanif Head of Leveraged and Aquisition Finance, MENA T +971 4 509 9149 E [email protected]