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Abu Dhabi Global Market (ADGM) – Special Purpose Vehicles (SPV) and Foundations
As a company within the Middle East, there are many seemingly insurmountable risks, such as financing, asset transfers or high-risk opportunities, which risks previously held no viable risk mitigation alternatives. However, the ADGM now supplies a competitive entity for which mitigates such risks. The risks as abovementioned could include, for example, should a company wish to engage in a project that is considered to be high-risk – such as the purchasing of an aircraft – such company may utilize the creation of an SPV to isolate this project risk from the parent company. In what follows will be a comprehensive breakdown of the many advantages of SPV’s as well as their practicality and ease of company formation in ADGM.
At the outset, it is pertinent to thoroughly examine what an SPV is and why a company would utilize such an entity. An SPV is a legal establishment which is formed to fulfil a limited, specific or temporary purpose. They are entities distinctively used by companies to isolate the parent company from a particular financial unpredictability. The official definition of an SPV is "a fenced organisation having limited predefined purposes and a legal personality."
The ADGM has stepped into the forefront in respect of their SPV regime, offering a dynamic and extensive scheme which caters to numerous industry sectors and a range of uses.
In the below table is a depiction of the typical uses of SPVs
|
Use |
Why |
|
Securitisation |
The utilisation of an SPV can be as an entity through which a company can securitise a loan. In this respect, the SPV will purchase these assets by issuing debt. A debt, the security of which, is on such an underlying asset. This provides a priority right to those persons who are holders of the asset-backed security to receive payments in respect of the debt while curbing the recourse they might have to the originator of the assets. |
|
Risk-sharing |
As has been eluded to above, an SPV can be formed by a company to shield the company from high-risk projects and to provide a possibility to other investors for risk-sharing. This entity is especially useful in joint venture projects for isolating partners from risks inherent in certain joint ventures. |
|
Finance |
An SPV can be used in this capacity for ring-fence investments, this can be utilized to gain financing without increasing debt levels of the parent company. |
|
Asset Transfer |
In respect of asset transfer, many permits and requirements may be needed for the operation of certain assets, for instance, a mine or a power plant. The attainment of such permits may be arduous, and such permits are often non-transferable. The way in which an SPV will relinquish the burden of the abovementioned can be that the SPV owns the asset along with all permits and authorisation and should the parent company wish to transfer the assets, they can do so through the sale of the SPV, thereby transferring the assets and permits in unison. |
|
To Maintain Secrecy of Intellectual Property |
This use for an SPV holds many applications and advantages, one being the protection of intellectual property rights of companies from pre-existing licensing deals the company may have with competitors. Additionally, it can be used to separate valuable Intellectual Property into an entity with minimal liabilities and provides it with the opportunity to raise funds and enter into agreements with third parties separate from that of the parent company. |
|
Financial Engineering |
An SPV has the capability of being utilised as a method of tax avoidance or a way of manipulating financial statements. |
|
Regulatory Reasons |
An SPV can be set up with an orphan structure to circumvent statutory restrictions, such as regulations relating to the nationality of ownership of specific assets. |
|
Property Investing |
An SPV can be utilised in the process of acquisition of real property, and this respect will afford limitation of recourse of mortgage lenders – this is dependent on the location of the asset. As was seen above in respect of the transfer of assets and the certain permit transfers, the same is true for the property transfer. An SPV that owns a property can be sold to a person interested in acquiring the property, and in this respect, persons can circumvent high taxes and fees that go hand-in-hand with the transfer of property. |
A famous example of utilisation of an SPV as securitisation of intellectual property is that done by David Bowie (Musician). In order to enhance cash flow, the formation of an SPV for which Bowie sold his assets to, such assets include the right to certain future royalty payments from certain albums. This SPV then issued what was known as Bowie Bonds, for which the record distributor provided specific credit enhancements. The underlying copyrights secured the bonds, and if the SPV defaulted on its payment obligations to bondholders, the copyrights are permanently transferred to bondholders.
ADGM SPVs are "exempt" structures, and this consideration is brought about due to the fact that they do not fall under the immediate supervision of the Financial Services Regulator. Such SPVs offer sophisticated ownership structures and propose a particularly innovative and flexible mechanism. They combine dematerialised SPVs into substantiated holding companies.
To surmise: -
|
|
|
|
The breakdown |
|
|
It's Suitability |
|
|
Advantages |
|
|
Legislative backdrop |
Common law |
|
Competency |
ADGM Courts |
|
Corporate Mitigation |
Allowed |
|
Protected cell companies |
Available |
|
Compatibility with sophisticated holding structure |
Yes |
|
Ownership |
Capable of being 100% foreign owned |
|
Registered office |
|
|
Minimum shareholding |
1 Shareholder |
|
Minimum director requirement |
1 Director and at least one of the directors has to be a natural person |
|
Corporate Directors |
Allowed provided there is one natural person as a director |
|
Minimum share capital requirement |
No minimum share capital requirement |
|
Evidence of capital pay-up |
Not required |
|
Set-up timeline |
5-7 working days |
|
Company name |
Prior approval required |
In addition to the numerous abovementioned advantages, the ADGM also offers a type of SPV which affords information disclosure protection to registered SPVs – this is through the Restricted Scope Company. This is an entity unique to ADGM which offers limited information disclosure on the public register but full disclosure to the ADGM Registrar.
ADGM Foundations
The concept of ADGM foundations has only recently been brought about and implemented by the financial free zone and affords individuals, and entities access to a product for which they previously had no access to. In this respect, the ADGM Foundations regime offer an alternative to trusts for the purposes of wealth management and preservation, family succession planning, tax planning, asset protection, corporate structuring, and for public interest purposes (with the exclusion of charities).
To delve a somewhat further into what a foundation is, we can begin by noting its similarity with that of a trust, the use of a foundation as described above depicts its vast similarity – the main difference here is that trusts find their basis in the common law, while foundations are derived from the civil law.
A notable difference between foundations and trusts is that foundations are incorporated as a legal entity and carry their distinct attributes and legal personality. It is in this characteristic that foundations are comparable to a company; however, they lack the company component of shareholding. The foundation will hold the title of assets in its own name on behalf of beneficiaries, and the establishment of such must carry a particular and specific objective. The foundation may not engage in any commercial activities which fall outside of the scope of activities necessary for the attainment of the purposes of the foundation.
The person who is responsible for the creation of the foundation will be the "founder", and such a person will transfer assets to the foundation which will subsequently become the property of the foundation. A further differentiation between a foundation and a trust is seen in that, and unlike a trust, a foundation safeguards the founder's ability to exercise control over a foundation. Should the founder die, this will have no effect on the foundation, and it will exist perpetually after the death of the founder.
ADGM is a market leader within the United Arab Emirates in respect of Foundation regulation and offers a variety of attractive provisions. The regime provides the domiciliation of foundations into and out of ADGM along with marginal set-up costs. The regulation too provides considerable flexibility in the amendment of governance and the utilisation of a registered agent is voluntary. The commitment requirement of primary assets is as little as USD 100, and it requires no physical office space. The regime also provides limited public disclosure with no individuals' names on the public register.
The ADGM continues to put forward regulation and evidence which place it at the forefront of International Financial Free Zones – providing innovative and effective corporate structures to suit every commercial and financial need. The two abovementioned entity types are just basic examples of the multitude of ADGM entities. Feel free to get in touch with our team of lawyers in Abu Dhabi to learn more on setting up SPV in ADGM and setting up ADGM Foundation entity.
