STA Law Firm https://www.stalawfirm.com/en.htmlSTA Law Firm - Court Uncourt (Blog) - The ADGMenCopyright 2024 STA Law Firm All Rights Reserved<![CDATA[ADGM Regulations for SPVs and Foundation]]> ADGM Regulations for SPVs and Foundation

"Regulation needs to catch up with innovation"

The ADGM's Registration Authority published a consultation document in October proposing a regulatory regime for the use of CSPs in the ADGM. The public consultation began against the backdrop of rising interest in and success with incorporating SPVs and foundations into the ADGM. The results of the recommendations that were subjected to the public debate have recently been implemented through a series of revisions to the ADGM's rules, notably the Companies Regulations 2020, the Commercial Licensing Regulations 2015, and the Foundations Regulations 2017. As of April 12, 2021, the legal regime controlling CSPs in the ADGM is in place.

SPVs and foundations in the ADGM are now required to appoint a CSP that is permitted to operate in the ADGM, unless they are exempt, under the revisions to the legislation introduced by the ADGM. CSPs, in turn, are subject to a slew of rules controlling, among other things, record-keeping and the protection of client funds. SPVs, foundations, and CSPs, as well as their officers and councilors, shall be held accountable for failing to comply with the new regulatory requirements, and fines may be imposed. In this update, we summarize the important regulatory requirements in the ADGM that apply to SPVs, foundations, and CSPs, as well as the appropriate transitional period deadlines.

What is an SPV?

A Special Purpose Vehicle (SPV), also referred to as a Special Purpose Company (SPC) or a Special Purpose Company (SPE), is a 'bankruptcy-resistant' entity. An SPV is typically a subsidiary that is protected if the original company goes insolvent and deemed isolated if the parent firm goes bankrupt. An SPV could be used to fund, purchase, and sell stock often held on the off-balance sheet to limit responsibility and isolate financial risk. The Abu Dhabi Global Market (ADGM) or the Dubai International Financial Centre are two options for forming an SPV in the UAE (DIFC).

ADGM's SPV framework is considered a strong dynamic and cost-effective asset holding and investing structure. The regime provides more freedom to business owners and asset owners while also separating financial and legal risks. SPVs follow company regulations rather than distinct regulations, thanks to the direct application of English Common Law, which assures consistency across all corporate vehicles.

The most prevalent application of an ADGM SPV in the UAE is to own shares in other firms. It can essentially act as a 49 percent foreign stakeholder in an onshore UAE LLC, allowing the shareholders to collectively possess assets and intellectual property in a strong local English Common Law jurisdiction. The following are some of the most common uses of an ADGM SPV corporate vehicle:

  • Risk Allocation enables a company to legally separate legal and financial risks. SPVs are frequently used to construct project companies for joint ventures, as they reflect management tasks while isolating the joint venture partners' risks.
  • Finance - An SPV could be used to raise funds without adding to the parent company's debt or exposing the parent's assets to cross-liabilities. It also allows investors to invest in specific initiatives directly rather than the parent company.
  • Securitization - Companies frequently employ SPVs to securitize loans or other receivables. The SPV can buy these assets by selling securities to capital market investors.
  • SPVs can be used to purchase properties in the real estate market. If the property sales tax is higher than the capital gain tax, the SPV can be sold instead of the properties, and the capital gain tax is paid instead of the property sales tax.
  • Asset Transition - Because some assets are difficult to transfer, a parent company may establish an SPV to hold these assets. When they want to sell the asset, they can sell the SPV as a standalone package when they want to sell the asset.
  • Obtaining Funds - When raising capital, an SPV may be able to obtain favorable borrowing rates. Because the SPV owns the underlying assets, it may have a better credit rating than the parent company.

What is a Foundation?

Wealth management, wealth planning and preservation, succession planning, asset protection, and tax planning are all things for which foundations and trusts are used. While trusts are common-law terms, foundations are a civil law notion that originated in continental Europe.

However, unlike trusts, foundations are incorporated as a legal body with their unique characteristics and legal personality. Foundations are similar to corporations in this regard. However, they do not have shareholders. A foundation is a legal entity that owns assets in its name on behalf of beneficiaries. It must be founded with one or more legal objectives.

Foundations are away for a family's different asset holdings to be consolidated under a single top holding company. Using a Foundation to store family assets, whether business interests, property, financial investments, or other assets, provides for the legalization of extremely precise instructions for asset transfer upon succession. Transferring ownership of all assets held by a single organization is cost-effective and tax-effective*. It's also less expensive than the time-consuming procedure of transferring ownership of an extensive range of assets separately and individually.

Unless excluded, SPVs and foundations must have a CSP at all times under the new requirements. A CSP is a person who is authorized to supply company services under the ADGM. Functioning as an incorporation operator in linkage with the incorporation of an entity in the ADGM; providing company services to an entity incorporated or registered in the ADGM; acting as a registered office provider to an entity incorporated or registered in the ADGM; providing directors, company secretaries, registered agents, or other offices to an entity incorporated or registered in the ADGM; or providing nomi to an entity incorporated or registered in the ADGM are all examples of "provision of company services."

If an SPV is a subsidiary undertaking of any of the following, it will be excluded from the requirement to appoint a CSP:

a person exempt from the requirement to obtain a license to a controlled activity in or from the ADGM; a person authorized to conduct a regulated activity in the ADGM; a person licensed or regulated by the UAE Central Bank; a corporation whose stocks are owned up to trading on a market system in the UAE (including the ADGM); or a business that has demonstrated to the satisfaction of the Registrar an adequate presence in the UAE, taking into account (among other things). The new legislative framework includes a slew of regulations that must be followed by CSPs of non-exempted SPVs and non-exempted charities. CSPs, in particular, are required to keep identical records as SPVs and foundations (i.e., the company's books). Unless the Registrar expressly permits an alternative registered office, CSPs must also function as a registered agent operator to those SPVs and foundations.

CSPs are now legally authorized to manage SPVs and foundations in contact with the Registrar. As a result, under the ADGM Companies Regulations 2020, Commercial Licensing Regulations 2015, and Beneficial Ownership and Control Regulations 2018, CSPs are required to make all filings on behalf of SPVs and foundations. In response, SPVs and foundations must make all necessary documentation and information available to their CSPs for the CSP to meet its regulatory duties. Furthermore, CSPs that manage client accounts must adhere to regulatory rules governing client money payments, segregation, and withdrawals.

Conclusion

The addition of specific criteria and requirements for CSPs in the ADGM, which follow international best practices and aim to create a solid framework for the functioning of SPVs and foundations in the ADGM, is a positive step forward. The new legal framework intends to address the problems and reduce any risks that posed to the ADGM as a result of increased global demand for ADGM-based SPVs, which has led to the emergence of entities in the ADGM that have no direct relationship to the ADGM or the UAE.

The new laws will also provide the ADGM Registration Authority with information on the extent to which nominee structures, which are extensively used for making investments in the GCC, are employed through the ADGM. Although the new laws will not immediately impact the ADGM's investment climate, future revisions to the legislation may be made depending on the ADGM's long-term objectives. It needs to be seen whether the additional layer of regulation and the costs connected with it would deter or encourage the use of SPVs or foundations in the ADGM.

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Thu, 21 Apr 2022 12:00:00 GMT
<![CDATA[ADGM Data Protection Rules 2021-2022]]> ADGM Data Protection Rules 2021-2022

"Availability of protection ensures reliability and timely access to data and resources to authorized individuals."

Organizations must emphasize educating about their responsibilities under the new ADGM Data Protection Regulations, conducting a disparity test to find whether their current systems are vulnerable or appropriate, considering any changes to their structure, and taking the necessary steps to adhere.

The Abu Dhabi Global Market (ADGM) has passed new Data Protection Regulations for 2021. (The Regulations). Following a 12-month transition period for current businesses in ADGM before February 14, 2021, and a 6-month transition period for new companies based in ADGM on or after February 14, 2021, these Regulations will take effect and replace the current Data Protection Regulations 2015 regime. Going through a period of public engagement, the revised regulations were enacted. The policies are based on worldwide standards and best practices, including the EU General Data Protection Regulation (GDPR), but adjusted to the ADGM's requirements.

The new Regulations are closely linked with the UK's Data Protection Act 2018 and the EU's General Data Protection Regulation (Regulation (EU) 2016/679) ('GDPR') following good input during a public consultation in November 2020. Regardless of whether the processing occurs in ADGM or not, the Guidelines apply to the processing of personal information in the framework of the activities of establishing a controller or processor in ADGM. Personal data is a broad term that refers to any information used to identify a living individual. This is crucial because unique IDs are widely used for technology and financial services.

To understand the mechanism set by ADGM, we need to closely analyze the data protection rules enforced by it.

Organizations (controllers) recognized in the ADGM and process personal information or sensitive data are subject to the law. The rule also applies to businesses that process data on behalf of these organizations, such as their vendors. Personal data collected and held outside of ADGM, but relating to ADGM-registered organizations, is protected by law. Processors who are registered in the ADGM and who process personal information for authorities outside the ADGM are, to a limited extent, protected by the law.

The ADGM DP Law protects personal data, defined as any data connected to an identified natural person or identifiable natural person. This also includes data containing opinions and intentions about identified or identifiable individuals. The ADGM DP law also applies to sensitive personal data, which is personal data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, genetic data, biometric data (where used for identification purposes), data about health, data about a person's sex life or sexual orientation, personal data relating to criminal convictions and offenses or related security measures.

Features of rules 2021-2022

  • The GDPR is closely related to the Regulations. As a result, organizations that now collect the personal data of EU citizens should be aware of important elements. The inclusion of the transparency obligation to the principles is one of them. Mobility, erasure, objection, limitations, and particular rights over real-time decision and profiling have been added to the list of data subject rights. Individuals now have the right to seek reparation from a controller or processor if the Regulations are broken.
  • In some situations, a data protection officer ('DPO') is required. The DPO is not required to be based at the ADGM and might serve a group of enterprises. There is also an obligation to keep track of the processing cycle and perform Data Protection Impact Assessments ('DPIA') when proposed processing activities pose a significant danger to persons' rights and freedoms.
  • In addition, the Regulations keep the duty to enroll with the Office of Data Protection ('ODP') but add a new responsibility to notify the ODP. Notice may be required in some cases, such as data breaches, DPIAs, and Binding Corporate Rules approvals.
  • Micro-businesses functioning in the ADGM is granted some restricted exemptions under the Regulations. The data protection cost is waived for businesses with fewer than five employees. They are also excluded from the need for a DPO. On the other hand, the exclusions are not valid if the company engages in our high-risk processing operations.
  • Businesses must comply with several data subject rights under the laws, including assisting persons in gaining access to personal data held about them. The revised timeframe for complying with such data subject access permissions is two months, with the possibility of a one-month extension "where appropriate, taking into account the complexity and volume of requests."
  • Businesses will also be expected to retain records relating to their data processing, perform data security duties, and, in some cases, hire a data protection officer and conduct data protection impact evaluations under the laws. The new rules also specify the circumstances for which private data may be legally transmitted from the ADGM to certain other countries.
  • The Regulations establish a separate Office of Data Protection (ODP) and a Data Protection Commissioner ('the Commissioner'). The revised Regulations define the Commissioner's function and obligations, which include administrative, regulatory, and compliance powers. The Regulations give the ADGM Commissioner of Data Protection the Middle East's toughest penalty mechanism. The Commissioner can impose financial penalties of up to USD 28 million.
  • The ODP participates in a range of international forums. The ODP is a member of the Global Privacy Enforcement Network (GPEN) 2 and an observer to the Council of Europe's Consultative Committee on the Privacy of Persons concerning Automatic Processing of Personal Data ('Convention 108') and the Global Privacy Assembly. The ODP recently announced that it had become the Gulf's first data protection body to enter the International Enforcement Cooperation Working Group3. The ODP aspires to become one of the region's most important data protection bodies.

Changes in ADGM DPR 2021

1.     Data Protection Officer is Required

  • The ADGM suggests that a DPO be appointed.
  • The DPO need not be a member of the ADGM or a data controller's employee. This would assure that the ADGM's businesses may benefit from their global DPO function.
  • Without conflict, the DPO can also have numerous jobs in a company or work with multiple companies.
  • An establishment with fewer than five employees is exempt from the requirement to appoint a DPO unless it engages in high-risk processing operations.

2.     Administration and Ethics

       The accountability principle is now included in the new law, which requires:

  • Data security is built-in and is enabled by default.
  • Data processing records
  • Impact assessments on privacy protection
  • Officers in charge of data protection
  • Corporate norms that are legally binding
  • Fee for data protection

3.    Transfer across Countries

The following are some general transfer principles: Protection of personal data at a high degree by adding protections such as:

  • The receiving region ensures that personal data is adequately protected.
  • Model clauses and binding corporate regulations (BCRs).
  • In the ADGM, a transfer is needed for important grounds of public interest - UAE law enforcement agencies request a transfer.
  • To save a person's life, a transfer is required.

Conclusion

"Data is the pollution problem of the information age, and protecting privacy is the environmental challenge."

The UAE has made a rational and coordinated effort to embrace and conform data protection standards and best practices, as shown by the GDPR. This will benefit businesses in the UAE because the new system is likely to expand and support data protection transit between the UAE and other data-protective countries, such as European Union member states or the United Kingdom. In light of this global shift toward more comprehensive data protection, we propose that all ADGM enterprises engage rapidly in their arrangements for the Regulations' implementation to prevent additional disruptions and fines for non-compliance.

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Mon, 07 Mar 2022 08:47:00 GMT
<![CDATA[Economic and Fraud Provisions in the Middle East]]> Economic and Fraud Provisions in the Middle East

"There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

- Milton Friedman

Economic fraud is a term that has been repeated over the years, so much so that the consequences it bears do not have any precedence or impact on the ones that hear it. For many companies and capitalist machinery, this term essentially triggers them to explore options to hide their fraudulent tracks and continue operating in the same manner. To have governments help them cover the tracks in certain jurisdictions ultimately defeats the purpose of the assignment.

Despite the incongruent activities of individuals, companies, and governments from the expected norm of justice in many jurisdictions, other countries are tenacious to implement a regulatory framework that will eradicate such fraudulent activities in the market. This article will discuss the economic and fraud provisions established in the Middle East, their effectiveness, and the scope of reach it possesses about financial crime.

What are the Economic and Fraud provisions in the Middle East?

If one area of the economy has seen a steady increase in the past years, it would be the economic fraud prevalent in society. Regardless of the number of provisions that jurisdictions and international organizations establish to combat financial fraud, none of them seems sufficient. The parties involved in economic fraud and other fraudulent practices are constantly evolving to cover their tracks efficiently.

Infamous scandals like Bernie Madoff and the Ponzi scheme leave one in absolute awe as it remains unclear, what is the culprit: the crime or the criminal? Many innocent parties, including employees and clients, were adversely affected by the ill-doings of these financial schemes. After the outburst of many scandals and its impact on many innocent individuals, jurisdictions are trying to fasten their pace to stay a step ahead of wrongdoers and hopefully eliminate the potential threats in the market.

The introduction of new anti-economic fraud regulations has paved the way for potential investors to feel a sense of security over their investments within the market, along with the ability of the regulations to enforce justice. Over time, people have understood that the formation and establishment of an anti-fraud legal framework are not sufficient to ensure peace and harmony in the market, an iron fist must be imposed on fraudulent parties and companies to deter them from doing such activities in the future and serving it as a lesson for other participants in the market who bear similar intentions.

The types of economic fraud can be quite varied and are spread across different industries and the scope of nature. These could include housing benefit fraud, tenancy fraud, council tax fraud, blue badge fraud, social care fraud, business rates fraud, insurance fraud, bribery, and money laundering. These are just a top layer of economic crimes prevalent in an ocean of fraudulent activities in the market. The crimes that are more coherent to the wrongdoings in the market include not declaring the business location, stating that a property is not in use while it is, dishonestly requesting for an exemption to pay for charges that are owed, or any unauthorized movement of money to make ill-gains.

Often, economic crime is caused not by companies but by customers towards companies. The highest reported crime boost in the Middle East is through customer fraud and procurement fraud, which have proved to be the most disruptive fraud within an economic crime. In a survey conducted on a global platform, the number of customer frauds was comparatively more in the Middle Eastern region.

In an ongoing effort to combat fraud together, many companies in the Middle East began investing in more stringent controls and implementation of the rules to avoid economic crime, while many others conducted a thorough examination into reasons after the occurrence of a crime in the company. Another issue that stands alongside customer fraud about its prominence is procurement fraud. This fraud entails the practice of favoring associates with vendor and supplier contracts.

All these efforts are measures taken to mitigate the risks involved and ensure that proper prevention is taken by instilling the right technology and talent to deviate from any fraudulent prone routes.

However, it is not easy to ensure that accountability will be maintained and transparent feedback is provided. Another limitation of this procedure is that advanced technologies to combat financial crime can be costly, which would further deplete if the company possesses insufficient resources to acquire and install the platform and is not equipped with properly trained employees to manage the technology. The lack of proper expertise to handle the in-place technology could attract various cyber threats, which allows a wrongdoer from any part of the world to infiltrate the company's system.

With this in mind, companies must equip themselves from the arsenal of defenses to protect themself and the financial and reputational facets of the company. The extent of damage that infiltration of the company's system can cause to the operations is quite unfathomable. It would be better for companies to leave their vault of secrets wide open than installing an IT platform that is managed poorly. The necessity of combating such insecurities is proliferating and must be countered at the earliest. One would like to believe that the efforts of the legal jurisdictions in the Middle East to battle economic crime are practical and promptly applied. However, many of the jurisdictions still fail to provide a proper implementation of the provisions established against economic crime.

The readiness of companies in the Middle East to confront the indecisive nature of economic crime and report any issues as they arise is still moving at a stagnant rate. The stark increase in cyberattacks and its potential threats is not a mystery to the companies in these regions. Nevertheless, they decide against preparing themselves in defense of such risks and attacks. The firms in the region and the governmental organizations must understand the types of threats that could arise in the economy and the nature of such economic crimes. Although this would seem like an insignificant step, this particular action could help achieve a more profound revelation of the gaps and vulnerabilities of the economy and its protective framework.

Many would argue that the relationship of the Middle East with economic crime and fraud dates back ages. All the glitz and glamour and the boom of economies are incongruent with the fraudulent activities occurring within the firms and regions. A region's legal systems cannot enforce the regulatory frameworks established to fight against economic crime if the country's government does not implement the rulings.

To know more about Economic and Fraud Provisions in the Middle East in Singapore Click here 

 

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Mon, 27 Dec 2021 03:22:00 GMT
<![CDATA[New Data Protection Regulations]]> ADGM Enacts New Data Protection Regulations

Introduction

On 11 February 2021, the Board of Directors of the Abu Dhabi Global Market, in the exercise of its powers under Article 6(1) of the Law No.4 of 2013 concerning the ADGM issued by His Highness the Ruler of the Emirate of Abu Dhabi, enacted new Data Protection Regulations. They were published on 14 February 2021 and replaced the Data Protection Regulations 2015.

According to ADGM's international benchmark of international standards and best practices, the European Union's General Data Protection Regulation (which took effect in May 2018) was found to be the leading international standard and best practice for comprehensive data protection law. The revised Regulations were tailored to ADGM's needs and designed to be proportionate and business-friendly, without jeopardizing the primary goal of achieving a high level of personal data security.

The formation of an independent Office of Data Protection, led by a Commissioner of Data Protection, is a vital feature of the new system. Its regulatory functions will be supported by a yearly data protection fee payable to the ODP's Commissioner of data protection from the commencement of personal processing data. Mr. Sami Mohammed has been appointed as the ADGM Commissioner of Data Protection by the ADGM Board.

Adoption of the new Regulations will result in significant changes and new duties for Data Controllers and Data Processors, according to ADGM. As a result, starting on 14 February 2021, a 12-month transition time for existing facilities and a 6-month transition period for new businesses were proposed. This transition time allows organizations to prioritize understanding their obligations under the new ADGM Data Protection Regulations, conduct a gap analysis to determine whether their existing systems are vulnerable or appropriate, consider any changes to their framework, and take the necessary steps to comply.

The DIFC Data Protection Law No. 5 of 2020 (DIFC DPL 2020), which governs the processing of personal data in the Dubai International Financial Centre, was passed shortly after these Regulations. The General Data Protection Regulation (EU GDPR) concepts are being accepted and incorporated in new laws and regulations, as evidenced by the Regulations, the recent DIFC DP Law 2020, and the general direction of data protection law in the UAE and broader region.

These regulations highlight that businesses in the UAE are responsible for handling personal data to high quality, and the regulations facilitate the execution of business activities by allowing for secure cross-border data movement.

Abu Dhabi Global Market (ADGM)

On 21 October 2015, the Abu Dhabi Global Market (ADGM), an international financial center (IFC) in the capital city of the United Arab Emirates, opened for operation. ADGM, established as a broad-based financial center by a UAE Federal Decree, strengthens Abu Dhabi's position as a worldwide trade and economic hub, serving as a critical link between the Middle East, Africa, and South Asia's expanding economies and the rest of the globe.

Abu Dhabi's primary capabilities, including private banking, wealth management, asset management, derivatives and commodities trading, financial innovation, sustainability, and more, are at the heart of ADGM's strategy. ADGM as an IFC governs the entire 114 hectares (1.14 sqm) of Al Maryah Island, a recognized financial free zone, and comprises three independent authorities: ADGM Courts, the Financial Services Regulatory, and the Registration Authority.

It enables registered financial and non-financial institutions, companies, and entities to operate, innovate and succeed within an international regulatory framework based on common law. Since its inception, ADGM has been awarded the "Financial Centre of the Year (MENA)" for four consecutive years for its initiatives and contributions to the region's financial and capital markets industry.

Data Protection Regulations 2021

The New Regulations apply to Personal Data Processing carried out by either a Controller or a Processor operating or conducting business in or from the ADGM, regardless of whether the processing is carried out in the ADGM or whether the Controller or Processor is incorporated in the ADGM.

A New Fines Regime: The New Regulations establish significant penalties fines for data breaches and non-compliance, with a strict limit of USD 28 million. The New Regulations also give data subjects direct rights to reparation.

Data Protection Fee: A Controller must pay a Data Protection Fee to the Commissioner of Data Protection for the twelve months following the date it began Processing Personal Data (in an amount to be established by the ADGM). Following that, yearly renewal fees are due.

Data Protection Officer (DPO): Professional qualifications, including expert knowledge of data protection law and practices, and the competence to carry out the responsibilities described in the New Regulations, must be used as factors to consider when nominating the DPO. Unless they participate in High-Risk Processing Activities, organizations with fewer than five workers are exempt from the necessity to designate a DPO under the New Regulations. ACCORDING TO THE NEW REGULATIONS, the DPO does not have to be an employee of the Controller or Processor, nor does he or she have to be present in the ADGM. In general, Controllers and Processors are not required to appoint a Data Protection Officer (DPO). Unless:

  • processing is carried out by a public authority (excluding courts);
  • processing operations requiring regular and systematic monitoring of Data Subjects on a large scale; or
  • processing on Special Categories of Personal Data (such as those related to healthcare, insurance, tech sectors) is carried out on a large scale.

High-Risk Processing Activities: These require the Controller to conduct a Data Protection Impact Assessment (DPIA). When a Controller, or even the Commissioner of Data Protection, determines or assesses whether adequate measures have been taken to demonstrate compliance, the results of this DPIA will be taken into account. This is consistent with the GDPR as well as the DIFC Law. The New Regulations create an exemption for situations where the processing of such data is required by Applicable Law.

Response Timeline for Data Subject Requests: The regulations oblige enterprises to adhere to several data subject rights, including assisting persons in gaining access to personal data. The New Regulations provide a two-month response timeframe for the requests (this can be extended for a further one month if necessary, considering the request's complexity).

Notification of a Personal Data Breach: In the event of a Personal Data Breach, the Controller must notify the Commissioner of Data Protection without undue delay and, where possible, no later than 72 hours after becoming aware of it, unless the Personal Data breach is unlikely to result in a risk to natural persons' rights. If the Commissioner is not notified within 72 hours, the notification must be supported by reasons for the delay. When a Personal Data Breach is likely to result in a high risk to natural people's rights, the Controller shall notify the Data Subject without undue delay. Where data processing is outsourced, processors who experience a personal data breach must notify controllers as soon as they know the incident.

"Appropriate Policy Documents": There is an explicit requirement to have an "appropriate policy document" in place when processing Special Categories of Personal Data based on carrying out the obligations and specific rights of the Controller or the Data Subject "in the field of employment law," and/or where they are processed based on a "substantive public interest."  The New Regulations specify precisely what must be included in such a document for it to be judged "appropriate." Given the broad spectrum of what may fall under the purview of "employment law" or "substantive public interest," as defined by the New Regulations, we expect that to achieve complete compliance under the New Regulations; businesses will need to update not only their privacy policies, but also their fraud policies, diversity and inclusion policies, employment policies, anti-money laundering policies, and any other policies that come under this category. Companies subject to the Regulations will be required to update or draft policies and contractual instruments, which will include and/or address the following:

a data protection policy to be distributed to employees that explain why and how personal data will be gathered, as well as how long it will be kept;

a privacy policy (in electronic format) outlining the company's processing activities, which must include the following information:

  • the Controller's and DPO's names and contact information;
  • the types of personal data processed by the company;
  • the purpose(s) of processing the personal data;
  • the company's data retention policy;
  • A description of:
  • the types of data subjects;
  • the people who will have access to personal data;
  • the "technical and organizational measures" put in place to ensure personal data security; and
  • relevant safeguards used when sharing personal data abroad (if applicable).
  • Adopting a deletion plan and process to ensure that Personal Data is securely and permanently removed when the retention period has expired.
  • Preparing written agreements with suppliers, distributors, and clients (such as a data processing/sharing agreement or data processing/sharing addendums) (where needed).
  • Significant fines (not exceeding $28 million) for Controllers found in violation of the Regulations. It is also worth emphasizing that data subjects harmed by the data breach will now be entitled to seek compensation.

Conclusion

Many of the new obligations in the Regulations are based on well-considered and comprehensive existing principles in the United Kingdom and the European Union, for example, where guidance and direction can be relied upon when evaluating your best compliance options.

The regulations will facilitate cross-border data transfers and result in better protection of personal data due to higher penalties for non-compliance with the regulations, which ensures accountability in businesses.

 

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Fri, 15 Oct 2021 12:00:00 GMT
<![CDATA[The ADGM Litigation Funding Rules]]> The Abu Dhabi Global Markets (ADGM) Litigation Funding Rules

The Litigation Funding Rules 2019 (the "Rules") of the Abu Dhabi Global Markets Courts ("ADGM Courts") were enacted on 16 April 2019. The Rules are issued by the Chief Justice of the ADGM Courts under Article 225 of the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 (the "Regulations"). The Rules provide a comprehensive framework for third-party litigation funding and are in response to the growing interest in third-party funding of proceedings in the Middle East and Africa region regulating both funders and litigation funding agreements concerning proceedings before the ADGM Courts. The Rules are designed to provide the parties and funders with greater certainty in relation to the enforceability of funding arrangements in proceedings for resolving disputes.

ADGM Courts are the most progressive judicial framework in the Middle East, are one of three world-class and independent authorities under the ADGM. ADGM directly applies the well-established and internationally accepted principles of English Common Law.

What does the Litigation Funding entail?

The litigation funding enables the litigants in obtaining finance to cover whole or part of their legal costs from any private commercial litigation funder who has no direct interest in the proceedings. When the litigant is successful, the Funder shall receive a pre-agreed share of the outcome of the claim, which may be a percentage of the amount recovered. When the litigant is unsuccessful, the litigant pays nothing to the Funder, and the Funder shall lose its money.

Part II of the Rules deals with the Funders.

What are the requirements for the Funders?

The following conditions must be satisfied at the time the Litigation Funding Agreement (LFA) is made and continued to be satisfied by the Funder:

  • A principal business of the funding of proceedings to which the Funder is not a party must be carried on by the Funder; and
  • the Funder must have qualifying assets of minimum USD 5 million or the equivalent amount in foreign currency. The qualifying assets could be cash and cash equivalents including, without limitation monies and assets contracted to the Funder under a contract for fund management; and in the case of an incorporated company, the paid-up share capital.
  • What are the prohibitions against financial and other interests in Funders?

    The Funder must not be owned wholly or partly, directly or indirectly, by way of shares or otherwise by the lawyer or the law firm who has introduced the Funder to a client concerning the proceedings; or whose client has an LFA in force with the Funder concerning the ongoing proceedings.

    Part III deals with the Litigation Funding Agreements (LFA)

    Reasonable steps must be taken by the Funder to ensure that the Funded Party receives independent legal advice concerning the LFA and its terms prior to its execution. This provision is satisfied when the Funded Party has confirmed in writing to the Funder that the Funded Party has received such advice.

    The LFA must include provisions setting out at a minimum; the scope of funding; the amount of funding; the timing of each tranche of funding; and the Funder's recovery under Section 225(3)(e) of the Regulations.

    Rule 8 also specifies Financial liabilities. The LFA must state whether and to what extent the Funder is liable to the Funded Party to meet the liability for adverse costs and to pay any premium (including insurance premium tax) for obtaining adverse costs insurance. The LFA must state when and the manner in which the Funder will seek recovery from the Funded Party.

    Rule 9 deals with Conflicts of interest. The LFA must not contain any terms that could induce the Funded Party's lawyer or law firm to breach its professional duties which are owed to the Funded Party or to ADGM Courts including under the ADGM Courts Rules of Conduct or permit the Funder to influence the lawyer or law firm so that it takes control of the dispute or assumes conduct of it. The LFAs which include more than one Funded Party must include provisions for managing conflicts of interest between the Funder, the Funded Parties and the lawyers.

    The LFA must:

  • Include provisions as to the Funder's role in decisions about whether to settle the proceedings and on what terms;
  • State the circumstances in which the Funder may terminate the agreement and the Funder shall not be entitled to terminate it except in the specified circumstances;
  • Require the Funder to observe the confidentiality and privileged nature of all information and documentation concerning the proceedings to the extent required by law;
  • Not result from or involve any commission, fee or share of proceeds being paid to a lawyer or law firm concerning the introduction of a client to the Funder by that lawyer or law firm;
  • Require the Funder to take reasonable steps to ensure that it has satisfied itself that there are no circumstances arising from the funding that might give rise to any reasonably foreseeable conflicts of interest, whether in connection with the Funded Party, its lawyer or law firm, the other parties to the proceedings or their lawyer or law firm, or ADGM Courts or arbitral tribunal hearing the proceedings;
  • Require the Funder to notify the Funded Party expeditiously if the Funder foresees or reasonably believes that it will no longer meet any of the prescribed requirements for Funders;
  • State, expressly for the benefit of the Funded Party and any other party to proceedings before ADGM Courts funded under the LFA that the Funder submits to the jurisdiction of ADGM Courts for the purposes of disputes concerning the costs as between the Funded Party and any other party to the proceedings.
  • Conclusion

    The ADGM Courts are anchored by a judiciary of highly experienced and eminent judges from the world's leading common law jurisdictions. ADGM Courts handle civil and commercial disputes. The ADGM Courts are "digital" by default and continue to engage and deliver the judicial and dispute resolution services via their e-platform. The Rules were drafted after an extensive review of the litigation funding framework adopted in other jurisdictions like Australia, Singapore, Hong Kong, England and Wales and the United States of America.

     

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    Sun, 11 Oct 2020 12:00:00 GMT
    <![CDATA[How ADGM Registered Entities can Own Real Estate in Dubai]]> How ADGM Registered Businesses can Own Real Estate in Dubai

    Abu Dhabi Global Market (ADGM), an established free-zone and international financial centre in Abu Dhabi was legally established pursuant to Federal Decree Number 15 of 2013 and Abu Dhabi Law Number 4 of 2013 (the ADGM Founding Law). ADGM attracts several international business and investors to the free-zone, primarily due to the adoption of the English Common Law as the cornerstone of its legal and regulatory framework.

    The ownership of the real estate in Dubai is governed by Law Number 7 of 2006 concerning Real Estate Registration in Dubai and is restricted to the UAE and GCC nationals and the companies wholly owned by them as well as public joint-stock companies. The foreign nationals and companies wholly or partly owned by them have the right to own real estate in Dubai but only in certain designated areas, the residential and commercial areas, including Downtown Dubai and Burj Khalifa, The Palm, Emirates Hills, The Meadows, The Lakes, The Springs, Dubai Marina and Jumeirah Lakes Towers.

    How can an ADGM Entity Own Properties in Dubai?

    The Dubai Land Department (DLD) initially permitted all types of onshore and offshore companies to own real estate in Dubai. In 2012, it introduced a change in its policy, permitting only Jebel Ali Free Zone Authority (JAFZA) Offshore Companies as corporate holders of Dubai property. The JAFZA offshore company could, in turn, be owned either by an individual or a foreign offshore company, such as a British Virgin Islands (BVI) company. In 2018, the DLD entered into a Memorandum of Understanding (MoU) with the ADGM, thus allowing investors to tailor structures for real estate ownership, under a more familiar Common Law framework. ADGM incorporated entities are now permitted to own land and property in the areas of Dubai designated for foreign ownership pursuant to the MoU between the ADGM and the DLD and structure their businesses in ADGM accordingly.

    For registering property in Dubai under an ADGM entity, the following rules and procedures shall apply:

  • The DLD will register properties in the name of an ADGM entity as per its own rules, regulations and conditions and subject to the Law Number 7 of 2006 of Dubai;
  • The DLD shall rely on a Certificate of Incumbency issued by the Registration Authority of ADGM for ensuring the registration and licensing by the Registration Authority of ADGM as of the date of the Certificate of Incumbency;
  • The shareholders in the ADGM entity are either natural persons or companies whose shareholders can be verified by the DLD. However, the ultimate shareholders can be identified by relying on additional information requested by the DLD to the Registration Authority of ADGM;
  • For ADGM entities which are owned by a combination of natural and corporate persons, the DLD approval may be subject to compliance with specific conditions and submission of certain documents including a No Objection Certificate issued by the DLD approving the ownership of properties in Dubai;
  • An 'Acknowledgement and Undertaking Letter' in the form issued by DLD concerning the disclosure of future shareholding transactions must be signed and submitted by all the shareholders or directors of the ADGM entity to the DLD;
  • Fees concerning the registration, transfer and cancellation must be paid in full directly to the DLD. Change in ownership for an individual owner involves a 4 percent transfer fee payable to the DLD. A change in shareholding of a company where the property is held by an ADGM company will require a No-Objection Certificate (NOC) from the DLD subsequent to the payment of the 4 percent transfer fee, but prior to the proposed shareholding change. However, for a transfer from an individual name to an entity set up by the same individual, the DLD may consider the transaction as a 'gift transfer', subject to a 0.125 percent transfer fee.
  • The ADGM branches of foreign companies and listed public companies are outside the scope of the MoU, and the ADGM trusts and foundations are not permitted currently to own properties in Dubai, whether directly or indirectly.

    The easiest method of property ownership is through ADGM SPVs. The Special Purpose vehicles (SPVs) may serve as a special purpose for professional investors, or investment institutions for securitizing assets or investing in real property.

    Registering property in Dubai in the name of an ADGM SPV tends to offer several benefits, for instance:

  • Having a single ADGM SPV as the corporate owner of multiple properties can help in consolidating real estate holdings for easier management and transfer.
  • An ADGM SPV separates the real estate assets from personal liabilities.
  • Having a corporate structure allows for the securitization of real estate assets.
  • An ADGM SPV being a locally-registered entity is at reduced costs, as opposed to a foreign offshore structure such as BVI for the documents of foreign offshore structures undergo expensive attestations to be used for transactions within the UAE.
  • The ADGM, being a Common Law jurisdiction, has the inheritance procedures greatly simplified as the shares held by the ADGM SPV are transmitted as per the Common Law, and hence Personal Status Law does not apply on the event of the death of a shareholder. However, in the case of Muslim shareholders, Sharia may still be applied.
  • Conclusion

    The UAE continues to develop an unparalleled real estate sector to bring forth new initiatives to bolster the ease for investors. The cooperation between ADGM and the DLD aims to streamline regulations to further enhance accessibility into the real estate market. The MoU serves to augment the sustainable growth of the real estate sector. The DLD, previously limited to free zones in Dubai, has gained access to the financial free zone in Abu Dhabi through the MoU, thus providing facilitated and transparent services for all investors and consolidating the vision to position Dubai as the world's premier real estate destination. Investors must obtain proper counsel and advice from lawyers in Dubai or law firm in Abu Dhabi and further undertake proper and effective due dliigence before acquiring real estate..

     

     

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    Tue, 29 Sep 2020 12:02:00 GMT
    <![CDATA[A Guide to REITs]]> A Guide on REITs

    Since time immemorial, real estate has been acknowledged as a historically significant investment class- one that offers increased portfolio diversification, low volatility, and optimally risk-adjusted returns. A Real Estate Investment Trust (REIT) is a financial instrument that not only allows investment in real estate but an instant investment in a multitude of real estate assets by means of the purchase of a single REIT's shares. While not all REITs are affordable, many are. On account of their accessibility and general universality, a REIT can often present an immensely appealing route for an individual looking to become a real estate investor.

    A REIT is a company that places investments in income-generating real estate, of the commercial variety in addition to others. Investors that yearn for access to real estate can accordingly purchase shares of a REIT; through that share ownership, they would be effectively adding the real estate owned by the REIT to their portfolios. This provides investors with exposure to all the properties owned by the fund, simultaneously.

    REITs – Background

    Why were REITs created?

    REITs first came to be in the United States under President Eisenhower when he signed the REIT Act in the Cigar Excise Tax Extension of 1960. These were intended to give commonplace investors a means of investing in a diversified portfolio of income-churning real estate through a share-based model.

    What makes REITs unique?

    They are mandated by law to follow a highly specific set of operating requirements to receive and retain the qualification of a REIT. What sets REITs apart from other investment vehicles is the fact that REITs are mandated to derive a minimum of 75 percent of their gross income from real estate-related sources, and correspondingly invest 75 percent or more of their total assets in real estate. Another significant distinction lies in the fact that the law requires REITs to distribute 90 percent or more of their income from their real estate investments directly to investors. Owing to these operating requirements, REITs offer investors a plethora of reasons to invest in real estate via this conduit, some of which shall be delved into below.

    Coveted Characteristics of REIT Investment

    Dividend Income

    The high dividend payout requirement for REITs translates into a larger share of REIT investment returns coming from dividends as opposed to other stocks. For this very reason, many financiers and advisors unequivocally recommend REITs to be well-suited for income-seeking investors, as well as for long-term investors seeking both income plus capital appreciation.

    In the United States, REIT dividend yields have historically been higher than the average yield of the S&P 500 Index. As a matter of fact, long-term calculations display that more than half of equity REIT total returns have come from dividends.

    Portfolio Diversification

    As discussed before, REITs have provided significant diversification benefits for investors on account of their relatively insignificant correlation with other assets, including other stocks and bonds.

    Diversification is an ideal sought to reduce portfolio volatility - the risk that investors will be subject to tumultuous oscillations in the value of their portfolio holdings. The remedy that some investors implement to evade volatility preemptively is the diversification of the portfolio, e.g., between small-cap stocks and large-cap stocks.

    However, it must be noted that this strategy only divides a portfolio between different parts of the same asset class and fails to achieve the full benefit of diversification. Another means to approach portfolio diversification would be to diversify amidst asset classes.

    REITs, for instance, have had less of a tendency to move synchronously with other equities when stocks fluctuate. Between 1992 and 2016, large-cap and small-cap equity total returns bore an 83 percent correlation, while large-cap equity and Equity REIT total returns bore a mere 56 percent correlation. This goes to show that the combination of a large-cap portfolio with listed equity REITs would certainly bear more fruit, with regards to achieving diversification.

    Inflation Hedging

    A key concern for several investors today is how to secure enough income to tide them by for a decade-long retirement period. Even in an environment with minimal inflation, the cumulative effects of inflation over long periods can erode the purchasing power of portfolio assets. The dilemma that retirees often encounter is that it can be tough to stay ahead of inflation with fixed income securities. In contrast, equities (the traditional inflation hedge) are usually trimmed back to reduce investment risk.

    REITs are structurally possessive of a natural hedge against inflation in a fashion that matches up exceedingly well with the needs of investors. The commercial real estate rents and values have tended to increase when prices do; this has, in turn, supported REIT dividend growth, and provided retirement investors with reliable income even during inflationary periods.

    Tax Benefits

    Adding to the standard benefits available to investors who have access to REITs by means of traditionally tax-advantaged accounts (i.e. retirement accounts), REIT investors encounter several additional, critical upsides.

    The most well-known tax advantage is actually related to an investment fund's basic ability to be classified as a REIT.

  • To receive the official REIT stamp and designation, one of the most fundamental requisites is that a fund distributes a minimum of 90 percent of its (taxable) income every year to its shareholders. 
  • If a fund successfully meets the REIT qualifications, then these earnings will not be subject to taxation at the company level.
  • Earnings are distributed to investors and are only taxed at the individual investor level. This eliminates the brunt of the burden of double taxation that many face with traditional company stocks. The absence thereof of a company level tax enables investors to keep the lion's share of their overall returns. 
  • Total Return Performance

    REITs' reliable track record of growing dividends, combined with long-term capital appreciation through stock price increases, has gifted investors with an attractive total return performance for many periods over the past 45 years, especially when compared to the broader stock market.

    REITs are publicly traded, professionally managed companies that manage their businesses intending to maximize shareholder value. These companies engage in positioning their properties optimally to attract tenants and earn rental income. They manage their property portfolios and ensure the buying and selling of assets to cultivate value throughout long-term real estate cycles. Their efforts drive the total return performance for REIT investors, who benefit from a reliable annual dividend payout as well as the potential for long-term capital appreciation.

    Liquidity and Transparency

    For a great many years, investors considered real estate to be an illiquid asset, and rightfully so. However, the liquidity of REITs listed on major stock exchanges converts real estate investing into a simple and straightforward operation.

    By the provision of real-time pricing and valuations, REITs also provide market transparency for investors.

    How do REITs work?

    Once a fund successfully achieves the qualification of a REIT, investors can buy shares in a variety of ways. The REIT pools this assimilated capital in order to make a great variety of real estate investments. Investments can include the REITs direct ownership of the real estate, real estate loans, or both.

    REITs can be classified into three broad manners:

  • By means of the types of investments they pursue (i.e. equity or debt).
  • Howe their shares are traded (i.e. exchange-traded REITs or non-listed REITs).
  • The sectors of real estate that they place a focus on (i.e. healthcare REITs or industrial REITs).
  • Each of REIT's represents partial ownership of every one of the individual assets held by the fund. Therefore, any fluctuation in the valuation of a REIT's shares reflects a change in the value of the overall collection of real estate properties the REIT holds. REITs are professionally managed by fund managers, who determine and execute the REIT's investment strategy.

    REITs Classification

    Earlier, we established that one way to classify REITs is based on the financial structures of their underlying holdings: debt, equity, or a hybrid of both.

    An equity REIT is one that participates in the direct ownership (and subsequently, the development and operation) of the real estate assets that it owns; these can include commercial real estate or for-sale housing. Equity REIT managers construct their investment strategies based on how much physical work and capitalization they deduce to be required to raise investment properties to their highest value and potential for producing income.

    To know more about Real Estate Investment Trust Click here 

     

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    Tue, 25 Aug 2020 12:00:00 GMT
    <![CDATA[ADGM Company Regulations 2020]]> ADGM Company Regulations 2020

    Abu Dhabi's decision to set up a financial center, known as the Abu Dhabi Global Market ("ADGM") has opened doors for international business. ADGM has its own published rules and regulations as well as Registrar of Companies (Registrar) and a Financial Services Regulator. Further, a court has also been established in the ADGM. As the laws and regulations needed to be attractive to international businesses, Abu Dhabi strategically based the system on English common law, even though the existing system in the UAE is heavily influenced by civil law systems, namely, French, Roman, Egyptian and Islamic law.

    The Companies Regulations 2015 of the ADGM were substantially based on the UK Companies Act 2006 (the "UK Act"). The decision to use the UK Act as the principal precedent for the drafting of the Companies Regulations 2015 was taken in view of the fact that that the UK Act is a well-established and highly regarded statute that has undergone evolution and improvement over a long period of time. The UK Act also has the benefit of being supported by precedents and regular English court decisions, providing increased legal certainty and predictability. The UK Act is also consistent with EU law and therefore, the company laws of the EU Member States. Moreover, the UK Act is well known to a large number of practitioners in the UAE and widely used in international business.

    As a result, the drafting of the Companies Regulations presented the ADGM with an opportunity to take the best of the UK approach and avoid the peculiarities that have been removed by the best practice of other jurisdictions. The ADGM Companies Regulations 2020 ("Regulations") has repealed the Companies Regulations 2015 and all of the amendments issued thereafter.

    In ADGM, there are no restrictions on foreign ownership. The types of company which can be established are:

  • Private (with limited or unlimited liability)
  • Public
  • Restricted Scope Companies (RSC")

    The private companies may apply to the Registration Authority to become RSC as per the Regulations. A company may only be registered as an RSC if it is a subsidiary undertaking of another body corporate that that prepares and publishes group accounts or is a subsidiary undertaking of a body corporate which is incorporated by a Federal Law or by a law of any Emirate of the UAE or it is directly or indirectly wholly-owned by an applicant (the "founding member") who is one person, or a group of members of the same family and approved by the Registrar exercising his discretion.

    What constitutes being a member of the same family has been broadened under the Companies Regulations 2020 to include grandchildren, great-grandchildren and adopted children (and their spouses).

    Third parties will know that an RSC is subject to less onerous requirements due to the requirement to have "Restricted" in the company's name. The onus will then be on such third parties to conduct diligence on the company. ADGM provides for RSC to be a vehicle with far less onerous disclosure and compliance requirements than those that are generally applied in ADGM. RSC is intended for use by holding vehicles and professional investors where confidentiality may be highly important. An RSC is required to file its articles, details of its registered office, details of its directors and secretary (if it has one) and an annual return with the Registrar. Of these documents, only its articles and details of its registered office will be made publicly available. An RSC is obliged to keep accounting records, to have an accounting reference date and to prepare, but not audit, accounts on the basis of the small companies' regime. However, an RSC will not be obliged to file these accounts with the Registrar (unless requested by the Registrar) or to circulate them to its members or debenture holders. An RSC will not be required to prepare directors' reports and the requirement to seek members' approval for certain transactions with directors, including directors' service contracts, is not applicable for an RSC. ADGM is keeping up with the deregulated regime for an RSC.

    Cell Companies

    The Regulations also provide for Cell Companies. A cell company may be a public or private company, and a limited company (whether limited by shares or by guarantee) or an unlimited company. However, a cell company cannot be an RSC, and an RSC cannot be or become a cell company.

    Cell companies operate via multiple cells within the company with their own allocated assets and liabilities, which are intended to be distinct from the assets and liabilities of the company itself with their own balance sheets and separate insolvency processes per cell. Cell companies may take two forms under the Regulations:

  • an incorporated cell company, where each cell has a distinct legal personality; or
  • a protected cell company, where a creditor's recourse is limited to cellular assets by operation of law.
  • As per the Regulations, different classes of share may be issued with varying rights of class and the Regulations provide for both companies having a share capital and companies without share capital and there is no concept of nominal share value.

    Certificate of Incorporation

    Under the Company Regulations 2020, any certificate of incorporation issued by the Registrar shall be in electronic form only as opposed to signed and authenticated by the Registrar. However, a request can still be made for a paper copy certificate of incorporation, signed by the Registrar or authenticated by the Registrar's seal, and such request may be subject to a fee as prescribed by the Board of Directors of the ADGM.

    Re-registration and Continuance

    Re-registration and Continuance provisions have been included in the Regulations to provide a route for companies to redomicile in the ADGM.

    Conflict of Interest

    A director of a company must not act on behalf of a company, or exercise any of his powers as a director, in relation to any matter in which he has or can have a direct or indirect interest which does or may conflict with the interests of the company. This applies to the exploitation of any information, property or opportunity, and it is immaterial whether the company could take advantage of the information, property or opportunity. However, this duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

    The Regulations impose a duty not to act in relation to matters where the director has an actual or possible conflict, without the approval of the unconflicted directors or the members.

    Disqualification of Directors

    The Regulations vest this power in the Registrar. The procedure to be followed by the Registrar envisages a staged process which involved the issuance of a warning notice followed by an opportunity to make representations to the Registrar, the issuance of a decision notice followed by the opportunity to contest the Registrar's decision in court and finally, the issuance of a final notice.

    The Registrar may make an order (a "delegation order") for the purpose of enabling functions of the Registrar to be exercised by the Financial Services Regulator subject to such exceptions and reservations as may be specified in the order. A delegation order may confer on the Financial Services Regulator such other functions supplementary or incidental to those transferred as appear to the Registrar to be appropriate. The delegation order may be amended or, if it appears to the Registrar that the continuation of the delegation order is no longer in the public interest, revoked by a further order.

    The disqualification, among other grounds, can be on conviction of a criminal offence, for persistent breaches of the company's legislation or fraud. The provisions of the Regulations impose a duty on the Registrar to disqualify unfit directors of insolvent companies.

    Derivative claims

    The Regulations provide for Derivative Claims which are proceedings by a member of a company concerning a cause of action vested in the company and seeking relief on behalf of the company. The right to bring a derivative claim is restricted to eligible members holding five percent of the share capital (a member holding five percent or more of the share capital of the company, or a member with the written consent of members holding along with the first-mentioned member a minimum of five percent of the share capital of the company). The derivative claim is in respect of a cause of action arising from an actual or proposed act or omission involving default, negligence, breach of trust or breach of duty by a director of the company. The cause of action may be against either or both the director and another person.

    Merger

    The Regulations involve a merger:

  •  by absorption, where any two or more companies merge into a single company which is an existing company, or
  •  by consolidation, where any two or more companies amalgamate into a new company.
  • In the merger, at least one of the constituent companies participating must be a company formed or incorporated under the Regulations. Where one or more of the constituent companies participating in a merger is a non-ADGM company, a merger shall not be approved unless the conditions set under Section 810 of the Regulations are fulfilled.

    The Regulations provide for drafting the terms of the merger, the preparation of various reports, the calling of shareholder meetings to approve the merger and the publication of the merger terms and reports prior to the meeting.

    Conclusion

    ADGM is a business-friendly financial center as it permits a broader scope of financial services and banking activities along with other opportunities. The ADGM Companies Regulations 2020 provide structuring flexibility for applicants and also a corporate governance and compliance framework that most international businesses are already familiar with. Efforts for the ADGM application, licensing and registration processes to be quick and straightforward are always a priority for ADGM.

     

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    Tue, 30 Jun 2020 07:21:00 GMT
    <![CDATA[Guide to International Arbitration]]> Guide to International Arbitration

    "When will mankind be convinced and agree to settle their difficulties by arbitration?"- Benjamin Franklin    

    A year ago, it seemed as if Brexit was finally about to happen. One year on, they are in the same position again. At one point, albeit, it seemed likely that the UK would leave the European Union (EU) without a Withdrawal Agreement (a 'no-deal Brexit'), which would have been hugely disruptive, not least concerning the enforcement of English court judgments in Europe. As a result, parties chose to include arbitration in their agreements, and this could lead soon to an increase in London-seated arbitrations. Under the agreement, the UK enters a transition period where it will continue to follow EU rules until 31 December 2020, by which time both sides hope to have agreed on a trade deal. The shift towards London-seated arbitration in international commercial contracts may turn into a long-term trend.   

    From a global perspective, Brexit is a sideshow compared to China's Belt & Road Initiative (BRI), the most significant investment and construction programme that has been undertaken. Arbitral institutions in APAC are eager to pick up disputes work arising from the many complexes, multi-party projects that makeup BRI.  

    In April 2019, Beijing and Hong Kong announced an arrangement permitting arbitrations seated in the island to be supported by interim or protective measures issued by courts in the mainland. The critical point is that the arbitration can be administered by any institution, as long as it appears on the official list of permitted bodies. The International Chamber of Commerce (ICC) along with the Hong Kong International Arbitration Centre (HKIAC) and a handful of other institutions appears on the list. Sadly, the difficulties in Hong Kong are affecting business confidence in the island's economy and institutions. Unless the political challenges are fully resolved, it is difficult to judge what their overall effect will be. Still, from an arbitration perspective, there is the potential for disputes to migrate southwards to Hong Kong's main rival in the region, Singapore. The caseload of the HKIAC has remained constant, and that of the Singapore International Arbitration Centre (SIAC) has more than doubled throughout the current decade. Both have recently permitted third-party funding of arbitrations. Hong Kong's law permits arbitral awards to be appealed on the point of law, provided parties to opt into the arrangement. This is contrary to the position in England, where appeals of this kind are allowed unless parties opt-out as per section 69 of the Arbitration Act 1996.   

    The expansion and globalization of cross-border investment and trade have led to an increase in more complex relationships between businesses, investors, and States. Inevitably, some of the relationships do break down. Hence the parties need to consider the best means of resolving any dispute which may arise, preferably at the outset of the relationship. Arbitration has been in use since centuries, with Plato writing about arbitration amongst the ancient Greeks. In the new era, arbitration has become the standard method to resolve disputes in specific industry sectors such as construction, shipping, and insurance where the arbitrators' technical expertise is particularly valued. However, over the last 50 years, the international community has increasingly embraced arbitration, with many recognizing its significance as the primary means of resolving complex, transnational, disputes as well as the economic benefits for a State perceived as "arbitration-friendly". Unlike courts, the arbitral tribunals in commercial disputes have no inherent jurisdiction or power as their authority arises from the parties' contract. Albeit, once selected by the parties, arbitration has the backing of statutes and treaties. The essential elements include that the International Arbitration Clause must be in writing to be enforceable as most jurisdictions require the arbitration agreement to be in writing (see, e.g., New York Convention Article II (1)). Also, the International Arbitration must be mandatory. The arbitration clause must make clear that if a dispute arises, it must be arbitrated. Permissive language suggesting arbitration is optional, such as "any dispute may be referred to arbitration," in certain jurisdictions may provide an argument for a non-cooperating party to try to avoid arbitration when a dispute arises. Some parties, in particular lenders, may prefer unilateral option clauses, allowing one party the option to choose between arbitration or court proceedings in the event of a dispute. These clauses are not enforceable in all jurisdictions and should be carefully considered before being included. Therefore, parties should take particular caution in drafting arbitration provisions. In a unanimous decision on 8 January 2019 in Henry Schein, Inc. vs. Archer & White Sales, Inc. (586 U.S., 139 S. Ct. 524 (2019)), the US Supreme Court confirmed that the United States is a pro-arbitration jurisdiction that will honor parties' agreements to arbitrate. Specifically, where an arbitration clause clearly delegates the decision of arbitrability to the arbitrators, courts should have no say in the matter, even if they perceive the argument in favor of arbitration as "wholly groundless." This decision provided clarity for potential disputants and was in line with prior Court precedent that prohibited courts from reviewing the merits of a dispute when delegated adequately to an arbitrator.   

    The choice of arbitral seat determines the country whose courts will have supervisory jurisdiction over the arbitration. Courts at the seat will have the authority to address specific matters that concern the arbitration, such as ruling on (i) preliminary injunctions in aid of the arbitration; and (ii) any challenges to the arbitral award. Thus, it is highly advisable to select a seat in a country with modern, arbitration-friendly laws in place, with courts that are familiar with principles of international arbitration. The selection of a seat should not be confused with the venue for the arbitration. The arbitral seat is distinct from and does not need to correspond with, the venue where hearings physically take place. In the case of A4 vs. B4 ([2019] ADGMCFI 0007), A4, a company registered in Abu Dhabi, brought arbitration proceedings in the Abu Dhabi Global Market Courts under the rules of the London Court of International Arbitration ("LCIA") on 8 March 2018 against B4, who are also incorporated in Abu Dhabi before His Honour Justice Sir Andrew Smith. 

    To know more about international Arbitration including arbitration in the UAE and arbitration in Dubai,Click here 

     

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    Thu, 25 Jun 2020 02:18:00 GMT
    <![CDATA[Due Diligence by Foreign Law Firms of UAE Entities]]> Due Diligence by Foreign Law Firms of UAE Entities

    Business transactions around the world often involve mergers, acquisitions or take-overs. Such transactions of the business organizations require thoughtful decisions which ultimately decides the future of the Company. Hence, due diligence holds the key to vital decisions of the economy as to whether the deal should be given a green flag or not.

    UAE as an economic and commercial hub in the Middle East and North Africa (MENA) region, has numerous foreign and domestic investors who are attracted towards the region's incentives like the tax regimes, free zones, etc. operating in the region. While some establish their own ventures, some businesses opt to enjoy the market reputation of the existing operations and employee base of established corporates in the UAE via mergers or acquisitions. Due diligence investigation is a useful tool to analyze the potential benefits and risks of investments. But easier said than done, the legal due diligence of a company is often a tedious task, which can significantly decide the timeline of the transactions.

    In plain terms, legal due diligence is a process through which substantial and reliable information about a business entity to discover any facts, circumstances or legal risks that are likely to influence a business decision. A snapshot of due diligence is depicted below:

    Although due diligence is not mandated by UAE law, it is always recommended to the buying entity that extensive due diligence for actual or constructive liabilities of target entity should be done. Also, legal and regulatory approvals and restrictions on transaction become clear to the purchaser.

    The information of the target company that is of the essence for the purchaser company is presented as follows:

  • Corporate Information
  • Legal entity structure, including name, location and function of all divisions, subsidiaries or related entities
  • Memorandum of Association & Articles of Association (or Constitutive Contract), including all amendments
  • Minutes of all meetings and consent in writing of managers, the board of directors, board committees and other committees and shareholders.
  • Shareholder/Partner (Owner) Information
  • Lists of all existing owners of shares with their address, number of shares they own, dates of issuance of shares and full payment, the consideration received by the Company.
  • List of all options and other rights to acquire equity securities.
  • Material Contracts
  • Debt financings
  • Bank line of credit or loan agreements and guarantees
  • Standard sales or license agreements
  • Indemnification agreements
  • Products, Manufacturing & Competition
  • Copies of any non-competition agreements of the Company with employees and subsidiaries
  • List of the top customers of the Company, indicating the products and the amounts of each purchase.
  • List of service and support contracts
  • Forms of warranties and guarantees provided to customers
  • Litigation & Audits
  • All management letters or individual reports from the auditor and responses to internal accounting controls.
  • Settlement documents
  • Decrees, order and judgments of courts or governmental agencies concerning the Company
  • Employees & Management
  • Management and organization of the company
  • Personnel handbooks and manuals
  • Government Contracts
  • Tenders and Government contracts and assignments
  • Technology and Proprietary Rights
  • All patents and applications pending or held by the Company
  • Copies of the agreement pertaining to confidentiality, non-disclosure, and assignment of invention agreements, between the Company and employees.
  • List of all copyright and trademark registrations and applications of all intellectual property
  • General
  • Report on all actual or potential conflicts of interests that the Company's directors, officers or employees have due to their relationship with any other person or entity which has any interest, financial or otherwise, in the Company
  • List and description of all transactions between the Company and its employees, directors or shareholders.
  • Any other documents which are relevant to the company and the sector in which it is operating as the due diligence and the perusal of documents differs from one domain of operation to another domain. But the above gives a bird's view of the same.

    The basic aim of drafting observations and action points in a due diligence report is to bring out or raise red flag over a gap of information or at the time of a non-compliance or an additional consent etc. required from the third party which was not known till the time it was raised in the due diligence report. Now, when it comes to the drafting of the observations and action points, lawyers need to keep one thing in mind that the due diligence report which is being prepared before a transaction would be discussed amongst or may be referred to a certain class of people who may not be lawyers. They could be read by business people, CEOs, CFOs or board of the company, general counsels, investor's legal advisors, investment managers, etc. Therefore, the correct and the most favoured way of drafting is first to tell the reader what has been provided for review, then your observations and lastly, the consequence of the observation (for, example, if it is a non-compliance, then the consequence of it, such as a penalty, etc.) so that even a non-lawyer could understand the basic requirement of such an observation.

    Action points are stated in the report but at an interim stage for the purpose of internal communication so that the target or investee company representatives can rectify the anomalies. They are often removed in the final report. The due diligence report generally has the following points in it to make a credible document: -

    PROJECT NAME

    SUMMARY OF CONTENTS:

    Transfer of Control

    • Key Commercial Terms

    • Duration of Material Contracts, Penalties, IPRs, etc.

    • Assignment

    • Termination

    • Governing Law/Jurisdiction

     

  • KYC Details and Background Check
  • It involves identifying the entity such as incorporation certificate, commercial license, shareholders, key directors and media releases.

  • Dubai Chamber of Commerce and Industry
  • The credit ratings and recommended credit limits of the company, besides companies' and financial information, such as shareholders, directors, bankers, payment history, etc.

  • Department of Economic Development (DED) database
  • It provides trade license number of the company, status of activity, expiry date, its activities, and the contact information and location of the company.

  • Al Etihad Credit Bureau (AECB)
  • It is a federal company [AA1] which is mainly a public joint-stock company (PJSC) which is wholly owned by the Federal Government of UAE. As per the Federal Law No. 6 of 2010 of UAE pertaining to the credit information, AECB is mandated to recurrently gather credit information from UAE's financial and non-financial institutions. It keeps details from all UAE banks, financial institutions and individuals and it provides credit reports for a nominal fee providing details of the debt levels and financial creditworthiness of UAE entities.

    Either the individual himself or by executing the power of attorney to the lawyer, an entity can check the credit information from the above-listed sources.

    Though the process and report of due diligence seem to be an exhaustive and in-depth one but the gross limitation of the process is that it is limited to two to five years during the examination. Moreover, legal due diligence doesn't reflect the financial and other due diligence, which is an expert domain of investment or merchant bankers or private equity firm.

    As Dubai envisions itself to be a smart city and with Expo 2020 UAE plans to be the hub of financial and commercial locus of the world, due diligence as a requirement would definitely pick the ground.

     

     

     

    ]]>
    Sun, 03 May 2020 02:37:00 GMT
    <![CDATA[Regulations on Private Finance Platforms in ADGM]]> Regulations on Private Finance Platforms in ADGM

    Global financial markets have witnessed unprecedented growth in the techniques and platforms in peer to peer lending over past two decades due to various factors such as improvements in technology backing such platforms, real-time access to funds, ability to obtain unsecured personal or corporate loans among others. This also meant that peer to peer lending does not directly fit within the fundamental principles of the traditional financial industry because of the same reasons. Initially, peer-to-peer platforms majorly monetized on the funding with social circles and the benefits of disintermediationi as the concept of crowdfunding for SMEs to unknown borrowers was still an untested experiment. However, the growth and reach of the internet and ultimately the convergence of the financial sector with technology (FinTech) opened up new doors of opportunities globally. Eventually, this gave birth to the need to regulate a diversified, robust and unclassified sect of the industry. Therefore, it is pertinent for us to understand the regulatory approach to such platforms (commonly known as private financing platforms or PFPs) to comprehend the legalities and risks surrounding the same in our dynamic and global economy.

    In today's world, such platforms provide enhanced functions such as real-time virtual interface and conduct thorough (KYC and) due diligence on the parties' bank accounts. This article aims to apprise the readers on the regulations laid down by the Financial Services Regulatory Authority (the FSRA), which is the financial services' regulator of the Abu Dhabi Global Markets (the ADGM). After observing the growing need to regulate the sector and the potential that PFPs bring into the current marketplace, the FSRA issued the Guidance – Regulatory Framework for Private Financing Platformsii (referred to as the Guidance in this article) on 10 September 2018. The regulation has demarcated the limits and set the provisions for operating private financing platforms in instruments and various types of entities. The Guidance was issued according to the authority placed on the FSRA as per section 15 (2) of Financial Services and Markets Regulations of 2015. Therefore, it is pertinent for us to understand who is deemed to be operating a private financing platform as per the provisions of the FSRA before moving forward. A person is deemed to be running a private financing platform iniii seven different scenarios as per the FSMR: -

  • introduces two (2) people over an electronic platform for one of them to provide credit to the other;
  • introduces two (2) people over an electronic platform for one of them to buy a specified instrument;
  • introduces two (2) people over an electronic electronic platform for one of them to buy a particular tool which would create a debtor-creditor relationship with the other person for the supply of goods or providing services;
  • agrees with a specific person for conducting the above mentioned activities;
  • facilitates such agreements (IV);
  • holds and/ or controls funds from clients or arranges custody for such funds in the above scenarios;
  • conducts a facility on PFP which provides a person to offer its rights as per mentioned above.
  • The Guidance applies to PFPs for private equity funding, PPP (private placement programs) and invoice financing platforms that raise funds from qualified investors including HNIs (high net-worth individuals), VC (venture capital), angel investors etc. The FSRA has advised investors of the risks associated with the PFP transactions including loss of money (since borrowing entities may have weak financial status), issues related to liquidity (as investors may not be able to exit the transactions as quickly), inadequate information on the PFP prospects, technical problems or failures in the platform and/ or conflict of interests.

    Fundamentals of the Guidance and Initial Regulatory Compliance

    The FSRA has restricted the access of PFPs (primarily) to professional investors due to the risks associated with such transaction and lack of knowledge of such threats to the general public. The FSRA may consider permitting non-professional clients who have an adequate understanding of the dangers and substantial experience in the sector to participate on a case by case basis. However, the FSRA has clearly laid down that only a corporate entity is permitted to be a PFP Prospect as it would not be appropriate for individual persons to obtain private funding through such platforms for business purposes. Further, financing through these platforms would not work effectively for entities that are being set up or have recently been set up since neither the platform operators nor the clients would have the opportunity to conduct thorough due diligence due to lack of sufficient information. The FSRA may prefer PFP operators to appoint third party custodians with requisite licenses in order to ensure the safety of the clients' funds - however, the regulator may consider alternative options for 'custody' when appropriate safeguards are in place. The FSRA will review the application of a proposed PFP operator in line with the threshold conditions mentioned in General (GEN) Rulebook, which requires applicants to:

    I. Have substantial resources;

    II. Be fit and proper;

    III. Be (capable of) being supervised in an effective manner; and

    IV. Have compliance standards in place. Specifically, the regulator will consider the

  • Business model;
  • proven track record of minimum five (5) years in corporate finance or similar activities;
  • Compliance requirements of the directors and partners;
  • Appointment of professionals such as senior executive officer, finance officer, compliance officer and money laundering reporting officer;
  • Compliance and governance systems;
  • Capital requirements and
  • PII or professional indemnity insurance.
  • The applicants may also be required to demonstrate the technology and its compliance with the regulations laid down by the FSRA.

    Ongoing Governance and Requirements

    The guidance requires PFP operators to comply with the rules mentioned below during their operations:

    I. Risk analysis - the holder of an FSP (financial service provider) license should list and inform the clients of the risks involved in participating in the transaction.

    II. Due diligence - The operator should maintain a minimum standard of due diligence on the PSP prospect (including an independent verification where necessary). The PFP operator may or may not provide the information that they acquire to the clients; however, they are mandated to disclose the selection and acceptance criteria for any particular transaction to be listed on the platform. It will enable the investors to make an informed decision before flushing funds to any particular PFP prospect. Further, they are also required to submit all such information to the regulator for review.

    III. PFP operators are permitted to use forums to identify the interests of clients analyze the interests of clients on any particular transaction and in such situations, the operators are not required to meet the compliance criteria mentioned in (i) and (ii). although they are placed with the responsibility to discard any misleading or fraudulent posts.

    IV. Marketing (business development) - the FSRA FSRA has explicitly restricted the mass advertising of its platform; however, FSPs are permitted to promote the general information of its platform to the general public.

    V. Disclosure of information - informally attributed one of the most critical aspects of compliance in the present global market. PFP operators have the responsibility to divulge the following information to the clients

  • Operations of the PFP including details about the transactions, process for participation, custody of assets etc.;
  • review of the PFP operator;
  • operator's rights and liabilities;
  • options and remedies the clients can resort to if a failure occurs on the part of the PFP prospect or the operator;
  • Notifications of any material amendments to the PFP transaction; and
  • other information as per the FSRA provisions.
  • VI. Exit options - this provides that PFP operators can permit clients to sell their positions (or exit the facility) to other clients of the PFP operator.

    VII. Intermediaries - PFP operators may utilize SPVs (special purpose vehicles) in transactions established in the ADGM for effective regulatory oversight.

    Applicants should also be aware of the implication of Islamic Finance Rules on PFP operators who deals in any Islamic Financial Business in the ADGM or makes offers on Shari'a-compliant securities in the ADGM. We would recommend that the applicants contact and visit the FSRA or a lawyer with adequate knowledge of the abovementioned requirements to obtained detailed information.

     

    i. disintermediation (noun): the elimination of an intermediary in a transaction between two parties -

    https://www.merriam-webster.com/dictionary/disintermediation

    ii. The author has referred to VER01.10092018 of the Guidance while drafting this article. It is advisable for readers to either contact the FSRA or the Corporate Practice at STA before arriving at any decision.

    iii. Specifically, Schedule 1, Chapter 17C, Section 73E (2) of the FSMR

     

    ]]>
    Tue, 31 Mar 2020 12:00:00 GMT
    <![CDATA[The Cost of Running a Private Equity Real Estate Fund]]> The Cost of Running a Private Equity Real Estate Fund

    Private equity real estate is an advantage class that comprises of pooled private and public interests in the real estate market. Such contributing includes the obtaining, financing and proprietorship of property or properties utilizing a shared vehicle. Private equity real estate ended up prominent during the 1990s amid falling property costs as an approach to gather up properties as qualities fell.

    A private equity fund is an aggregate investment plan utilised for making investments in different value (and to a lesser degree obligation) securities as indicated by one of the investment strategies related to private value. Private value assets are usually restricted associations with a fixed term of 10 years.

    At origin, institutional investors make an unfunded duty to the restricted organization, which is then drawn over the term of the store. From the investors' perspective, assets can be conventional, where every investor contribute with equivalent terms or deviated, where various financial specialists have distinctive terms.

    A private equity fund is raised and overseen by investment professionals of a particular private equity firm (the general accomplice and speculation counsel). Ordinarily, a single private equity firm, will deal with a progression of private equity funds reserves and will endeavour to raise another fund each 3 to 5 years as the past store is entirely and fully invested.

    Breaking Down Private Equity Real Estate

    Investing resources into private equity real estate, for the most part, requires a financial specialist with a more extended term standpoint and a critical forthright capital responsibility. Little adaptability and liquidity are offered to investors since the capital commitment window usually requires quite a while. Lock-up periods in case of private equity real estate can now and again keep going for more than twelve years approximately. Also, dispersions can be moderate, as they are regularly paid from income, as opposed to through and through liquidation where the investors stand with no right to request settlement.

    In any case, given real estate's prominence as an asset class, it can furnish high potential degrees of pay with substantial value appreciation. Yearly returns in the 6-8% for strategies and 8-10% for techniques are considered reasonable. Returns for worth included or opportunistic approach can be significantly higher. So, private equity real estate is risky enough that investors can lose their entire investment if a reserve fails to meet expectations.

    Types of PERE Funds

    • Core
    • Core Plus
    • Value Add
    • Opportunity

    Fund Structure

    The essential PERE subsidize vehicle will more often than not be a limited partnership. The more extensive reserve structure may, in any case, include various other store vehicles, for example, feeder assets and parallel assets, which, thus, may incorporate companies or private REITs especially for US PERE reserves that craving to restrict unrelated business taxable income for US expense absolved financial specialists and duty payable under the Foreign Investment in Real Property Tax Act of 1980 for non-US speculators. A fund additionally contains various parts, including a cast of players that incorporates the fund's advisers, chiefs and investors.

    Common Private Equity Real Estate Investments

    Office buildings, tall structure, urban, rural and garden workplaces; modern industrial properties including stockroom, innovative work, adaptable office/mechanical space; retail properties, shopping centers, neighbourhood, network and power centers; and multifamily condos, are the most widely recognized private equity real estate ventures. There are additionally speciality property investments, for example, senior or student lodging, inns, self-storage, medicinal workplaces, single-family lodging to own or lease, undeveloped land, producing space, and the sky is the limit from there.

    Who Invests in Private Equity Real Estate?

    Organizations (annuity assets and not-for-profit reserves), third parties, for example, asset managers and resource directors contributing for the benefit of foundations, private licensed investors and high-total assets people put resources into private value land.

    Private equity real estate investments are generally pooled and can be organized as constrained organizations, LLCs, S-corps, C-corps, aggregate venture trusts, private REITs, guarantor separate records or other lawful structures.

    The development of PERE assets since the 2008 global financial crisis (GFC) has been staggering – and it is a pattern that appears to keep grabbing speed, notwithstanding when vulnerabilities from exchange wars and debilitating economies loom overhead.

    The actual fund cost from the Asia perspective

    There are a couple of basic structures being utilized and supported by speculators all-inclusive. Considering USD 500 million reserve utilizing a typical GP/LP structure through the lense of an Asian-based store supervisor putting into Asia Pacific real estate - a significant part of the literature distributed has been it is possible that the US or EU driven, with very little spotlight on this piece of the world to date.

    The costs can generally be classified into the following:

  • Set-up
  • Annual Ongoing
  • Ad-hoc
  • Pre-launch and set-up costs

    At the pre-launch stage for another shop, support supervisors and fund managers are generally focused around raising money and leading roadshows while working intimately with external legal counsels to have the store record pack arranged. This forms the main part of the set-up expense; in APAC, this can cost at least USD 35,000, and the charges can without much of a stretch reach USD 100,000.

    Specialist organizations, for example, legal advice, banks and store directors, have seen costs expanding as of late, to a great extent because of expanded Know Your Client (KYC) and compliance prerequisites.

    Normal extra costs that kick in are express documenting expenses and odds and ends, which can expand the set-up expenses by up to 10 per cent.

    When it is set up and is running, one should consider paying salaries for a group of at least four experienced portfolio supervisors to help the store administrator and standard overheads of physical office space.

    Unscheduled capital calls, drawdowns, extra dedicated capital and new financial specialists are on the whole uplifting news, however, when such changes are not overseen in an effective manner. Factor in rebuilding because of amendments in tax laws and the fees can multiply.

    Mitigating costs exceeding the planned budget

    With every one of the charges included, the expenses frequently surpass the first original proposed budget and store supervisors would be hard squeezed for results while explaining increased operational costs.

    Are there approaches to oversee such circumstances?

    Honestly, without a doubt. Transparency and communication, along with openness, are of the utmost importance. We urge finance directors to request their fund administrator to their structure planning as right on time will be expected under the circumstances.

    Being a piece of the discussion implies the fund administrator can give an autonomous perspective, and an accomplished proficient will probably feature areas which may have been neglected.

     

    ]]>
    Mon, 30 Dec 2019 04:27:00 GMT
    <![CDATA[Cryptocurrency and Asset Exchange in the Abu Dhabi Global Market]]> Cryptocurrency and Asset Exchange in the Abu Dhabi Global Market

    Currency is defined as something, more often than not paper and coins, that act as a medium of exchange for goods and services. This practice of trade has been a constant for humankind throughout its various ages, occurring in multiple forms, yet resulting in the same outcome. While earlier transactions revolved around the exchange of physical forms of currency in the form of legal tenders, at present, with the advancements made in technology, the currency has taken an alternative system that's known as cryptocurrency.

    Cryptocurrency facilitates financial transactions in the same manner currency does, with the exception that it is intangible and acts as a digital asset. The standard currency relies on central banking systems and controlling authorities as a form of regulation, whereas cryptocurrency utilises a form of decentralised control. This decentralised methodology of control is made possible by the use of distributed ledger technology (DLT). The technology is such that digital data is spread across multiple devices in an interconnected network and subsequently synchronised using a consensus of these devices within the network. The lack of a regulatory body overseeing these networks is considered as a significant security threat, but this hasn't stopped multiple variations of cryptocurrency being conceived including Bitcoin, Altcoins, Token, etc. With cryptocurrency gaining major traction and becoming mainstream, countries have looked into the same, and while some have expressed reservations in adopting the system, some have taken it up as an authorised medium of exchange. The United Arab Emirates (UAE) is one such country that has taken an active interest in integrating cryptocurrency into its economy through the Abu Dhabi Global Market (ADGM), an international financial centre and financial free zone in Abu Dhabi.

    Abu Dhabi Global Market

    The Abu Dhabi Global Market was established as a financial free zone in the Emirate of Abu Dhabi by Federal Decree Number (15) of 2013,

    The FSRA conducts and facilitates all financial services in the ADGM. Financial entities registered with ADGM must adhere to the obligations set out by the FSRA, that are in addition to the standard obligations of ADGM. The FSRA seeks to uphold the integrity of ADGM's financial system and acts to deter any such conduct or activity that disturbs the stability of the financial services industry. ADGM also has set up measures to towards prevention of financial crimes by adhering to Countering Financing of Terrorism (CFT) Anti-Money Laundering (AML) guidelines, with FSRA being the competent authority governing the same. The ADGM Courts consists of the Court of Appeal and the Court of First Instance, and function as per the rules and regulations enacted by the ADGM Board of Directors and its subsequent amendments.

    Guidelines related to Cryptocurrency

    In May 2019, the FSRA issued a set of guidelines with respect to Cryptocurrency. The guidelines enacted were:

    • Digital Security Offerings and Crypto Assets Regulations under the FSMR (dated 13th May 2019)
    • Regulation of Crypto Asset Activities in ADGM (dated 14th May 2019)

    According to these guidelines, a Crypto Asset was recognised to be a value of digital representation that could digitally be traded and be utilised as a medium of exchange, but not having any legal tender status in any jurisdiction. The main objectives are to address the risks that arise when trading of crypto assets occur. At present, in the event of a theft or a loss of crypto assets, users do not have a safety net that will enable them to recover their assets. The mere adherence to AML and CFT guidelines is not sufficient enough to quell the broader risks of crypto assets. The issues addressed by the guidelines pertain to the areas of:

    • Consumer Protection
    • Safe Custody
    • Technology Governance
    • Transparency
    • Market Abuse

    Under the regulatory framework, any person (custodian, market operator or intermediary) dealing in crypto assets needed to be approved by the FSRA as a Financial Services Permission (FSP) holder in the business of operating crypto assets, otherwise known as OCAB. Apart from the above-mentioned guidelines, authorised persons must comply with the following additional guidelines:

    • The FSRA Conduct of Business Rulebook (COBS)
    • The FSRA General Rulebook (GEN)
    • Anti-Money Laundering and Sanctions Rules and Guidance under the FSRA (AML)
    • The FSRA Rules of Market Conduct (RMC)

    As per chapter 17 of COBS, there are seven key factors which the FSRA considers while determining whether a Crypto Asset becomes an Accepted Crypto Asset. They are:

    Maturity/Market Capitalisation:

    The volatility, sufficiency and the proportion of Crypto Asset in the free float are assessed. The FSRA does not prescribe a source for the calculation of market capitalisation of Crypto Asset. It instead uses recognised sources, as and when it may be available.

    Security:

    The Crypto Asset is determined if it is able to adapt and improve the risks and vulnerabilities it has and tested on their ability to allow secure private keys the appropriate safeguarding.

    Traceability/Monitoring:

    The ability of crypto assets to identify counterparties in transactions are assessed along with the ability of OCAB holders to demonstrate the origin and destination of such crypto assets.

    Exchange Connectivity:

    The presence of other exchange centres which support crypto assets, their jurisdictions and regulations are investigated.

    Types of DLT:

    The security of the DLT that is used for the purpose of Crypto Assets is assessed to understand if it is stress tested.

    Innovation/Efficiency:

    The ability of the Crypto Asset to solve fundamental problems or create value for the participants or meet a need of the market is determined.

    Practical Application/ Functionality:

    The functionality of the Crypto Asset in terms of real-world quality is looked into and plays an important role in determining if it becomes an Accepted Crypto Asset.

    Anti-Money Laundering and Countering Financing of Terrorism Guidelines

    One of the primary concerns with the usage of Crypto Assets is money laundering (ML) and terrorism financing (TF). The ADGM introduced the Anti-Money Laundering and Countering Financing of Terrorism Guidelines in 2015 with the jurisdiction being exclusive to the Global Market area, and it is independent of any federal anti-money laundering legislation. The guidelines introduced to apply for all those persons who operate from or in the ADGM.

    Under the UAE criminal law, as per Article 3 of Federal Decree Law Number (20) of 2018, a person may be held criminally liable for money laundering if it is conducted intentionally in the name of the person or from their account. The following also constitute offences in relation to money laundering:

    • Failure to report suspicions related to money laundering
    • Assisting in the commission of money laundering

    An inter-governmental organisation called the Financial Action Task Force (FATF) helps develop and promote international standards to fight money laundering and terrorist financing. The FATF has identified certain critical risks associated with crypto assets, such as:

    Anonymous operation of Crypto Assets

    Since crypto assets are traded on the Internet with no face-to-face interactions, anonymous funding and transactions take place. This can result in the failure to identify the source of destination of the funds.

    Increased potential for ML and TF risks:

    The ease of access to Crypto Asset systems (even from a mobile phone) massively increases the global and can enable cross-border transactions, which can be challenging to monitor.

    Complex infrastructure:

    Crypto Asset systems are built on platforms that require complex infrastructures with multiple entities across different jurisdictions being involved. This can cause difficulty for law enforcement agencies to access them. The rapid increase of decentralised technologies which are used by Crypto Asset businesses further aggravates the issue.

    Jurisdictions not having adequate ML/TF tools:

    Since different components of the Crypto Asset system may be spread out across multiple jurisdictions, it is entirely possible that such jurisdictions may not have adequate framework and control over money laundering and terrorism financing.

    On the basis of the risks put forth by the Financial Action Task Force, the FSRA has introduced fundamental principles an OCAB holder should consider, which are:

    Risk-Based Approach:

    OCAB holders must understand the risks associated with the activities involved and should carry out periodic risk-based assessments, which identify, assess, manage and mitigate the risks related to money laundering.

    Business Risk Assessment:

    In accordance with the Anti Money Laundering rules, entities must take appropriate steps to identify and analyse ML risks the business may be exposed to, with importance given to the use of new technologies that can be used. The FATF further recommends that financial institutions must conduct such risk assessment prior to the launch of any new practice, technology or product.

    Customer Risk Assessment and Customer Due Diligence:

    Procedures in relation to Customer Risk Assessment and Customer Due Diligence must be implemented by all OCAB holders and must rate the Clients according to their risk profile. The due diligence must be carried out in accordance with the AML rules as per FSRA. In the event that the ongoing due diligence happens non-face-to-face, the OCAB holders are expected by the FSRA to identify the client as a natural person. OCAB holders must ensure that the process of due diligence is not a simplified one and may use any technology available to them in order to mitigate any such risk associated with verifying the client.

    Governance, Systems and Controls:

    OCAB holders are required to implement the necessary technological governance systems and controls to ensure appropriate ML and TF compliance. Third-party solutions and technologies can be brought on in order to fulfil the regulatory obligations put forth. Effective transaction monitoring systems must be implemented in order to determine the origin and destination of Crypto Assets. A Money Laundering Reporting Officer (MLRO) must be appointed by the OCAB Holder, and this officer will be responsible for implementing and overseeing how the OCAB Holder complies with the AML rules.

    Suspicious Activity Reporting Obligations:

    OCAB holders must establish online connectivity with UAE's Financial Intelligence Unit for submitting such suspicious activity reports and must ensure that transaction monitoring systems are in place to identify any possible breach of domestic or international sanctions.

    Record Keeping:

    The FSRA expects record-keeping practices in accordance with the AML/CFT compliance guidelines, to be followed by OCAB holders. Such data must be kept in an easily accessible format and provided to the FSRA whenever required.

    Conclusion

    It is imperative that for the successful integration of crypto assets, the guidelines that are put forth by the Financial Services Regulations Authority are followed. These guidelines are quite comprehensive in nature and ensure that a safety net is available for those dealing in crypto assets and digital asset exchange. The ADGM has been a pioneer in international financial centres, with its unique outlook and it has certainly paved the way for further inroads in the field of cryptocurrency.

     

    ]]>
    Tue, 10 Sep 2019 12:41:00 GMT
    <![CDATA[Force Majeure Clauses and the Limitation of Liability]]> Force Majeure Clauses and the Limitation of Liability

    Introduction

    Force majeure is a Latin term, commonly used in the legal profession which translates to 'superior force' and is used when referring to unforeseeable events taking place. For the most part, unforeseeable events are not attractive prospects for any individual, especially in the case of business agreements. While contracts generally do consists of plans for many potential eventualities, these are usually somewhat anticipatable. Force majeure, on the other hand, are events which cannot be predicted or anticipated. The most common forms are natural disasters and certain types of changes in the law. Historically, this concept only referred to 'Acts of God'. Earthquakes, fires, floods and tsunamis occur and have arisen regularly across the globe. In the modern world, there are other concepts which fit the descriptions in many ways. Changes in international law and significant global events resulting from human activity are not entirely natural, though that may be unpredictable, and can have significant impacts on business agreements.

    In the event of such an occurrence, parties often share the opinion that it would be unfair to continue to apply the original contract's clauses. An example of this could be relating to tenancy contracts. If a natural disaster were to transpire resulting in damage to property, contracts would usually have a force majeure clause, allowing for immediate termination of the agreement and allowing the property owner to work on and repair their home freely.

    The force majeure clause is one which is relatively well known heavily used across many industries and throughout numerous contract forms. In the case of the UAE, they are often found in tenancy contracts, due in part to situations such as the one mentioned previously. Another critical industry is that of construction. There are two points of note here. Firstly, it is fairly obvious that a natural disaster could have a negative impact on a project and this could extend so far as to make it impossible to continue. The other point relates to the country itself. The UAE has a huge construction industry, with the Emirate of Dubai being particularly famous for its large-scale undertakings. However, the land on which the city of Dubai lies is relatively stable. There are many complexities to the topic and numerous considerations to contemplate.

    The UAE Civil Code

    The UAE relies primarily on the UAE Civil Code (Federal Law Number 5 of 1985) in matters relating to contracts. In the code, Section 5 concerns the dissolution of contracts, and Article 273 elaborates on the topic of force majeure. Here, it states that in the case of an event that would lead to the agreement being impossible to complete, the obligations on both parties will cease, and beyond this, the cancellation of the entirety of the contract may transpire.

    However, there are occasions wherein part of the contract becomes impossible to complete while other aspects remain doable. In this case, Article 273, Subsection 2 states that the elements of the deal that are affected by the force majeure will become terminated while leaving the rest of the contract to continue as ordinarily as possible. The obligor of the agreement, in this case, will be able to cancel the contract provided the obligee is aware of their intent to do so.

    An example of a case in which force majeure was a key factor was the Dubai Court of Cassation, 213/2003 (195). In this case, a contractor was performing construction work, though they failed to complete it in time. However, a force majeure was claimed to be the cause, and therefore the judgement gathered that since the problem arose due to unforeseen circumstances, the contractor should receive the value of the work completed, and the termination of the remainder of the contractual agreement should take place.

    It is important to note that the civil code primarily covers the UAE mainland. While numerous free zones also follow the Civil Code in parts, there are some including the DIFC and ADGM which have their regulations in place. The DIFC Law Number 6 of 2004 covers contracts within the free zone's jurisdiction. Article 82 of the law regards force majeure clauses and instances.

    Subsection 1 of this Article states that, in the case of a non-performance of contractual obligations, a party may be excused should they be able to prove that their non-performance arose due to uncontrollable circumstances.

    Subsection 2 mentions temporary roadblocks. In the case of a temporary issue, the obligations may be held off until a time when it is reasonably possible to continue.

    A notice must be given by the party that is unable to complete their obligation as soon as the problem becomes known to them, as stated under Subsection 3.

    Finally, Subsection 4 indicates that if a party wishes to terminate a contract due to a force majeure event occurring, they shall be entitled to do so.

    DIFC

    A case that took place in the DIFC was the Judicial Authority of the Dubai International Financial Centre: Court of First Instance, 7/2013 CFI. The Claimant, in this case, had sold properties to numerous defendants, though these were then either delayed or cancelled. However, within the contracts between the parties, there was a force majeure clause within the contract. There were numerous delays during the construction period, though notices accompanied these. The critical issue here was primarily related to the provided warnings themselves, as the force majeure clause itself was acceptable.

    ADGM

    The ADGM, on the other hand, follows the UK court system and contract laws. It states that within the Market Infrastructure Rulebook (MIR), Article 2.6.2, that business continuity plans will be required in the contracts that need them. The Article then proceeds to list some of these, and Subsection d specifies that a force majeure clause should be included to provide some plan for emergencies.

    The UK

    Because the UK is a country that utilises a common law system, force majeure will only be applicable in a case that has it mentioned and specified in the contract. It is for the parties to decide on the extent of the clause.

    Further to this, the burden of proof is on the party that attempts to apply it. They must prove that the event in whole or in part prevented the completion of responsibilities. If this is possible, the clause as found in the contract can be applied.

    As a whole, the UK system is more customisable than general, though it must be included explicitly by the parties to the contract.

    The USA

    The US, much like the UK is a common law jurisdiction. As such, many of the same concepts apply here. There is no Federal Law in place which dictates force majeure, and therefore, if it is absent in a contract and such an event occurs, the concept cannot be relied on to shift the liability away from any of the parties.

    The clause is one which is often put into contracts in a very generic manner, partly due to the fact mentioned above. While problems can arise out of the use of a generic clause, the point remains, that force majeure is a well-known and utilised often.

    For a force majeure to be applicable, it must fulfil one of two requirements. The first is that of impossibility (or impracticality), while the second is the frustration of purpose. An example of a case in which the impossibility clause applied was Taylor v Caldwell. One of the parties owned a music hall which it had agreed to lease to the other. However, a fire arose which destroyed the building; this made it quite impossible for the agreement to be completed and enacted, and so under the impossibility force majeure clause, the contract would be terminated.

    India

    Once again, India is a common law jurisdiction much like the UK and US. The UK system heavily influences it due to the past the countries share, and so it should come as no surprise that they have much the same attitude on force majeure clauses. In India, there is the concept of Doctrine of Frustration, and this applies in any case wherein the initial purpose of the agreement is no longer a possibility.

    Section 56 of the Indian Contract Act of 1852 states that any case in which an act or obligation becomes impossible or unlawful, the agreement shall become void. However, it was confirmed by the Indian Supreme Court that this would not apply in any case wherein the defendant causes the impossibility to arise due to their personal actions or decision.

    Conclusion

    Force majeure is a fairly standard clause used in contracts around the world. It provides as much stability as is possible in the face of the world's instability, with numerous occurrences of unpredictable and uncontrollable natural disasters occurring regularly and human-made changes in legal systems taking place through government acts on national and international fronts. This clause is both specific in its outcomes, while simultaneously being vague enough to cover all possibilities. Depending on a nation's legal system, there may be different regulations controlling the use of the clause, with many of the common law jurisdictions sharing similar attitudes towards it, while civil law systems have their view of things. However, the fundamental outlook on the matter remains alike.

     

     

     

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    Tue, 03 Sep 2019 12:00:00 GMT
    <![CDATA[ADGM SPV and ADGM Foundation]]> Abu Dhabi Global Market (ADGM) – Special Purpose Vehicles (SPV) and Foundations

    You may either look at a glass with water as glass half full or glass half empty – and that is definitely the case in today's corporate world. Perception is everything. The times that we live in has parallelly proved to be a boon and a bane due to inherent corporate risks such as financing, asset transfers or high-risk opportunities. However, the ADGM provides investors with a solution to these risks for today's competitive markets. 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 Abu Dhabi (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 fulfill a limited, specific or temporary purpose. 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.

    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. 

    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.

    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. 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.

    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. 

     

    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 Regulatory Authority (the FSRA). These SPVs offer sophisticated ownership structures and propose a particularly innovative and flexible mechanism. They combine dematerialized SPVs into substantiated holding companies.

    To surmise: -

    The breakdown

     

    It's Suitability

    • Proprietary investment;
    • Securitisation;
    • Holding;
    • Capital raising;

    Advantages

    • Dependability;
    • Adaptable;
    • Different share classes;
    • Applicability of the common law;
    • Acceptance of trusts, funds as holder, and foundations;
    • Capable of morphing;
    • No foreign ownership restrictions;
    • Tax Residency – all ADGM registered companies are eligible to apply a Tax Residency Certificate from the UAE Ministry of Finance to benefit from the UAE's Double Tax Treaty network.
    • Migration or continuance of existing corporate entities

    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

    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 corporate structure 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. 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 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.

     

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    Thu, 21 Mar 2019 06:59:00 GMT
    <![CDATA[A Guide to Non-compete Clauses in the MENA Region]]> A Guide to Non-compete Clauses in the Middle East

    Introduction

    Non-compete clauses are sometimes incorporated into the contracts of employees to ensure the security and protection of the employer if an employee decides to move to another company. When working for an entity, individuals will likely pick up on and be privy to highly confidential information and practices of their employers. In the modern and extremely competitive business environment, companies look to obtain every advantage they possibly can. A company's unique selling points are what allow them to rise above their competitors, and these unique characteristics can include everything from trade secrets to working practices and even knowledge of specific customers and interacting with them. These are all things that an entity would seek to protect.

    Placing a non-compete clause in a contract restricts an individual's future employment in specific ways. That employee will be unable to obtain jobs at similar competing establishments, though the duration and specifics of how this will work will vary based on the country. The clause will have the effect of preventing one from obtaining employment under certain circumstances to ensure one company will not lose business to a competitor due to the profession of the ex-employee.

    It is no small matter, and so there are regulations in place within all of the GCC countries to ensure employers do not take advantage of employees. An individual working for a company in a particular field and at a specific position, when looking for a new job, will most probably be seeking in a similar sector. Realistically, this related sector will also be the one they would be most likely to find work in, and so this gives rise to something of a problem. If a non-compete clause is present, how will an employee find further employment?

    There are solutions to this, such as time limits, though more often than not, these limitations have to be reasonably specific. Non-compete clauses are not intended to give any single party an advantage over the other, and they are indeed not intended as oppression to the employee. Preferably it is merely a preventative measure used by the employer to secure their business.

     

     

     

     

     

     

     

    Contents

    1.   Non-Compete Clauses in the UAE

           1.1     Federal Law Number 8 of 1980

           1.2      In the Case of Litigation

           1.3      Ministerial Resolution Number 297 of 2016

    2.      Non-compete Clauses in the DIFC

            2.1    DIFC Law Number 6 of 2004

    3.      Non-compete Clauses in the ADGM

            3.1    The Employment Regulations 2015

            3.2    The UK Common Law and Equity

    4.      Non-compete Clauses in Kuwait

             4.1   Law Number 10 of 2007 (Competition Law)

             4.2   Damages for a Breach of Contract

    5.      Non-compete Clauses in Bahrain

             5.1   Law Number 36 of 2012

    6.      Non-compete Clauses in Oman

             6.1    Royal Decree Number 50/90

             6.2   Sultan's Decree Number 35/2003

    7.      Non-compete Clauses in Saudi Arabia

            7. 1   Royal Decree Number M/21 of 1969

            8.1    Royal Decree Number M/51 of 2005

    8.     Conclusion

    1.   Non-compete Clauses in the UAE

    The UAE is a highly competitive business market, being the most famous and popular in the Middle Eastern region; this is made clear when looking at its population, which consist of around 90% being expatriates. Non-compete clauses are quite well regulated although the matter can often be complicated. On top of this, the ADGM and DIFC free zones have differing regulations.

    The principal regulations on this matter are:

    • Federal Law Number 8 of 1980 (Labour Law)
    • Ministerial Resolution Number 297 2016

     1.1  Federal Law Number 8 of 1980

  • Federal Law number 8 of 1980 is the general labor law of the UAE. It does not explicitly mention non-compete clauses, though Article 127 does concern the matter
  • Within Article 127, it says that in the case that an employee's work allows them to become familiar with the clients of their employer, or if that work exposes them to the trade secrets of the company, the employer will be in a position to oblige a non-compete restriction upon the employee.
  • These are the conditions under which a non-compete clause may be allowed as per the law, though the Article also states conditions.
  • Article 127 States that for this restriction to be applicable, the employee must be over the age of 21 from the time of the contracts initial formation.
  • On top of this, the clause must be limited regarding the time and place. Further, it should also be limited to similar forms of work that would directly allow for competition with the original employer and will not be permitted unless it is necessary for them to protect and safeguard their lawful interests.
  • From this, a point that can be noted is that the law is stated in such a way to ensure a fair system. A non-compete clause cannot be used to take advantage of the helpless. The age restriction is present to provide that those who are very young do not have the early and crucial stage of their careers unnecessarily restricted, as this could have more considerable repercussions on them.
  • On top of this, the time and place restrictions are just a matter of fairness. For time limitations, markets change and so there must be an absolute time limit after which the employment of that employee will not have a noticeable or competitive impact. Further to this, employees employed within the UAE will be less likely to interact with clients in competitors in other jurisdictions, and with the international market and competition on such a scale being far more unpredictable, a limitation will have to exist.
  • Of course, the non-compete clause must prevent work in a similar business that would be in direct competition with the employer. They should be able to demonstrate that in the ex-employee working in the new company, they will suffer losses directly as a result.
  • Due to Article 127, it is more often than not, more senior employees who receive these clauses in their contracts. Those at a decision-making level who would potentially be able to impact the interests of a company and their competitivity with their knowledge may genuinely require a non-compete clause; there will be little to no positivity to arise from applying non-compete clauses to lower level employees or those privy to less insider knowledge.
  •  1.2   In the Case of Litigation

    Escalating a case to litigation is a serious matter, and so there must be a certainty of a breach. However, the UAE's outlook and handling of these cases can be quite a complicated procedure. Click here to read more.

     

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    Thu, 11 Oct 2018 01:47:00 GMT
    <![CDATA[Cryptocurrency– A Magical Bubble or The Future of Currency?]]> Cryptocurrency– A Magical Bubble or The Future of Currency?

    The noise and media surrounding the notion of cryptocurrency have been increasing the curiosity rapidly. Before curiosity kills the cat, let's walk through the story of cryptocurrency.

    Cryptocurrency is an innovative and a virtual currency that utilizes cryptography for security and this matter it is difficult to fake it. A characterizing highlight of a cryptocurrency is its organic nature; it is not issued by any government authority, rendering it hypothetically resistant to government obstruction or control. The mastermind behind cryptocurrency is the blockchain. A blockchain is digitized and decentralized of all cryptographic transactions. It is the process of converting readable data into a relatively uncrackable code, to track purchases and exchanges. Over the years, blockchain and cryptocurrencies have grown exponentially that uses as a financial service tool to improve transparency and efficiency.

    Not many know that digital currencies rose as a side result of another innovation. Satoshi Nakamoto, the obscure innovator of Bitcoin, the first and still most critical cryptocurrency, never proposed to invent a currency in the first place. In his declaration of Bitcoin in late 2008, Satoshi said he built up "A Peer-to-Peer Electronic Cash System." The primary cryptographic currency was bitcoin, and since then there are currently more than 1,000 different types of cryptocurrency accessible on the web with over 200 Bitcoin ATM's installed around the world.

    The creation of Bitcoin is via a mining process where miners receive compensation for newly issues bitcoins. There is a limitation on the production of the number of bitcoins which is limited to 21 Million. Once the limit has surpassed, the miners will receive transaction fees instead of bitcoin. Individuals contend to "mine" bitcoins utilizing a computer to settle complicated math confounds. There is no curtailment on who can become a miner, all you need is a computer and accessible internet. Bitcoin transactions are not confidential as it is published to the public network to be verified by the system on miners. Therefore, it is possible to trace bitcoin between bitcoin wallets. The storage of Bitcoins is in a 'digital wallet' that exists either in the cloud or on the user's computer that acts as a virtual bank account that allows users to exchange, trade or make transactions. FDIC does not insure bitcoin wallets like bank accounts. The operations are public, the owners of the portfolios can be anonymous. It is the most attractive feature of bitcoin as miners effectually vote on the legitimacy of each transaction as part of the mining process.

    In this modern era of economics, where societies no longer have to rely on banks and other centralized institutions to keep track of their payments and guarantee the financial system. Blockchain technology frees people from this centralized trust. Cryptocurrency makes it less demanding to exchange finances between two parties in a transaction; these exchanges are encouraged using public and private keys for security purposes. These operations are done with minimal fees, enabling clients to maintain a strategic distance from the high expenses charged by most banks and financial organizations for wire transfers.  Cryptocurrency is digital and doesn't have a local repository since its digital it can be wiped out by a computer crash if a backup of the possessions does not exist. Since costs depend on free market activity, the trade rates of cryptocurrency can vary broadly.

    The support of cryptocurrency is only by the trust of users rather than the authority of the state. Money is based on confidence and trust regardless of a nation's currency; whether it is dollars or dirhams, people accept it because it is recognizable as trade. Some argue that Blockchain today has a high potential to become a disruptive technology mainly for its ability to offer decentralized and public but highly secure ledger transactions while others claim that Bitcoin and cryptocurrency in general has zero intrinsic value given that its merely speculative with underlying asset value being zero.Those defending this theory (that Cryptocurrency has no underlying value) defend themselves on subjective theories of value and quantum theories which suggest that a mouse inside a box can be considered alive and/or dead only until the box is opened and observer looks inside. All said, one strong argument against cryptocurrency is that 1) paper currencies are fiat currencies, 2) they are backed by gold or any other hard asset, 3) they have central banks who monitor and endeavor to stabilize their value, all of which does not apply to bitcoin. Does that make bitcoin a riskier investment? If yes, how must risk does it pose?

    Paper vs. Electronic vs. Crypto?

    Individuals have a variety of options when making a transaction from cash, debit, credit, crypto, etc. The massive multinational tech company, Microsoft recently added Bitcoin as a payment option on its online portal to purchase games, movies, and apps in the Windows and Xbox stores. Regardless of whether it is Pound, Dollar or Euros; All necessary cash monetary forms have lost enormously over the last year against the central five cryptocurrencies. Meanwhile, more than the US $ 90 billion has been put worldwide in crypto, and the pattern keeps on rising. The most striking contrast between cryptocurrency and paper money is that crypto is accessible virtually, while paper money exists in tangible form. Paper money accounts in the banking system via account numbers; digital currencies use addresses and cryptography that encrypt private data and mathematically verifies identities. European Central Bank defines virtual currency as an unregulated, digital fund which is issued and controlled by developer and utilized and acknowledged among the individuals from a particular virtual group. Through the use of cryptography, digital currencies are usually safer and more challenging to manipulate compared to the paper money. The transparency on the blockchain minimizes the risk of corruption. Therefore, some states are now considering the use of blockchain in the public sector.

    Credit card transactions are the dominant payment method used across the web. If you have ever bought anything with your credit card from an online seller, you know the drill. Online seller takes the credit card details, and then sends it to a financial system with processors, banks, credit card companies, and other mediators. If you use PayPal or Venmo to carry out your online transactions, a third party takes your bank account details and approves the purchase and notifies the seller. Approaching the third-party system, you can keep the privacy and make a payment through a secure network, but you lose the simplicity of directly dealing with the online seller.  However, cash minimizes the possibility of buyer defaulting his debt. Money has some advantages as it has better anonymity whereas purchasing with credit card requires you to disclose your account details and it is easily traceable. Consequently, cash is not identifiable.

    On the other hand, bitcoin doesn't protect the status of anonymity as much as cash. Bitcoin doesn't require you to reveal your real identity, but there is a connection with a public ledger of transactions and where the invasion can happen in the worst case scenario. It doesn't require a central server but relies on peer to peer network. The disadvantage is that if the Internet fails or the user does not have access to the internet, one cannot execute the transactions. Another drawback is that if the crypto owner loses his key or accidentally wipes his wallet than that's a threat to security. Cryptography is more suitable for tech-savvy users, the acceptance in the traditional trade is still low.

    Crypto Theft

    The murkiness around the subject of cryptocurrency often makes it seem dodgy or a scheme to sucker fools out of their money. Crypto users can be inclined to theft, fraud, and cons, which some contend is made less demanding on account of Bitcoin's structure and absence of control. The very idea of Bitcoin makes prevention of theft difficult, one of the most significant components being there is no real way to recover Bitcoin that has been stolen or conned, and no real way to return the transaction. Cryptocurrencies are not insusceptible to hacking. In Bitcoin's history, we have acknowledged so far at least 40 thefts that exceed US Dollars one (1) million.  The recent breaking news in the crypto world is featuring One of Asia's most significant advanced money trades – Coin check that is known as the 'world's biggest ever cryptocurrency hack.'  Hackers have stolen £380m worth of cryptographic money from one of Japan's biggest advanced trades. Coin check, situated in Tokyo, said that there was a wrongful transfer of around 523 million of the trade's NEM coins to another record. The trade has suspended stores and withdrawals for all digital forms of money except for Bitcoin. In 2014, known to be the single greatest hack ever. At the time of the hack, Mt. Gox (Magic the Gathering Online Exchange) was the biggest Bitcoin trade in the world and took care of 70% of the world's Bitcoin trades. The trade was under a cyber-attack, and the programmer exchanged a large number of Bitcoin from the business to his record prompting the theft of $473 million in Bitcoin.

    Cryptocurrency for Illicit Activities

    Bitcoin is anonymous and flexible, which means its popular among criminals. The record of Bitcoin exchange is in an open log, names of purchasers and sellers that are out in public – just their wallet IDs. There is no bank or central authority, like a government or a state to control this information. It keeps bitcoin users' transaction private and additionally gives them a chance to purchase or offer anything without effortlessly being traceable. That is the reason it's a favorite choice for individuals to purchase drugs or other unlawful exercises on the web. It enables law requirement to track exchanges and have the capacity to make it less demanding to follow Bitcoin back to its proprietor, as was done in 2013 to capture one of the most prominent medication advertises that utilized Bitcoin. Bitcoin also became a conventional method for making payments when a computer system is taken over by ransomware. It has helped ransomware assaults. However, the degree of reprimanding Bitcoin is far from being naturally correct. Web security is considerably fragile, while programmers have been getting substantially more modern, so it would bode well that assaults would rise.

    Despite the fact that Bitcoin can make it simpler for criminals and scammers to play out their devious deeds, regardless it is impeccably respectable and great speculation to invest. Any money has unlawful users; Bitcoin is the same in such a manner. By far most of the clients do utilize it legitimately, similarly as most utilize US dollars or any other currency lawfully. That doesn't mean one shouldn't be observant when using Bitcoin, likewise as you ought to be cautious on the web or to make any other transaction.

    Cryptos Future

    Cryptocurrency gives billions of people access to financial services that otherwise have no bank account. In developing countries, in particular, almost 60% of adults are excluded from the banking system because they do not meet the minimum requirements to open a bank account.  In countries where the currency is not stable like Zimbabwe or Venezuela etc. it serves as means of exchange and conservation. 

    On the other hand, Crypto-related issues are also on the upsurge in companies and banks. At IBM, an estimate that by the end of 2017, around 15% of banks will use blockchain techniques, as these financial transactions are more efficient and less expensive.

    However, no one knows what the future holds for Bitcoin. It is unregulated. A few nations like Japan, China, and Australia have started measuring controls. Governments are worried about tax collection and their absence of control over the money. Be that as it may, you cannot pay the rent utilizing Bitcoin or purchase insurance. There is yet to see what the future holds for cryptocurrencies.  

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    Wed, 15 Aug 2018 11:54:00 GMT
    <![CDATA[Abu Dhabi Global Markets: Civil Court ]]> ADGM Civil Court Proceedings

    Abu Dhabi Global Markets (ADGM) located in the capital of UAE in the city center of Abu Dhabi is an international financial center for local, regional and international organizations. ADGM is a channel that connects UAE with the world with its essential hub for global commerce. ADGM has three independent authorities; ADGM Courts, Registration Authority, and the Financial Services Regulatory Authority (FSRA) that ensure that businesses run within the framework of international practices that are recognized by major financial centers across the world.

    The ADGM, or Abu Dhabi Global Market, is a relatively new free zone, having been established in 2013, and is located on Al Maryah Island. This particular free zone was set up as an international financial center and is fast becoming a vital element of the city's long-term plans, interacting and connecting with International Financial Centers around the globe. ADGM has given life through Federal Decree Number 15 of 2013, under which Article 1 states the establishment of a financial free zone in Abu Dhabi. Following three authorities are responsible for managing the open region and all the companies within:

  • The Financial Service Regulatory Authority (FSRA)
  • The Registration Authority
  • And the ADGM Courts
  • ADGM Law

    Having three independent authorities within the free zone allows for each to concentrate on the legislation under their area of expertise. The law here comes in three levels. At the highest level is the Federal Legislation of the UAE. These are laws from the federal level that act within the free zone and govern some aspects of the activities therein. These include:

  • The UAE Constitution
  • Federal Law Number 8 of 2004, which allows for the setting up of a financial free zone anywhere within the country, and unbinds them from all commercial and civil laws, though it does not exempt them from the countries criminal law
  • Decree Number 15 of 2013/Cabinet Resolution Number 4 of 2013, both of which are responsible for the establishment of the ADGM
  • Cabinet Resolution Number 28 of 2007, which implemented regulations of Federal Law Number 8 of 2004 concerning financial free zones
  • After the Federal Laws of the UAE, there is the Abu Dhabi Legislation, which is:

  • Law Number 4 of 2013, which sets out the governance, legislative and regulatory framework and activities to be carried out in ADGM
  • Beyond these, the rest of the laws under the decision of internal authorities of the ADGM, and include:

  • ADGM Courts Regulations and Rules, enacted on 11 December 2015
  • ADGM Courts Procedures promulgated on 30 May 2016
  • Arbitration Regulations, passed on 17 December 2015
  • Commercial Regulations, adopted 3 March 2015
  • FSRA Regulations and Rules
  • Civil Proceedings within the ADGM

    To begin with, the ADGM has two courts. These are the courts of the first instance, and the court of appeal. There are many elements of similarity with this system and the one used in the UK as will be seen through the civil procedure rules. Some of these similarities include the way the claimant initiates the case, the way in which the defense accepts or denies allegations, and the concept of case management. These are not all of the similarities, and while the elements will not be the same, there are apparent similarities

    The ADGM court procedure rules, which were implemented in May of 2016 and amended in December of 2017, govern the issue of Civil Proceeding within the free zone, and also the matter of evidence and how the court handles. Their regulations are highly in depth, and the entire system within the ADGM adequately organized.

    Part 5 of the rules states that the proceeding begins on the date entered on the claim form, which is to the defense on the request of the claimant. The claimant files the application in the court, who then proceed to question the claim form. The claim form must contain within it what the claimant seeks and should include any particulars and practice directions of the case.

    Part 6 of the rules concern the response of the defense party. The party must come forward with defense within 28 days of the service of the initial claim.  If the defendant fails to reach the deadline, the claimant party may move for a default judgment, which is touched on under Section 39 of the rules. Section 49 relates to the content of the defense response. Within this should be included what elements of the claim the defense chooses to admit, deny and which they cannot accept to or deny but would require the claimant to prove. If the argument fails to do the above mentioned for an activity, they shall be considered to be admitting to it.

    Section 50allows for the defense party to make counterclaims in regards to the case, though they must first mention this to the courts. This counterclaim needn't be directed at the claimant party, though it must be related to the overall issue at hand.

    The parties and individuals present in the litigation are under the rules of Part 7 of the manual. It is also feasible for the courts to provide Summary Judgements on cases brought before them if they feel:

    • The claimant has no real chances of success
    • The defense doesn't have a prospect of defending the claim
    • Or if they think there is no reason for the case to be disposed of at trial

    While the situation is going through the court system, there is an element of case management, which is under Part 12 of the civil procedure rules. Case management is when the court itself takes part in managing some aspects of the case, usually to ensure the trial runs smoothly and the appropriate directions are into consideration. The idea behind this is that the situation becomes more transparent in this way, and there is less wastage of the courts time and money.

    One of how the courts may manage a case is under Section 1 of part 12, which states that is a court decision to do so, they may issue a directions questionnaire to the parties on a specific area of the case. Placing time deadlines upon them to have to have those completed, and Section 4 states that should a party choose not to follow these instructions, the court may take what steps it deems necessary to deal with the issue.

    On top of this, the court sends out a pre-trial checklist to the parties and a date by which the parties should complete the list. It will allow the court to obtain the information they deem necessary before a trial, thus allowing them to make appropriate preparations and be up to date. With this information in hand, the court can accurately decide deadlines for the litigation.

    The Law of Evidence in the ADGM

    The law relating to evidence is the same as the court procedure law and is in Part 14 of the rules. According to the law, the courts have a reasonable degree of control over evidence. They will likely see all of the evidence of the trial before its start, and this is because the parties may request it as part of the pre-trial checklist. It provides the court with a great deal of control over the trial, as they can then choose when specific evidence is required, and they can also decide to exclude evidence from being presented, even if that evidence would have otherwise been admissible.

    About witnesses, the rules set out the basic principles. Once again, the court can decide which witnesses can stand to provide testimony. So long as the court approves a witness, they can be brought forward to prove any fact that requires evidence via oral testimony as mentioned under Section 93 of the Court Procedure Rules. On top of this, as per Section 93 Subsection 4, witness testimony may be given through video chats or other such similar services.

    Parties can use affidavits separately or alongside witness testimony. They are under Section 104 of the rules, and in Section 105, it is clear that the only authorized bodies that may take affidavits are:

    • A notary public by Section 221 of the regulations
    • A Judge of the court
    • The Registrar
    • A lawyer
    • A court officer appointed to perform the duty by a registrar

    The use of photographic evidence, models or plans is not allowed in the courts unless the court has been made aware of these, and has approved of them. This type of evidence under Section 116 of the manual, and Subsection 4 furthers this by mentioning that all parties must be allowed to view and inspect the evidence before it can be admissible in the case

    Another point of importance under Section 117 of the rules and concerns foreign law. The treatment is similar to that of photographic evidence, in that it must be approved of before it can move forward.

    Another matter which receives emphasis throughout Part 14 of the rules is that much of the evidence must get shared with the courts and other parties, and the practice directions must be made clear.

    The regulations are far more expansive than what we discuss presently. It is just the tip of the civil procedure and law of evidence iceberg. The system is highly regulated, with many notable similarities to the UK civil court procedure system, and the ADGM, in general, has big plans for its future, for which a good, well-developed system would be ideal

        ]]>
    Sun, 24 Jun 2018 11:49:00 GMT
    <![CDATA[Company Formation in Abu Dhabi Global Markets]]> Company Formation in Abu Dhabi Global Market

    The impact of globalization and elimination of trade barriers is considered to be an economic merit that consolidated the domestic markets of the world under one roof. However, there also exists an opposing view to this concept. Some financial pundits have argued that this global phenomenon may have paved the path for instability and competition hitches in domestic markets. Further, they also contend that the entry of international players into the domestic markets often leads to a misbalance in the local sectors and industries.

    Nevertheless, minimal trade restrictions and government intervention have increasingly become synonymous with the success of an entity. This requirement equally applies to modern financial centres. The Abu Dhabi Global Market (the ADGM) is currently the most prominent and subsisting example in this regard. The financial free zone became predominant in the region due to scarce trade barriers and absence of restrictions imposed on mainland companies in the United Arab Emirates. Further, the adaptation of international corporate governance techniques along with global financial norms and standards have only acted as a catalyst to this process.

    Setting up a Legal Entity in ADGM

    The ADGM offers investors with superior location and a dynamic business environment to attract investors from the global financial community. Multinational corporations approach the financial free zone with the intention of establishing themselves in the region; whereas, new investors view this as an opportunity to establish themselves at par with the former. Further, the common-law legislations and legal structure of the free zone acted a magnet to the investors who were looking to either, expand or establish their business in the region. The ADGM also covers in-house courts and dispute resolution bodies to avoid the implication of Shariah Law onto civil and commercial disputes that arise within the free zone. The free zone also offers a variety of real estate solutions to meet the high-end and dynamic needs of different types of entities established in the free zone. Customizable office spaces and retail outlets are only a new start to a long list of attractions in the ADGM.

    The robust and extensive set of ADGM company laws that largely mirror the UK Companies Act of 2006 but carefully cover requirements of the region and local regulations. The interesting feature of 'restricted scope entity' providing for minimal disclosure requirements will open doors to holding company structures where investors prefer safeguarding sensitive information and trade secrets and same time prefer a regional holding company.

    ADGM has made substantial development in collaborating with the bigwigs both - domestically as well as overseas. Collaboration with prominent authorities including the Economic Department in Abu Dhabi, the UAE's Central Bank, Insurance Authority, the Securities and Commodities Authority, Abu Dhabi Municipality, the Financial Services Commission in Jersey has set a benchmark.

    ADGM has evolved to be the pivotal point for investors who are looking to undertake financial activities in Abu Dhabi. The dedicated Financial Services Regulatory Authority (the FSRA) regulates and overlooks the licensing of all the entities that are engaged in the financial sector and are looking to establishing their presence in the free zone. The FSRA has endeavored to provide the investors with an ineffable experience by adopting international standards employed in global financial centers in Hong Kong, London, and Singapore. Ergo, the risk-based financial sector would be governed by the FSRA while conducting various activities such as banking, hedge funds, wealth and asset management and other financial services.

    Further, investors in ADGM have the option of setting up one of the following types of companies to conduct their activities in the free zone:

     

    Type of Entity

    Remarks

    Limited by Shares

    §  At least two directors (minimum one should be a natural person);

    §  At least one secretary.

    Limited by Shares (Limited by Guarantee, Unlimited with Shares, Unlimited without Shares, Restricted Scope, Protected Cell Company & Incorporated Cell Company)

    §  At least two directors;

    §  Secretary is not mandatory.

    Branch of (non-ADGM Company)

    Suitable for establishing presence or representative office.

    Partnerships (General Partnerships, Limited Partnerships & Limited Liability Partnerships)

    *depends on the type of partnership

    Branch of (a non-ADGM General Partnership, a non-ADGM Limited Partnership & Limited Liability Partnership)

    *depends on the partnership model

    Applicants looking forward to setting up a company in the ADGM must submit an application form (online) along with the following documents to expedite the application process:

     

    • copy of passport, visa page or immigration entry stamp and Emirates ID of director(s), authorized signatory, secretary and shareholder(s);
    • application form for reservation of proposed name of the company;
    • the business plan of the proposed company;
    • statement of capital and initial shareholding (for companies limited by share capital);
    • statement of guarantee (for companies limited by guarantee);
    • statement of proposed officers of the entity;
    • tradename reservation document;
    • a statement with the intended address of the proposed company;
    • a copy of proposed articles of association;
    • a copy of the resolution of Board of Directors;
    • a copy of lease agreement for office space;
    • confirmation of restricted scope of the company;
    • duly filled and signed data protection form (DP-01)
    • duly filled and signed beneficial or ultimate owner form (BO-01); and
    • any other document(s) that may be required by the authorities based on the scope of activities that the company proposes to undertake.

    However, companies looking to conduct financial activities in the free zone may have to undergo a strict company formation process since the FSRA would review their application. Further, the relevant authority (FSRA for financial services and ADGM Registration Authority for non-financial and retail services) would issue a license once the application form has been submitted and reviewed by them. Subsequently, the applicant would have to apply for the FAWRI account (e-visa online application system) and an establishment card to apply for the visas of the investors and officers who would be working in the proposed company.

    Company formation in ADGM could be an elaborate process (especially for entities undertaking financial activities) with extensive documentation and compliance procedures. Ergo, investors are advised to take assistance from a law firm that provides bespoke legal advice while setting up a company in the ADGM due to the lengthy regulatory procedures and documentary compliances that have been established by the free zone to conform to international corporate norms.

    ]]>
    Fri, 28 Jul 2017 05:00:00 GMT
    <![CDATA[Special Purpose Vehicles]]>  

    Special Purpose Companies or Vehicles (the SPCs or SPVs) are temporary companies set up to achieve a precisely structured financial operation. SPCs provide an alternative mode of financing transactions. Put simply they are subsidiary companies of a parent company, whose assets are protected from the actions of the parent company. In short, they limit financial risk to the property of the SPC.    Special Purpose Vehicles have played a significant role in the seamless operation of global financial markets. Commercial objectives of corporates, multinationals and institutional, as well as non-institutional investors, could be realized by raising capital, securitizing the assets, risk sharing, tax benefits, and carrying out planned activities. These practical features of special purpose company absolve corporations from the risk element.   SPCs can choose to operate on separate balance sheets than their parent companies (called 'off-balance sheets'). SPCs provide their shareholder's limited liability. SPVs generally operate on independent balance sheets instead of recording transactions on their parent or holding companies. For this reasons, parties often consider SPVs as off-balance sheet vehicles. Firms can use these entities as synthetic lease to possess assets independently and is treated as an expense in revenue statements rather than a liability on company's balance sheet. SPVS are commonly used for following transactions:-   •    Securing Projects: - SPCs can help firms secure projects from financial, commercial or operational failures of the entity •    Securitizing loans and receivables. SPVs play a significant role in securitizing loans and other receivables. Governments, for instance, set up SPVs to fund their projects in particular sectors and the SPC entity acts as a catalyst to channelize funds for projects in different areas.  •    Transfer of Assets: SPCs can safeguard firms in the event of bankruptcy or liquidation given that assets once transferred to SPC they become unidentifiable. That said, courts in many countries have ruled that SPC's assets and funds should be linked to the originating firm. Likewise, assets that are difficult or impossible to transfer (for example, power projects or gas plants), parties can transfer such assets as a self-contained package and thereby avoid undergoing a multitude of compliance and permits.  •    Regulatory and Compliance: SPVs can be set up within orphan-like structures thereby preventing regulatory and compliance mandates. •    Financing and Raising Capital: SPCs can be used to finance new projects without increasing costs or altering the shareholding. This aspect makes SPVs an obvious choice to finance aircraft(s), power projects, and infrastructure projects.   The Dubai International Financial Center   In the Dubai International Financial Center (the DIFC), foreign owners are entitled to incorporate SPCs which are used to finance routine transactions. The company which establishes the SPC (the Initiator) is authorized to operate the SPC in the areas of acquisition, granting security interests over assets, financing other SPCs, as well as the parent company, or any other activity approved of in writing at the time of incorporation with the Registrar. These areas of practice are officially known as "exempt activities." Acting outside the scope of exempt activities subject the SPC to a fine of USD 5,000.    The DIFC itself provides an attractive venue for establishing one's SPC due to its separate regulatory framework, including the Dubai Financial Services Authority (DFSA) and Courts. These structures operate on a common law basis, in the English language, providing investors across the globe an easy access point to the Dubai investment market.    SPCs do not have their accounts filed nor audited annually. Also, there is no formal requirement for shareholders to be based physically within the DIFC itself. The Corporate Services Providers (CSP) can act as majority directors and company secretary of the SPC. These CSPs are entitled to receive administration services from third-party management providers and are not required to be appointed directly. However, the majority of directors of the SPC must be employees of the Corporate Service Provider.    It is possible to incorporate SPC as the person(s) (natural or legal) including a shareholder; the CSP; or through any law firm or accounting practice. Incorporation of SPCs in DIFC is carried out per the DIFC Law Number 2 of 2017 (the Companies Law), and the respective Companies Regulation. Formation of SPCs is also possible electronically, by attaching electronic documents submitted within one month of submission. Failure to provide these documents within the one-month time frame subjects the SPC to a fine of USD 2,000.   Incorporation costs are nominal, with the minimum values of shares totaling USD 100. The cost of company formation itself is a mere USD 1,000, with no requirement of obtaining a commercial license. Despite this, SPCs have a limitation in their general scope of action within the meaning of the previously outlined activities. Voluntary winding up of SPCs is possible only in the event a declaration is filed in writing that there are no outstanding liabilities, and (if accepted) the dissolution shall be published on the DIFC online site.   The Abu Dhabi Global Markets   The inflow of investments into the country plays a vital role in the elevation of its economy. Dubai plays an important part in this regard since it houses numerous free zones such as the DIFC that confers with the international corporate governance and financial sector regulation norms. Abu Dhabi, realizing this potential for investments in the financial sector, established the Abu Dhabi Global Markets (the ADGM). Since then, the ADGM has played a vital role in the attracting foreign investors into the country, especially those wishing to incorporate special purpose vehicles.    The ADGM grants investors with a comparatively lenient SPV regime than that of the DIFC since there is no explicit constraint on the number of shareholders. Investors may opt for one of the following legal structures to set up an SPV in the ADGM:   i.    RSC or Restricted Scope Company   The main advantage of an RSC is the curb on the information that should be disclosed to the public (although, investors should note that they may be required to provide all the information regarding the SPV to the registrar). This form of legal entity is used as a family office or a subsidiary of a public company.   ii.    LTD or Company Limited by Shares   Investors who wish to incorporate a holding company or intends to undertake operational activities opt for LTD. These are private limited companies and one of the most common forms of SPVs in the ADGM.  We have noticed a growing trend whereby investors around the globe prefer to establish their SPVs in the ADGM due to their (relatively) flexible regulations. Investors do not have to attest their corporate documents, and there is no minimum share capital for company formation in the ADGM. Although, SPVs in the ADGM may have to provide a registered address in the free zone at the time of company incorporation. But this rule does not necessitate them to have a physical office space. There are numerous options whereby an investor can obtain a registered office address without actually having a physical office space in the free zone (such as choosing a physical space or appointing an agent). ADGM also offers investors with the option of relocating their existing companies from certain other jurisdictions (as long as the firm is authorized to make this transfer by the domestic laws of that jurisdiction). Investors should take the advice of a law firm in Abu Dhabi that provides bespoke legal advice in company formation and is well-conversant with the regimes of the ADGM before initiating the company formation process.   The common law jurisdiction of the ADGM along with their flexible legal regime has attracted an immense number of investors in the past years. Numerous SPVs have been set up in the ADGM for investing in the real estate sector, acquiring and holding intellectual property, asset transfer, risk sharing, raising capital, etc. To know more about setting up an SPV, the documents required, procedural requirements, etc. at the DIFC or the ADGM, contact us!   ]]>
    Sat, 22 Jul 2017 12:00:00 GMT
    <![CDATA[Asset Securitization in the UAE (Part II)]]> Asset Securitization in the UAE 

    (Part II of II)

    In part one of our series on Asset Securitization, we defined asset securitization, reinforced its importance and illustrated the ways in which it is used for financing purposes. In fact, asset securitization transactions had evolved centuries back and were also, incredibly pervasive during the late seventeenth and the early eighteenth centuries.

    Anyone from the Republic of India would easily be able to recognize the name 'East India Company.' This company, a mercantilist corporation of Britain, and South Sea Company, jointly held nearly eighty percent (80%) of the British Crown's national debt by 1729 through the process of asset securitization. They essentially became 'Special Purpose Vehicles' (the SPV) for the British Treasury. Clearly, this process has been pervasive and prevalent for much longer. This part two explores and discusses the concept of securitization within the UAE Regulatory Framework and further highlights the manner of enforcement of security created to secure the rights of creditors.

    Regulatory Framework in the United Arab Emirates

    The securitization market in the United Arab Emirates (the UAE) is at a nascent stage. Hence there is no proper law from which securitization could derive its regulatory framework. However, since its emergence as a leading financial center, the Dubai International Financial Centre (the DIFC ) has been a robust platform for undertaking asset securitization in the country. DIFC has a sound legal structure to facilitate securitization transactions in the country, within conventional and Islamic structures alike. Moreover, in 2008, the DIFC passed the DIFC Special Purpose Company Regulations, which eased the securitization framework within the DIFC for foreign investors and the local businesses. DIFC legal framework comprises of the Law of Security, the Real Property Law, and also the DIFC Security Regulations, which categorically safeguard security created over assets within the DIFC, and by entities based and operating from within the DIFC. Notably, there are several free zones in the UAE, and each such free zone has its regulations for creating security interests by entities licensed within that zone and over assets located therein.

    Any financial transaction is effected and perfected by executing documentation governing the terms of understanding and intent of parties. These documents include the financing documents, which cover the terms and structure of proposed transaction, including security documents, and creating a right over assets of the obligor for its creditors. These documents are a mechanism which ensures a lender's ability to enforce their rights, including taking possession of the property/assets secured, selling it and appropriating the proceeds to repay their debt, in the event obligor, fails to perform. Importantly, the laws applicable to documenting, registering and enforcing security interest created (either in the form of a mortgage or pledge) over assets in the financial transaction are governed by the UAE Commercial Transaction Law (the Commercial Code) and the UAE Civil Transactions Law (the Civil Code).

    In the absence of a separate legal framework for securitization of assets under Dubai law (or; UAE law), the agreements executed between the parties evidencing an Islamic securitization shall be Sharia compliant and adhere to the terms of Civil Code and Commercial Code, both.

    Mortgage

    Article 1399 of the Civil Code defines a mortgage contract to mean "a contract by which a creditor acquires, over an immovable property allocated for the payment of his debt, a real right by which he obtains preference over creditors and creditors following him in rank, for the repayment of his claim out of the price of such property, no matter into whose hands it has passed."

    Article 101 of the Civil Code defines Immovable Property (Real Property) as "anything of permanently fixed nature which cannot separate without damaging or altering its surrounding."

    The Civil Code and Commercial Code (read with Law number 14 of 2008, in cases where the real property located within the Emirate of Dubai) cover the mortgage of 'real-estate' upon terms that are recorded by way of a mortgage deed, by and between the parties. The only way to create a valid and enforceable mortgage is to register the mortgage deed with the appropriate authority (where the immovable property locates). For instance, a mortgage deed gets recorded with the Dubai Land Department and the local Municipality in the Emirate of Abu Dhabi is responsible for registration of mortgages.

    We now examine mortgages created over a 'Musataha' right. Musataha is a form of long-term lease which allows the holder (the Musatahee) the right to use and exploit (including development) the land belong to the land owner for a term of fifty (50) years. The lease is renewable by mutual consent (or; as agreed contractually) for a further period of up to fifty (50) years. Once vested with musataha rights, the musatahee may dispose of such rights in any manner he deems fit. For musataha rights to become active, the musataha agreement granting those rights must be registered either with the Land Department or, the Municipality, as the case may be.

    Similarly, the usufruct is also a form of long-term lease for ninety-nine (99) years. However, usufruct form of 'lease-contract' varies from 'Musataha' as it does not entitle the leaseholder to develop the property.

    It is essential to highlight here that both - Musataha and usufruct can potentially apply to underlying assets for ijara based Sukuk (the Sukuk Al Ijara).

    For safeguarding the interest of the party in whose favor the security creation take place, it is vital to execute and register the security document in the jurisdiction where the property locates, even if the laws of another jurisdiction apply to the financing document.

    Pledge

    • Movable Assets

    Article 1448 of the Civil Code defines pledge to mean "a contract giving rise to a right to retain a property in the hands of an obligee, or a stakeholder by way of security for a right which may be required, in whole or in part, giving such obligee priority over other obligees.

    The Civil Code further provides that it is essential that a pledge must be capable of delivery and auctioned. A 'pledge' must be provided in consideration of an ascertained debt specified at the time of creation of a pledge and created over the movable property. An essential requisite of a perfect pledge is that the creditor must take possession of the movable asset. The asset to be pledged must be in existence at th time of creation of pledge.

    The parties must also record the terms and conditions of the pledge by way of an agreement, which must either be in Arabic or have Arabic translation. There is no formal registration process for pledges created in the UAE and therefore as a prudent step, the document should be executed before the Notary Public to create a record of such security creation, and registered with the local traffic police with a notation of charge on the vehicle's title.

    • Shares

    Creating a pledge on shares involves a written agreement in which all the details of the pledge are set out. Such particulars include the amount, period, event of default, and the terms and conditions pertaining the share pledge.

    Pledging of Shares in joint stock companies and Free Zone companies can effect by delivering the share certificates to the pledgee (mortgagee) as provided for under the UAE Commercial Companies Law (Federal Law Number 2 of 2015, as amended). To effect a valid and enforceable pledge, the 'pledger' should undertake to request the company to register the pledge in the register of shares of the company to secure the full payment of the facility or loan. The pledger shall have the right to receive the dividends and utilize the rights related to the shares unless otherwise agreed in the pledge agreement.

    The Council of Ministers' Decision Number 12 of 2000, shares of a public joint stock company, subject to certain exceptions, must be listed on one of the stock exchanges in the UAE. A pledge over the shares of a listed company is recorded in the share register maintained by the relevant stock exchange where such shares pledged are listed.

    In light of recently amended position about the pledge of shares of a limited liability company (the LLC), Article 79 of the UAE Commercial Companies Law permits shareholders in LLCs to pledge their shares. Any such pledge must be per the company's memorandum and articles of association, under and agreement notarized before the notary public and entered into the Commercial Register maintained by the Department of Economic Development in the relevant Emirate.

    Article 81 of the UAE Commercial Companies Law further provides for a mechanism of enforcement against a defaulting shareholder or partner's pledged shares in the LLC. The creditor enforcing his rights over the shares may agree with the shareholder or the partner and the LLC on the method and terms of sale, by way of private arrangement. Otherwise, the pledged shares shall be offered for sale at court controlled public auction. The shareholder or partner will have the right to buy back the shares from the winning bidder in the auction within fifteen (15) days of such 'auction' on the same terms and conditions.

    For the purpose of enforcement of security, the UAE courts have a vital role in enforcing any security upon a claim being filed by security holder for the realization of debt for the security created. The asset so created shall be realized upon an order passed to that effect. However, since there are no blanket regulations for the enforcement of securities and each case gets decided at the sole discretion of the court, it may sometimes raise uncertainty in the minds of parties.

    An essential factor where UAE scores over other financial markets undertaking securitization transactions are the zero tax regime and non-payment of any stamp duty. The UAE Ministry of Economic Development does not prescribe the payment of any amount of stamp duty on any securitization transaction, which otherwise is quite high in other countries, including India. However, withholding tax may have to be paid on remittance of receivables from an entity in the UAE to another outside the UAE.

    Conclusion

    UAE Economy is still emerging in the field of securitization but it has to act swiftly in order to reap the benefits of risk management and liquidity associated with the securitiation activity. Though Islamic securitization like conventional structured finance purports to generate equal financial opportunities for the originating entity, each transaction of Islamic securitization may invite different interpretations of Sharia law. This may adversely affect the growth of this activity in comparison to conventional securitization. At the same time, the DIFC legislative framework has extended a great support to the UAE economy to jump start financial activities, including Islamic finance. DIFC has set regulations in place to streamline Sharia compliant financial frameworks. It is extremely promising that DIFC has already become the largest global platform for the Sukuk market. Additionally, with the emergence of the Abu Dhabi Global Markets (the ADGM) in the Emirate of Abu Dhabi, there is a scope for infrastructural development in the country which may make securitization a viable source of financing. There is enough scope for development of the securitization on a viable source of financing. There is enough scope for development of the securitization market in the UAE. It is imperative, however, for the Government to push the envelope and develop laws and regulations to facilitate securitization activity with ease.

    ]]>
    Sun, 26 Mar 2017 12:00:00 GMT
    <![CDATA[Clash of Jurisdictions: Applicability of Islamic Finance Principles under English Law]]>

    Clash of Jurisdictions

    Applicability of Islamic Finance Principles under English Law

    As in any religion, one may argue, there exists a spectrum of devout belief spanning from those who strictly follow the teachings of the Qur'an, to those that rarely feel the impact of their faith on a daily basis. In countries where there are both conventional and Sharia complaint banks, there are options for every investor, devout or not, Muslim or secular. The last decade has witnessed the rapid growth of Islamic finance on both an international and domestic platform. Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This fact remains constant even when the primary legislation of the contract is that of common law or civil law country. If judges and law makers fail to comprehend the reasoning of Islamic finance professionals in incorporating Sharia law, the result could be precedents and codes that may hamper the growth of a multi-trillion dollar industry!

    Lord Asquith had refused to apply the provisions of the Sharia Law in the case of Petroleum Development (Trucial Coasts) Ltd. v. Sheikh of Abu Dhabi[1]. He further quoted, "it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments". However, if Lord Asquith could foresee the future, he would have chosen his words wisely before delivering the far-reaching judgment about the inadequacies of Sharia Law. Little did he know that, years later, the United Kingdom would rank ninth in the world in holdings of Sharia-compliant assets and would become the first Western country to issue sovereign Sukuk. Islamic Finance is gaining a foothold in the global financial market as a commercially viable alternative to conventional financing. Remarkably, transactions initiated in the Islamic financial sector no longer remain confined to countries having legal systems based on Sharia principles.

    However, the Sharia-compliant structures of the Islamic finance instruments face a serious impediment when implemented in a non-Islamic legal framework.  Most of the countries do not have a legal mechanism to grasp and implement Sharia law in financial structures. Moreover, the western courts do not have the necessary expertise or resources to interpret and enforce the Islamic finance transactions and the documents based on principles of Sharia law.

    In the first 500 years or so after the Hijrah, Islamic law developed rapidly to accommodate the legal needs of an Islamic Empire and its increasingly sophisticated commercial transactions. However, with the passage of time, more emphasis was given to jurists, and less scope was left for original thinking based on direct reference to the Quran. This change is referred to as the closure of the gate of Ijtihad. The resultant outcome was a stagnation of legal thinking by the leading intellectual Muslim scholars. Thus we find that cross-border Islamic Finance Contracts usually are written under English law. The prime reason proved that English law provides a greater level of certainty to the contracting parties than attempting to write a contract under the rules of Islamic Law.  The Global Islamic Finance Magazine recently held an interview allowing people to explain concisely why English law is the commonly preferred law for cross-border financial Islamic transactions.

    Enforcement

    The Medjella is considered the first attempt to codify Islamic law and represents the endeavor of the Ottoman Empire. The Medjella dedicated an entire chapter to arbitration, stating within it that 'a decision validly given by the arbitrators following the rules of law is binding on all parties.' Decisions by arbitrators were not enforceable except upon confirmation by the judge, and then only if made per law. In the world of Sharia-compliant finance, there has never been more of openness to settle disputes through arbitration. In previous times, and to some extent today, scholars of Islamic law considered the enforcement of the award of an arbitrator to be purely discretionary by the judge.

    At the outset, however, it is paramount to understand why the excessive focus has been put on examining enforceability issues. Parties to a transaction scrutinize the law governing the same to determine whether their rights and obligations would be enforced in a consistent and transparent manner. A primary function of law in any commercial and financial transaction is to provide a considerable degree of certainty and to apply the determinations of the parties in respect to their obligations. The choice of law concerning Islamic finance transactions is more delicate as the parties would naturally want to opt for Islamic law as the governing law of the finance documents. However, parties cannot merely adopt Islamic law as the governing law without reference to the law of a particular jurisdiction since Sharia law is not a standard codified law. Therefore, a codified legal system which exercises the principles of Sharia law is often used as the governing law in an instrument to provide more certainty on the rights and obligations of the transacting parties.

    This embedded in the landmark case of Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd (the Shamil Bank Case)[2], which discussed the scope and interpretation of Sharia law in relation to the English law. In this case, defendants failed to make payments under the Murabaha agreement (the Agreement) entered into with plaintiff and consecutively, the latter claimed the amount outstanding under the provisions of the Agreement. The governing clause in the Agreement stated that "subject to the principles of the glorious Sharia, the agreement would be governed by and construed per the laws of England". The defendants argued that the Agreement contained a hidden form of riba which was contrary to the principles of Sharia and was hence, unenforceable. Therefore, the principal issue of debate at the appellate court was whether the governing law clause in the Agreement required the consideration of the Sharia law.

    The Shamil Bank has been positively accepted by commentators in its two main propositions concerning Shariah as a choice of law, namely: i) the Rome Convention which requires that the law of a contract be that of a country, and ii) there can be only one law which governs a contract. The probability of this conclusion being the same for other common law jurisdictions is very likely also. When the topic regarding governing the law of the Agreement arises, the court held that the provisions of a contract could only be governed by a single law. Therefore, in the present case, the Agreement could not be subject to both, the English law and the Sharia law. Further, the court held that the parties were permitted to choose the governing law of a contract in accordance with the Rome Convention[3]. However, the latter convention has provided that the parties were only entitled to choose the law of a country. Further, the judge held that the general reference to the Sharia law in the Agreement did not explicitly relate to the intention of the parties to incorporate the same as the exclusive governing law. In the light of this judgment, it is implied the moral burden of structuring Sharia-compliant contracts has been placed on the contracting parties due to the reluctance of English courts to permit Sharia law to be chosen as the governing law of contracts.

    Structuring an Instrument in Compliance with Sharia

    Apparent from the Islamic economics literature, is that interest-free instruments must guide the raising and mobilization of financial resources in an Islamic economy. This is a requirement that stems from the moral injunctions well rooted in the Qur'an and the Sunna, which form the epistemological sources of the Sharia. The Sharia invokes an extensively participatory form of profit-sharing system that can replace interest-based financial instruments. Such instruments are traditionally termed profit sharing, or mudāraba, and an Islamic term for a sale where the buyer and seller agree on the mark-up for the item(s) being sold better known as Murabaha. The modern-day murabaḥa is considered as a crucial instrument for facilitating short-term finance for consumer and business requirements. It is used to finance household items, cars or business equipment and/or supplies. It is often used to replicate a conventional trade financing agreement. With the rise of Islamic banking since 1975, murabahah has become "the most prevalent" Islamic financing mechanism. This contract illustrates several methods that are used widely in the formulation of Islamic financial transactions. This includes the conglomeration of nominate contracts, the binding promise and the application of takhayyur which initially was put to systematic use in the compilation of the Majalla, completed in 1876. The principle of takhayyur has expanded extensively in its scope, and has proven to be the major expedient in the modernising legislative reforms throughout the Muslim world. These tools and legal stratagems are pivotal to the industry's gamut of financial structures. However, some of the indemnities comprised in murabaḥa transactions may fall foul under the English statutory law, in particular the Sale of Goods Act, 1979 and the Unfair Contract Terms Act, 1977. These laws prevent the contracting parties from incorporating such indemnities into their contracts depending on the circumstances of the particular transaction. Further, the English domestic industry has faced several regulatory difficulties due to the hybrid legal structure of the Islamic financial contracts. However, the Shamil Bank Case infers that the choice of governing law which would apply to financial documents and the extent of the applicability of Sharia law principles are bound to arise in cases where an Islamic finance transaction is concluded between parties from multiple jurisdictions (both secular and Sharia jurisdictions).

    Consonance between Jurisdictions

    Currently, English law is the most common choice of law for the governing of disputes arising under agreements purporting to adhere to Islamic principles. Some of these contracts contain no references to Islamic law and may even include a waiver of Shariah defense, implying that in the case of a dispute the parties agree to waive any argument that the agreement is invalid under Shariah law. Such stipulations attempt to rectify the Sharia risk, which is a term that became known in the industry as the term associated with the risk that one party will fail under its contact obligations and then state the entire agreement is void for being invalid under Islamic law. This risk exists despite the fact that multinational law firms have created entire divisions dedicated to Shariah-compliant financial transactions. However, the current culture of Islamic finance is liberal, with parties beginning with the assumption that a deal is Shariah-compliant, and contracting parties are not necessarily knowledgeable of Islamic law.

    Hence, the principles of Islamic finance have to be synchronized within the macro-structure of the English Law to maintain concord between the jurisdictions. Further, it can be perceived that financial services environment of the United Kingdom does not prevent the Islamic financial industry from simultaneously developing an alternative financial market. For instance, the government's abolition of double stamp duty in 2003 had ushered in a range of new Islamic financial activity like permitting financial institutions to offer home ownership plans based on a murabaḥa contract. Earlier, these transactions had incurred double stamp duty; first when the property was purchased by the bank and then when the property was subsequently sold to the client with a profit.

    The English government also facilitated the operation of mudāraba partnerships and profit & loss investment partnerships. An important feature of the Mudaraba contract lies in the fact that it places equal importance on both financial and knowledge-based investment.  In these partnerships, the parties providing the ideas and ongoing training for the business venture are viewed as equally important to the venture. The profit share arising from these transactions would normally not be tax deductible by the Islamic Financial Institutions as the dividends were subject to a disadvantageous tax treatment. The government resolved this issue by authorizing mudāraba dividends to be treated as interest paid on loans by validating tax-deductibility on these dividends through an amendment of the Finance Act of 2005.[4]

    Further, the legal systems can be reconciled by standardizing the Islamic financial contracts. However, the issue of standardization is closely related to the controversial debate concerning the codification of the Sharia in any nation state. A partial solution to this problem can be achieved by encouraging the industry to incorporate specific provisions, such as the Auditing and Accounting Organization for Islamic Financial Institutions (AAOIFI) sharia standards into Islamic finance contracts. As long as these rules are sufficiently accurate, they can be construed to operate as a set of contractual terms agreed upon between the parties. Further, the English courts will refer to incorporated standards in their interpretation of English law contracts so that the legal substance of contracting parties' objectives is achieved. Therefore, the determinacy of such norms and criteria would permit for a serene judicial interpretation.

    Conclusion

    The Sharia is a mechanism which governs every aspect of a Muslim's life. A practicing Muslim is required to lead a just and pure life to achieve piety. In this endeavor, his/her income and expenditure must remain free of impurities (such as the receipt or payment of interest). To do otherwise would be to commit a sin. The need for Islamic finance can, therefore, be seen as a spiritual necessity rather than an economic convenience.

    As it is apparent from the above, many cross-border Islamic finance transactions, contracts are often governed by English law with the English courts expressly having the jurisdiction to decide on the necessary disputes. The stagnating fact that an Islamic finance contract, although governed by English law, must still comply with the regulations and reformations of the principles of the Sharia to be rightfully enforced to provide for the just equilibrium of balance and correlation existing between the two systems alike. 

    Sharia Law must develop a distinctive corporate culture, the primary purpose of which is to create a collective morality and spirituality which, when combined with the production of goods and services sustains the growth and advancement of the Islamic way of life as quoted in The Pak Banker.


    [1] Arbitration Between Petroleum Dev. (Trucial Coast) Ltd. v. Sheikh of Abu Dhabi, 1 INT'L & COM P. L. Q. 247, 250–51 (Sept.1951).

    [2] 1 WLR 1784 (CA 2004) (UK)

    [3] European Convention 80/934/ECC on the Law Applicable to Contractual Obligations (Rome Convention) [1980]

    [4] Jonathan G. Ercanbrack- The Law Of Islamic Finance In the United Kingdom (supra)

     

    ]]>
    Mon, 01 Aug 2016 08:02:00 GMT
    <![CDATA[The Fueling Of MLM through Bitcoins]]> The Fueling of MLM through Bitcoin Pragya Gianani; Shahed Abdul-Dayem; and Faraz Salat discuss the legal aspects surrounding multi-level marketing and usage of bitcoins.  

    Any entrepreneur will tell you that the success or failure of a startup, business idea, or product depends on demand. Supply and demand are the basic driving forces of economies. But, when we think of a successful start-up idea, we recognize that success is almost entirely due to an entrepreneur's initiative in fulfilling a demand that they recognized, closing the gap between consumers who require this service, and the aforementioned demand.

    But what about successful business models that didn't depend on demand generation, but demand creation?

    Demand creation is the concept of 'creating what people love before they know they want it.' Essentially, drumming up excitement for a product or service people didn't even know they wanted, and capitalizing off the buzz and magnetism which has been created from thin air.

    Is that even possible? The CEOs of Netflix, Uber, and Kindle would respond in the affirmative.

    The founder of Netflix, Reed Hastings, found himself irritated by the late fees associated with renting DVDs from Blockbuster. He created a demand for DVD-by-mail that eradicated the need to travel to a physical shop in order to rent DVDs and introduced a single-pay subscription system and CineMatch, an algorithm that recommended movies based on the consumer's taste in television. Eventually, it became what we know as Netflix, as we know it today; a purely streaming website for an affordable price, with thousands upon thousands of TV and movie options. Did we need this? No. Was there an extensive demand for this commodity? No. Yet, here we are.

    Bitcoins

    We've seen the rise of Bitcoin over the past few years. In layman terms, Bitcoin is an electronic currency, not regulated by any authorities, providing users with perfect anonymity. Seems too good to be true, and yet, Satoshi Nakamoto single-handedly created this cryptocurrency. It is unnervingly easy to use, requiring only an internet connection and the software associated with Bitcoin mining. A person holds their Bitcoins in what is called an eWallet and exists solely on the internet. Essentially, any transaction involving Bitcoin would require absolutely no middlemen.

    New Bitcoins are created in a process called 'mining,' which involves Bitcoin users' computers attempting to solve a complex mathematical puzzle related to the current number of Bitcoins. Reuben Grinberg of Davis Polk compares it to finding the missing piece of a puzzle. Whoever finds the puzzle piece wins a certain number of Bitcoins, and the process starts all over again. Finding the Bitcoin solution involves an incredible amount of processing power, and so users often band together in 'pools' in order to find the solution and to earn Bitcoins more regularly.

    Why would anybody be interested in this currency? What might have driven Satoshi Nakamoto to spend as much time as he did to develop it? Perhaps it was suspicions in regards to financial institutions and central banks like the US Federal Reserve. Perhaps people seeking privacy might find comfort in the anonymity afforded by Bitcoin transactions. As with gold, the idea is that the value of Bitcoin could survive some sort of cataclysm.

    However, Bitcoin is primarily unregulated in most jurisdictions, despite the volume of Bitcoin transactions taking place. It might be prudent to discover the possibility of potential regulation in the following important areas:

    United States of America

    Federal Tax Law

    • The IRS has decided to treat Bitcoins as property for taxation purposes.

    Federal Anti-Money Laundering Laws

    • Because money laundering crimes often involve transactions processed by banks, the Bank Secrecy Act (BSA) has imposed many record-keeping requirements on banks and other financial institutions. Currently, Bitcoin exchanges and individuals and businesses that change Bitcoin into U.S. Dollars, or other foreign currency, must register with the Department of Treasury and comply with Bank Secrecy Act requirements.

    Canada

    In January 2014, the Department of Finance stated that Canada does not consider Bitcoin to be legal tender. Further, the Canadian Revenue Agency has announced that Bitcoin will be taxed in two ways:

    • Transactions for goods and services will be treated as a barter and taxed accordingly;
    • The profit made from buying or selling Bitcoin for speculative purposes could be considered income or capital and taxed as a security.

    European Union

    In early 2014 the EBA sent the European Commission and European Parliament guidelines for the regulation of digital currencies. The EBA instructed financial institutions to refrain from buying, holding, or selling digital currencies until these new rules are in place.

    India

    In December 2013 the Reserve Bank of India issued a warning about Bitcoin. This led to virtually all Bitcoin exchanges in the country choosing to suspend operations. One Bitcoin exchange reported having been raided by government officials, while another exchange said tax officials visited their premises to investigate how digital currencies could be managed and taxed.

    Israel

    In February 2014 the Bank of Israel issued a generic warning about the investment risks and dangers of fraud, money laundering, and terror financing that come with Bitcoin usage.

    Australia

    The Australian Tax Office (ATO) has stated that income and profits derived from Bitcoin transactions are taxable.

    Let us look at the risks that a cryptocurrency carries, by using the legal framework of India specifically.

    Statutory provisions in India that regulate the issuance, utilization and disposal of currencies (and money) are The Foreign Exchange Management Act, 1999, The Reserve Bank of India Act, 1934 and The Coinage Act, 1906.

    Despite the fact that the terms 'legal tender' and 'bank notes' have not been clearly defined, the nature and characteristics of the terms have been determined according to the aforementioned statutes. Does Bitcoin, a virtual currency, come under the purview of the defined currency? If we apply the principle of express um facit cessare tacitum, virtual currency does not have any place in the ambit of the label 'currency.'

    Bitcoin transactions have been prone to security threats and hacks in the recent past; one instance being in early 2014 when hackers reportedly stole more than USD 5 million in virtual currency from Bitstamp, a major Bitcoin exchange. Cyber-thievery has increased gradually and significantly, with Bitcoins being a frequent target. Since the transactions are contained in the cyber environment, cybersecurity will be a long-standing concern. Due to a lack of confidence and insurance in Bitcoin, there is no sign of consumer protection in the Bitcoin community.  However, if Bitcoin exchanges and the use of Bitcoin were as widespread in the securities market, such security breaches may be construed as acts of cyberterrorism.

    There are also several political and economic implications in the use of Bitcoin, ranging from government policies to economic upturns and downturns, as well as illicit activities.

    As most jurisdictions have not made any decision with regard the status and treatment of Bitcoin in the economy, one of the major dangers is that any government might declare it illegal, leaving the investors helpless without remedy. Further, there are very few nations which have passed legislation on the taxation of Bitcoin, however, it must be kept in mind that since Bitcoin is not a centralized currency, people are not likely to comply with regulations which require them to disclose their Bitcoin transactions.

    Further, anonymous cryptocurrencies such as Bitcoin may be used to engage in illicit activities, not the least of which is drug trafficking. Silk Road was a website launched in June 2011 which sold illicit goods and services. An estimated of $1.9 million dollars' worth of Bitcoin transactions per month were conducted, confirming that Bitcoin is fast becoming the first choice for those conducting illicit activities to shelter themselves from the scrutiny of the law.

    Multi-level Marketing

    Multi-level marketing (MLM) schemes are a form of network marketing characterized participants paying the company in return for:

    1.      the right to sell a product, and

    2.      the right to receive commissions in return for recruiting other participants into the program.

    Perhaps the most renowned and long lasting MLM is 1886 established California Perfume Company, renamed to 'Avon Products' in 1939. Avon made massive headway in yielding legitimacy to MLMs. It created demand women did not know they wanted yet - word-of-mouth business. In a time where women were increasingly entering the labor force, Avon used that to their advantage. Women were able to work and market according to their needs and schedules, allowing them time to look after their families while earning a commission.

    The MLM industry was proceeding on a legitimate legal course until a proliferation of pyramid programs appeared on the scene in the 1970s. A promotion called 'Dare To Be Great' promoted by Glen W. Turner was one example. Like other pyramid schemes, the only 'commodity' that moved through this program was money. No viable goods or services, sold at fair market value, accompanied the recruiting activities. Virtually every state had residents who were impacted by this and other programs which officials successfully argued were mere 'headhunting' schemes.

    The Federal Trade Commission (FTC) established the earliest guidelines regulating pyramids and other entrepreneurial chains and was highly critical of:

    ●       large membership fees;

    ●       programs in which distributors were misled as to the amount of commission they might reasonably earn; and

    ●       programs in which commissions were not based on the sale of the product to the end consumer.

    No legal ruling has had more impact on the direct sales industry than the landmark FTC v. Amway decision. (In the Matter of Amway.) In 1975, the FTC accused Amway of operating as an illegal pyramid. After four years of litigation, in 1979, Amway prevailed. An administrative law judge ruled that Amway's multi-level marketing program was a legitimate business opportunity as opposed to a pyramid scheme.

    Where Bitcoin and MLM meet

    The sale of Bitcoin in and of itself is no more a vehicle for MLM than the sale of any currency, stand alone. Bitcoin MLMs work like other MLMs of a similar nature. For example, one Bitcoin MLM may be one which sells Bitcoin mining hardware and additional educational materials to consumers for a price, from which they may earn a commission by selling Bitcoin mining hardware and educational materials to others. Given the online nature of Bitcoin, it is not even required that one have the hardware they own in their physical possession. Companies can and have providing cloud/remote Bitcoin mining services.

    The most notable case of Bitcoin used in an MLM scheme is that of GAW Miner/Zenminer, who is currently being sued by Securities and Exchange Commission (SEC) on account of their fraudulent conduct in selling hardware to mine Bitcoin.

    The scheme first began with Mr. Garza's business which purchased virtual currency mining equipment from overseas manufacturers and resold them to customers. Later, he began to offer a service known as 'Hardware Hosted Mining.' In short, this process consisted of GAW Minder would host the computer hardware in their own data centers, for a fee, as opposed to shipping out the equipment, but allowed users direct and complete access over their equipment remotely, over the internet. This sort of trade between the seller of the scheme and the user later became known as 'Cloud Hosted Mining'.

    From August 2014 until the end of that same year, Zenminers LLC, under GAW Miners LLC, sold contracts to over 10,000 investors. These contracts, they claimed, represented a share in the profit from using computer power to mine virtual currency. The returns cloud miners received of these shares were in the form of 'Hashlets,' a system the corporation claimed would earn a reward based on the number of virtual currency units one had mined.

    Eventually, the company sold more Hashlets worth of computing power that had existed in their computer centers. The computer equipment they claimed to be selling often did not exist in their data centers or did not back up the number of Hashlets the company claimed had been sold. The company earned approximately $19 million in this way.

    This, the suit claims, misrepresented the amount of computer power associated with the packages investors had purchased and been hence fraudulent. Further, it is claimed that the company did not provide adequate information to the customers as to the sustainability of the Hashlets they mined, nor the basis by which Hashlets were derived.

    Customers' computing power was being neglected, and any choice they believed they were given through the ZenCloud interface was not accurate. Customers became disgruntled as they realize the options they were being sold had no effect.

    Implications

    Despite the risks involved with Bitcoin MLMs, there are perceived perks to such affairs. One of the reasons there has been a surge in Bitcoin exchange is that the practice is not regulated by anybody; there is no centralization of this currency which is so easily exchanged. However, the demand creation for Bitcoin using Multi-Level Marketing may influence banks into treating Bitcoin as a currency which can be exchanged for physical money. This would allow for Bitcoin to be more easily regulated, defeating several features of the currency, though this is not a likely outcome.

    Another perk of Bitcoin is the anonymity it affords its users. Any centralization, or even the use of cloud-hosted Bitcoin MLM, negates either the initial anonymity of an individual or the entire concept in itself. Regardless, Grinberg claims that anonymity is not complete in Bitcoin transactions as they are at present: 'It's possible that using statistical techniques and information that's publicly available [on the blockchain] you could find out a great deal about Bitcoin users.' Further, bitcoin users who reveal information to third parties, either a Bitcoin e-Wallet provider or through joining pools to mine Bitcoins, are compromising their identities.

    Conclusion

    Engaging in Bitcoin may be risky in itself, but its marriage with Multi-Level Marketing could potentially prove disastrous if misapplied. The regulatory concerns are paramount. The possibilities for exploitation of security flaws, crime opportunities, and of potential customers are numerous. The aforementioned positive implications are not minute, but, it still seems like regulation is a necessary concern of all jurisdictions if the rise of Bitcoin MLMs continues. The legal complexity of the creation of such businesses has led to a scramble for a legitimate solution.

    Perhaps the most important consideration is one of accountability. The product involved in this process is a purely economic one, there is nothing tangible to it. As has been presented in the case law, the merging of Bitcoins in MLM companies has led to the lessening of accountability, especially in regards to cloud-hosted Bitcoin mining schemes. It is difficult to hold companies accountable for the acts they commit because there seems to be very little legal precedence for situations that require justice. The most fundamental problem is the lack of confidence that the public entrusts to virtual currencies. Modern states need to found trust in its market should it introduce a formal regulation for virtual currency.

    Technology is a double-edged sword. While the law on Bitcoin in the various jurisdiction is the need of the hour, it's also important to note that needless laws will merely serve to complicate business transactions and restrict opportunities. The government must critically engage with the Bitcoin community. Eminent economists such as George Stigler and Avinash Dixit have emphasized the need for intelligent and dynamic regulations rather than a 'one-size-fits-all' measure. 

    ]]>
    Sat, 16 Jul 2016 07:00:00 GMT
    <![CDATA[Abu Dhabi Global Markets: Rising to the Challenge]]>  Abu Dhabi Global Markets: Rising to the challenge

    Historically, finance has always been 'international' in character; capital has rarely been mobile. Money has moved freely across borders for all of the civilization with gold and silver being global currencies for millennia. With the passage of time, money has been reverting to its natural state with the removal of capital controls and the gradual integration of national capital and banking markets but now on a global scale1.

     

    Rapid advancements in the field of technology, free movement of capital globally, and need to service an increasingly global clientele are creating opportunities that call for the establishment of new world-class financial centers. Any new development in the financial market piques the interest of people globally. London may have edged ahead of New York and Singapore may have become more competitive financial center compared to Hong Kong. These big financial centers now face competition from several new and ambitious challenges and one of them being the Abu Dhabi Global Markets in Abu Dhabi, United Arab Emirates.

     

    The establishment of a financial free zone in Abu Dhabi has been generating buzz since the time of its inception. The establishment of Abu Dhabi Global Markets (the ADGM) under the Federal No. 4 of 2013 came at a time when Abu Dhabi had begun facing the heat of a volatile oil market and needed to broaden its horizons from the oil and gas economy. Upon its commencement of operations in the year 2015, the financial market has been keenly following the progress of this latest entrée in the financial free zone arena. Investors have been speculating whether ADGM can offer similar lucrative options for investment and unparalleled infrastructure as its neighbor, Dubai International Financial Center (the DIFC).

     

    This Article examines the regulatory and legal landscape of ADGM to determine the ease by which businesses may be set up in ADGM.

     

    Regulatory Framework

     

    In ensuring that ADGM maneuvers its operation efficiently, the regulatory framework is hinged upon its three independent authorities; Regulatory Authority, Financial Services Regulatory Authority (the FSRA) and ADGM Courts.

     

    ADGM has demarcated the manner of regulation of registration of companies undertaking financial and non-financial business activities including retail activities. Financial activities are regulated and supervised by FSRA while non-financial ventures and retail organization get filed with the Registration Authority. To obtain a license from ADGM to commence operations, an applicant has first to identify the category of business activities, and the type of company desired to be formed with ADGM. ADGM establishments are allowed to register as a public company limited by shares, a private company limited by guarantee, a private company limited by shares, private legal entity unlimited without shares, limited scope company, private company unlimited with shares and branch of a foreign company.

     

    The applicant company desirous of obtaining a license to undertake non-financial activities will have to submit an application form and supporting documents along with the business plan outlining the activities to the business development team of Registration Authority of ADGM with an initial fee. Consequently, if the Regulatory Authority concurs that the activities desired to be undertaken permissible and the supporting document are found to be in order, the applicant company may then proceed to apply for name reservation with the online registry. Upon successful completion of reserving a name for the new entity, a license to the applicant company for carrying out the activities will be issued. The operational framework of ADGM was presented at length in one of our other articles.

     

    To streamline the process of setting up business in ADGM and for the ease of the investors registering under ADGM, Mubadala Development Company has taken charge of all leasing activities about office premises within ADGM. Investors, now have only to approach Mubadala for the purpose of leasing commercial office space. Similarly, companies desirous of being registered as a financial services provider are regulated by the FSRA, and FSRA derives its powers under the Financial Services & Markets Regulations 2015 (FSRA Regulations) enacted on 4 October 2015. FSRA Regulations provide for the list of regulated activities permissible to be carried out. The applicant company is required to have an initial meeting with the Authorization team of the FSRA wherein the applicant company must have a regulatory plan setting out the activities proposed to be undertaken, internal controls and resources to address the related risks. The applicant company is also required to complete an application form by the name of 'General Information for Regulated Activities (GIRA)", along with additional forms about activities and make payment of the initial fee.

     

    An essential distinction between ADGM and DIFC's permitted business is that ADGM allows the grant of license for the business of commodities-related activities, which so far has not been permitted under DIFC.

     

    Legal Framework

     

    In a bid to provide a transparent and robust system of laws with a well established legal framework, the ADGM legislature has incorporated the English Common law as its keystone and enacted the ADGM Courts, Civil Evidence, Judgments, Enforcement and Judicial Appointments Regulations 2015 and rules to it, independent of the UAE legal framework. ADGM Courts comprise a Court of First Instance and a Court of Appeal as modeled on the English Common Law structure. The ADGM can confer its jurisdiction on all civil and commercial matters except matter about criminal cases, divorce, and inheritance.

     

    Conclusion

     

    While DIFC has had a head start of a decade, ADGM has swiftly risen to the opportunity. The regulatory framework has been in line with the digital age, and for the ease of the investors, the registration process can be undertaken online without any difficulty. If ADGM continues to achieve the objects for which it was established, it shall soon be leading financial hub offering an array of services. In spite of the presence of DIFC, which is still a popular platform for investment, Abu Dhabi's rich oil reserves and one of the leading sovereign wealth assets shall ensure investors are attracted to this upcoming financial center. For more information on ADGM, please get in touch with STA's Abu Dhabi Law Firms expert team of corporate lawyers in Abu Dhabi or call one of our representatives at our ADGM Law Firm office.

     

    _______________________________________________________

    1 The Dubai International Financial Centre, Information Pack - Publication, STA Law Firm available online

     

    Note: This article was originally published on Lexology

    ]]>
    Fri, 27 May 2016 03:00:00 GMT
    <![CDATA[UAE Insurance Law]]> INTRODUCTION:

    The Insurance Third Party Administrators have become the vital section of the insurance industry and changing the facade of the insurance sector all around the world. Third party administrators are neither insurance providers nor insured. They are the service providers bridging the gap between the two and serves the insurer and insured during processing of applications and claims, adjudication, and negotiation of claims including keeping records or maintenance of the plan. The sector needs to be regulated as being in-severable to the process during this era. This article will also briefly accentuate the insurance law under DIFC regime.

    Instructions for Regulation of HITPA

    Board Resolution No. 9 of 2011 Concerning the Instructions for Licensing Health Insurance Third Party Administrators and Regulation and Control of their Business was passed pursuant to the provisions of Article 7 (9) of the Law, recommendations of the Director General of the IA and the approval of the IA board of directors. The resolution sets out several key terms requiring insurance companies to adopt and practice in operation of their business in the region, a brief overview of which is appended below:

    i. Article 2 comprises definitions which are consistent with the Law except for the 'Register' which means the "Register of Health Insurance Third Party Administrators at the IA. The revised definitions of Pertinent Authority and other important terms such as Beneficiary, Health insurance third party Administrator, Medical Service Providers, Excess, Fraud, and Abuse are added.

    ii. Article 3 states that health insurance third party administrator may only be performed by a company specialized in this kind of business and registered in the register. Further, such companies need to adhere to regulations and instructions issued by the medical authorities of that Emirate.

    iii. Article 4 provides the scope of business and provides that the business of Health Insurance Third Party Administrators shall be limited to:

    • Settlement of claims arising from health insurance.
    • Payment of health insurance claims on behalf of the Insurers.
    • Management of health insurance programs approved by the Insurers.
    • The conclusion of agreements with medical service providers on behalf of the Insurers.
    • Development of health insurance programs provided that they may not market or sell them.
    • Establishment of a network for service providers.
    • Provision of consultancy services in underwriting (reports on the analysis of claim expenses and recommendations for effective underwriting policies.)

    iv. Article 5 provides for 'eligibility' to operate as Health Insurance Third Party Administrators (HITPA):

    a. Private or public joint stock company/LLC incorporated under the laws of UAE/ branch of the foreign company and has been practicing the business for a period of not less than two years.

    b. Obtain the license from insurance authority in respect of present resolution in addition to the license from the competent authority in the emirate.

    c. Minimum paid-up capital of UAE Dirham five million.

    d. Objectives limited to the health insurance third party administration

    e. Conclude an insurance policy covering professional liability risks, provided that the sum insured thereof may not be less than AED 3,000,000 (UAE Dirham Three Million) and the excess amount may not be more than AED 100,000 (UAE Dirham One Hundred Thousand).

    f. Adhere to international standards in such practice

    v. Article 6 provides for the limitation and restrains on activities of the HITPA:

  • Neither sell nor market the health insurance policies
  • HITPA not to possess or share in the capital or management of any medical facility or health insurers.
  • The TPA shall separate its accounts from the accounts of funds generated from its activities in the health insurance claims.
  • HITPA should not provide services to insurance companies not licensed to provide service in the state.
  • Cabinet Resolution

    Cabinet Resolution No. 42 of 2009 concerning Insurance Companies Minimum Capital Regulations was issued on 27 December 2009. This resolution applies to all companies, excluding companies operating in free zones in the State.

    Article 3 states that the minimum capital of the company –'the subscribed and paid-up capital' of a company may not be less than AED 100,000,000 (UAE Dirham One Hundred Million).

    The subscribed and paid-up capital of reinsurers may not be less than AED 250,000,000 (UAE Dirham Two Hundred and Fifty Million).

    Article 4 states that at least 75% (seventy-five percent) of the capital of a company incorporated in the State must be owned by natural persons of the UAE or GCC nationals or by corporate persons wholly owned by citizens holding UAE or GCC nationality.

    Pursuant to provisions of Article 6, if the company intends to increase the capital of the company it could be done under a decision of the IA based on an application submitted by the company. For the reduction of capital of the company same rule would follow. The board has the discretion to approve or reject such reduction application in public interest. Article 7 lays responsibility on the companies to comply with the rules stated in this resolution within 3 years from the date of taking effect of the resolution.

    Broker Regulation

    Board of Directors Resolution No. 15 of 2013 is concerning Insurance Brokers concerning the regulation of the profession of insurance brokers sets out the requirements for obtaining and maintaining a brokerage license, including an obligation for a broker to maintain paid-up capital of AED3 million (for UAE companies) and AED10 million (for branches of brokers established in a Free Zone or branches of a foreign company). Further, insurance brokers are prohibited from dealing with insurance companies not licensed by the IA. Vide Circular No. (5) of 2014 issued on 16 January 2014, the Ministry of Economy Resolution No. (543) of 2006 was repealed.

    The Health Insurance law number 11 of 2013 (the Health Insurance Law) came into effect on 1 January 2014 which makes health insurance cover mandatory in Emirate of Dubai including free zones. The companies with the different number of employees were granted different deadlines. The employers failing to cover employees as required by law will incur fines ranging between AED 500 and AED 150,000.

    The Standard notice number 2 of 2015 (SN 02/2015) pursuant to Health Insurance law was issued by the Dubai Health Authority in respect of the Emirate of Dubai. The SN 02/2015 provides guidelines for minimum standards in respect of following:

  • Training and competency schemes.
  • Complaint handling procedure and complaint logs
  • Code of Conduct for Permitted Health Insurance Representatives (PHIRs)
  • Data protection and client personal data confidentiality policies.
  • The SN 02/2015 applies to all the health insurance intermediaries marketing within or into the Emirate of Dubai. The SN 02/2015 sought the submission of documents in respect of the above-mentioned items by the intermediaries registered for the health Insurance intermediary permit (HIIP) since 1 December to receive "unconditional compliance" status from the "conditional compliance" status. The policy document submitted must meet the standards/guidelines stated in the SN 02/2015 to receive unconditional compliance status and sought the submission before 31 August 2015. This date was further extended till December 2015.

    Dubai International Financial Center (DIFC):

    Insurers and Reinsurers operating within DIFC have to obtain Dubai Financial Services Authority's (DFSA) approval before they can carry out insurance business in DIFC.

    In essence, DFSA regulated insurers are not authorized to under direct risk outside the DIFC for individuals or companies based in mainland UAE. The DFSA authorized firms are free to underwrite direct and indirect risks anywhere in the world. However, the authorized firms can act as reinsurers for mainland UAE indirect risks. Therefore, DIFC provides for a wholesale regime instead of a retail platform for insurance within the UAE mainland market. Rule 7 of Conduct of Business Rulebook.

    The DSFA rule book Prudential – Insurance Business Module which applies more specifically to insurers. The rule book does not define the insurance contract and is a guideline for insurers and reinsurers. It elaborates on management and control of risk, long-term insurance business, capital adequacy, measurement of assets and liabilities of insurers, financial and other reporting by insurers, actuaries, consolidated supervision, insurers in run-off and other guidelines.

    Although there is no general rule or market practice as to the content or form of reinsurance contracts issued by DFSA – authorized reinsurers, the terms of such insurance contract will generally dictate commercial arrangements agreed by and between the insurer and the insured including commercial terms, nature and terms of policy, conditions precedents and special conditions if any. The contract will also dictate the terms of dispute resolution before the DIFC court.

    The DIFC Insurance Association has been incorporated as the non-profit body in the DIFC on 29 March 2015. It comprises the professional association of insurance entities at the DIFC.

    Conclusion:

    The regulations are further expected in the sphere of minimum coverage provided by employers, prices of health insurance service products and premiums rates charges by the insurers.

    Originally published on www.complinet.com Complinet Group Ltd (Thomson Reuters) by STA Law Firm

    ]]>
    Mon, 11 Apr 2016 06:34:00 GMT
    <![CDATA[Project Financing - a Primer ]]> Project Finance as the technique of financing any development idea is rapidly increasing in developing countries due to their drive to gain industrial development and improve infrastructural amenities. The infrastructural projects or projects relating to energy industry are usually funded by the government through public funds since historical times due to the mammoth size of initial capital investment required. The governments introduce private parties into big infrastructural projects by public-private partnership (PPP) arrangements considering long-run maintenance of the projects and investing the public funds into other projects. Other incentives for the government can be inter alia to introduce new technology, privatization of some sectors for policy reasons and efficiency in operations of the infrastructural systems.

    The project finance is a complex process involving various parties, stages, process and legal and financial implications involved in the process. Further, considering the bounds of current publication we will outline the other aspects of this work in subsequent volumes of our publication. This article will accentuate the brief account of what is public finance and understanding of the parties involved.

    The project finance is defined as "the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project."

    The project financing is called limited recourse or non-recourse as the major volume of financing is derived predominantly out of revenues generated by the project itself not from any form of share capital. The viability of the project is deliberated upon in pre-development stage which includes concerns such as the title of ownership of assets, revenue generation estimates, profit generation and utility, etc during the planning and financial due diligence. However the concerns in project financing starts with reconciling the interest of various parties involved in the financing. The parties to the project financing are varied and independent having different interests in the project. In pre-development phase parties need to evaluate the financial viability and technical feasibility. General understanding of each party's objective behind engaging into such financing is pertinent to establish prudent negotiations. The parties and their general role along with the some probable objective are listed below:

    1. Host government

    The government of country where project proposed is planned to be based and which will be issuing all the relevant permits, authorization, licenses and subsidies, if any, for the project. The host government is usually contracting authority by entering into project agreement and /or carries out bidding process to allocate the project to private party and thereafter may either handover the project for development as well as later maintenance. The host government may allow private party to develop the project, either conjunctively or otherwise, or take under public ownership after the development of project once the return on its investment has been received by the private party or decide to regain ownership in case of failure by the private sector to deliver the project. The host government's involvement in the project may also be limited to granting consents for project, to granting various tax concessions and / or being partner in the project. The private party financing the project allows host government to allocate resources in other areas of expenditures. The host government can be party to various agreements for the project concerning supply of electricity, water or any other raw materials and imports required.

    2. Project Company

    This is also called special purpose vehicle (hereinafter referred to as SPV). This company is created with sole purpose of project. It can be corporation established for this purpose or limited partnership usually a PPP. This company is often created in host country where project is intended to be carried out. SPV is the center of all agreement and project financing. SPV is owned and managed by its sponsors/shareholders. The SPV is used to finance the large project without putting a corporation at risk or isolate parent company from project-related risk by shifting it on other investors. SPV in project financing allows shareholders to keep project liabilities "off-balance sheet". Such off-balance sheet structure needs review of applicable laws to understand its applicability in host country of project and incorporation of SPV. The host government and SPV enter into project agreement to defining degree of participation by host government and further laying down rights and obligations during the term of the agreement for concession agreement. The host government and SPV may enter into different agreements for different phases. The host government would enter into property purchase or product purchase agreements with SPV after the project completion.

    3.Sponsors

    The sponsors are equity shareholders and /or owners of the project. The main objective is to earn profits either by simple high investment returns called as financial sponsors or by selling the products of parent company usually falling under the category of industrial sponsors as the project is associated to their business activity. However, there can be different factors based on which the sponsors enter into project financing which includes sharing the risk in undertaking the project and carry out project off-balance sheet, enter into new activity by means of diversification and such other corporate strategic plans. The sponsors may be single party or consortium. There can be public sponsors such as municipalities, agencies or corporations whose objective is public welfare or utility. Since sponsors are equity holders they bear the maximum risk of the project they also earn the huge share of the profits is the project is successful. Sponsors enter into management and shareholders agreements or service agreements with the SPV.

    4. Lenders

    The lenders are primarily large commercial banks, national or international. Considering the large scale of investments there is often a syndicate formed of the group of lenders. This includes investment banks, bondholders or multilateral agencies. The lenders in the project financing only have recourse to the assets of the project at hand. The nature of security depends on the negotiations and loan agreements signed between SPV and lenders. The lenders may also create right against parties other than SPV and sponsors such as off-take purchasers for assurance of purchase of the agreed quantity of purchase, construction companies/contractors to complete the construction as per required standards and performance criteria by giving completion guarantees as agreed. These rights must be expressly stated in agreements between the parties directly. Comprehensive security structure needs to be planned based on the review of laws such as ownership of real property laws as project property are the only assets available, bankruptcy laws and any other financial laws as they may hamper the enforceability of security rights of lenders. Further lenders must note that there are often reversion rights available with the host government to prevent wearing down and suspending of any public utility services thereby giving host government right to regain ownership over the project works or developments of the project. Since the lenders are in syndicate the lenders may appoint an agent to represent their interests.

    Multilateral credit agencies such as World Bank, Asian Development Bank, International Finance Corporation, so on and so forth can ensure protection against regional risks to commercial banks such as political risks. Export credit agencies may also lend money to promote that industry.

    Other parties

    Purchasers: As per the off-take agreement the purchaser will be obligated to purchase the products of the project in advance usually found in energy industry products.

    Contractors: The projects will require contractors for various purposes and thereby enter into various different agreements with parties as contractors for construction works vide construction agreements ensuring timely completion and liabilities in terms of liquidated damages for delay. Construction contractors enter into design and perform operations and maintenance (P&M) vide P&M agreement between SPV and operators and engineering, procurement and construction (EPC) contracts for designated works.

    Suppliers: The supplier is important to party to project in terms of technical support and financial estimates as price implications impact entire project works. The supply agreement can be for any requirements during the project such as raw materials. The agreement may be, in a sense, off-take purchase agreement for the SPV. The supply agreements need various price considerations bearing implications on project revenue at different phases. The agreements relating to oil and gas sales usually called gas sales agreement are also supplied agreements from SPV point of view. The factual analysis of depletion of such natural resources needs scrutiny while negotiating the agreement. The practice of selling of portfolio of reserves is also undertaken in the UK, however, a lesser followed practice in developing countries.

    The SPV along with other parties needs legal and financial advisors for reconciliation of interest of parties and negotiations with several parties by keeping in mind the main objective of the SPV while taking up the project whether it is simply financial investment to earn profit or to work in line with corporate strategic plans of business development and associations. The stages in the project financing and risk factors in projects financing from the standpoint of different parties need elaborate assessment and will be addressed in the subsequent publication.

    Read the latest legal update on Public Private Partnership in Dubai here. For more information, contact one of our lawyers in Dubai here.

    ]]>
    Mon, 11 Apr 2016 06:00:00 GMT
    <![CDATA[Dubai Data Law: Let’s share!]]> Dubai Data Law

    In October last year, Dubai introduced the new 'data law' which will allow the sharing of information between public sectors and for the benefit of the private sector. This Article aims to understand the concomitants of such a move.

    Remember that time when a dial-up icon popped up on your screen at the time you logged into the internet connection and had to wait for the system to be connected to LAN? In contrast, all you need to do today is switch on your computer and it is automatically connected to the internet. In the coming years, technology is anticipated to be more intelligently integrated into our lives than it is today. Specialized software and sensors will be used to track resources, respond to the crime or take constant vital signs.  In the words of technology maker Vint Cerf, 'it is almost as everything will be connected to everything.' The inherent risks that such wide exposure will pose to the public, in general, cannot be denied. But when the risk is compared to the magnitude of benefit the economy will have, it appears that the decision makers will be willing to take the plunge.

    In 2013, Obama's 'open' data policy saw a major breakthrough as the White House issued the Executive Order for open and machine-readable government data thereby instilling a sense of transparency in government actions. In 2014, the President's assent was concluded for the enactment of Digital Accountability and Transparency Act 2014 (US Data Law). 

    The general principles under Section 1 of the Executive Order provide the germane frame of reference for implementation of the Executive Order. It states as under:

    "Decades ago, the U.S. Government made both weather data and the Global Positioning System freely available. Since that time, American entrepreneurs and innovators have utilized these resources to create navigation systems, weather newscasts and warning systems, location-based applications, precision farming tools, and much more, improving Americans' lives in countless ways and leading to economic growth and job creation. In recent years, thousands of Government data resources across fields such as health and medicine, education, energy, public safety, global development, and finance have been posted in machine-readable form for free public use on Data.gov. Entrepreneurs and innovators have continued to develop a vast range of useful new products and businesses using these public information resources, creating good jobs in the process." 

    'Open data' and need for its encouragement in the wider context

    Open data means such information which may be available in a defined format for the use, re-use, and benefit of the people. An understanding of the US concept of which data will be open data, required fulfillment of the following:

  • The data should be PUBLIC. This means that subject to applicable and legislative restrictions the data should be available publicly on a platform.
  • The data should be REUSABLE which means that there will be an 'open license' on the data with no restriction on the use and should be non-proprietary. 
  • The date should be ACCESSIBLE which means that the format in which data is provided or published should be retrievable, downloadable and capable of being searched appropriately. To the extent possible, the resources should use granular metadata, data dictionaries, and characteristics of data.
  • As economies are getting more technologically adept, the concept of open data is expected to promote efficiency, interoperability, accessibility, accuracy and economic development wherever legally permissible.

    Imagine the use of such data for monitoring public utilities, understanding the trends relating to utility consumption, managing traffic issues. Open data can provide deeper significance in understanding healthcare innovations, markets trends on commodity consumptions, education trends for starters. Advancements in the field of science, healthcare, and education are more palpable when inferred from an inspiration. Relying on Wikipedia, the idea of software giant Microsoft was born when Paul Allen showed Bill Gates a publication on Altair 8800- a supercomputer.  This concept of 'open date' has gained much acceptance for innovators in technology, as there has to be the reasoning for Facebook and Google to provide 'open source' for its artificial intelligence (AI)  hardware computing design.  These companies do not procure hardware from suppliers like Dell or HP but have inspired themselves to be self-efficient for their hardware needs. Now, with the 'open source'AI, although countless other factors will play the key role, yet this inspiration would be multiplied.

    What does the new law mean for Dubai?

    As it stands today, the new law will be applicable to Dubai rather than have a federal application.

    For starters, the new law provides for 'data sharing' or 'open data' concept rather than 'data protection per se. The scope of such distinction is beyond the purview of the article. The new law is a well-conceived move to making Dubai a SmartCity in coming years.

    Dubai has evolved and is set to evolve more drastically by 2021. The rulers have the vision to make Dubai a SmartCity for which a committee has been formulated to oversee the physics in making dreams a reality. In 2013, the number of tourists in Dubai was a whopping 11 Million. The city offers state of the art infrastructure and services.

    The aim of SmartCity initiative is then to capture data, integrate the same and provide seamless services in major sectors including safety, travel, health, and education. Dubai's smart city strategy includes over 100 initiatives and a plan to transform 1,000 government services into smart services. The project aims to encourage collaboration between the public and private sectors to achieve targets in six 'smart' focus areas: smart life, smart transportation, smart society, smart economy, smart governance and smart environment. The strategy relies on three basic principles: communication, integration, and cooperation.

    Challenges? Considerations?

    With any concerted move, it is only wise to take into consideration the latent risks or challenges associated with such a move.  One such key challenge to the data law will be the protection of privacy and sensitive data. Perhaps the implementation of a 'data protection law' needs to be contemplated. The new law needs to have directives and guidelines with clear objects on each challenge that the policy may face in coming years. While many may construe the above as a soup spoiler, such challenges have only been real and existent in the past. If the policymakers rely on the examples of nations that have tested 'open government data' models, the pattern of these challenges could be mitigated to great extent.

    For instance, in United Kingdom data.gov.uk provides for open government data. A survey by Direct Line Insurance in 2011 found that 11% of respondents[1] claim to have seen but not reported an incident because they feared it would make it more difficult to rent or sell their house. In another incident, the reported crimes for Surrey Street were 136 for 2011 while actual incidents were only two. [2] It, therefore, infers that policymakers will have to adopt much careful approach than it can be visually thought of to offer the seamless services that they have envisaged. If these hurdles can be well mitigated and Dubai is able to tread on the data sharing and smart city initiative, a better quality of life is around the corner no doubt.

     

    [1] http://spatial-economics.blogspot.co.uk/2011/07/crime-nudge.html

    [2] As reported by the Guardian magazine

     

    ]]>
    Mon, 11 Apr 2016 02:00:00 GMT
    <![CDATA[UAE Insurance Law – Detailed Overview]]>

    Federal Overview Within the United Arab Emirates, insurance is largely governed at a Federal level by the Insurance Authority (IA) which was established pursuant to Federal law Number 6 of 2007 (the Insurance Law). The law replaced the previous enactment being Federal Law No.9 of 1984 on Insurance Companies and Agents and the amending laws. The law applies to insurance companies incorporated on shore that are licensed to perform the operation of cooperative insurance, takaful insurance, reinsurance and insurance in general. The IA regulates both conventional insurance and shariah-compliant insurance- Takaful.  Article 7 of the Insurance Law provides for duties and responsibilities and duties of the IA, Article 8 provides for the composition of IA to include a board, director general, and executive body. Article 12 provides for duties and authorities of the Board. Article 7 and Article 12 broadly cover the following:  
    • Protecting rights of insured and beneficiaries of insurance operations, monitoring solvency of insurance companies (Article 7 (i));
    • Devise code and rule of conduct to enhance capabilities of insurance companies (Article 7 (ii));
    • Manage administrative areas, formulate programs and plans for the overall development of the insurance sector, identify risks, and approve incorporation of insurance companies; 
    • Devising laws (include draft laws and regulations), regulations and directives relevant to the insurance industry and implement the same (Article 12 (1) to Article 12(3));
    • Approve annual budget, annual accounts, and appointment of an auditor (Article 12(4) to Article 12(6)); and
    • Acknowledge grants, donations, and aids; and to settle objections received from insurance companies, and executing other duties of Insurance Authority's affairs (Article 12 (7) to Article 12 (9).
      Article 24 of the Law addresses the different form of companies that are eligible to carry out insurance and reinsurance operations in the UAE. These include a Public Joint Stock Company (PJSC), a branch of the foreign insurance company; and insurance agents. Article 64 of the UAE Commercial Companies Law defines a Public Joint Stock Company (PJSC) as "Any company whose capital is divided into equal value negotiable shares shall be considered a public joint stock company and a partner therein shall only be liable to the extent of his share in the capital" Article 26 of the Law imposes restrictions on insurance companies.   In that, the provision seeks to prevent properties existing within UAE (or liabilities resulting therefrom) from being insured outside UAE (this applies also to the branch of foreign companies operating within UAE).   Article 119 of the Law empowers the UAE Cabinet with an exclusive power to issue regulations needed to implement provisions of Law number 6 and this includes issuing regulations relating to fees, the minimum share capital of insurance companies, and other aspects necessary for the insurance industry. In line with provisions of Article 119, the UAE Cabinet issued a resolution (Cabinet Resolution 42 of 2009) raising minimum statutory paid up share capital for insurance and reinsurance companies to UAE Dirham 100 million and UAE Dirham 250 million respectively; and further states that insurance companies must comply with terms of the said resolution on or prior to January 31, 2013. The resolution also sets out that minimum seventy-five percent of the share capital must be owned by a UAE citizen or; a GCC citizen.   Resolutions and Developments IA Code of Conduct   The IA issued board of directors' Resolution Number 3 of 2010 on Directives of Professional Practice and Code of Conduct for Insurance Companies Operating in the UAE. The resolution sets out several important key terms requiring insurance companies to adopt and practice in operation of their business in the region. Below is a brief overview of the Resolution:  

    Serial

    Article reference

    Particulars

    1

    Article 1

    Definitions. Most of the definitions are already covered under the Law except that it provides for a new definition of Minister to mean Ministry of Economy

    2

    Article 2

    Scope and Applicability. The Resolution applies to all insurance companies registered with the Insurance Authority operating in the UAE.

    3

    Article 3

    General Provisions. This article imposes obligations on insurance companies requiring them to conduct their operations transparently, in good faith, and in accordance with best practices. The article requires insurance companies to adopt necessary mechanisms with regards to anti-money laundering (AML) and provides that insurance policies and other documents must be in Arabic along with an accurate translation copy of the same (In event of the conflict, Arabic text supersede). The Insurance authority has also issued a board resolution (Board Resolution Number 1 of 2009 – "Directives on Procedures for Anti-Money Laundering (AML) and Combating Terrorism Financing through Insurance Activities"). The resolution came in to effect from February 2010 and criminalizes money laundering activities. The resolution mandates every insurance company to establish strong AML procedures, know your client disclosures and is subject to inspection of Insurance Authority inspectors.

    4

    Article 4

    Offering Insurance Services and Products. Insurance companies are required to service their clients in a timely and professional manner, insurance companies must make insured aware of means to prevent accidents, provide necessary documents and technical statistics to the insured.

    5

    Article 5

    Pricing. The Directive requires insurance companies to abide by fair pricing practices, and not to charge premiums with inflated amounts, nor reduce the premiums rates, provide a detailed statement of rates to client, adhere to insurance pricing practices, and notify the Insurance Authority of rates the insurance company intends to apply or modify provided however that such notification is made at least thirty days prior to putting them to use.

    6

    Article 6

    Insurance Application. In preparing the specimen for insurance application, insurance companies must ensure that the questions raised therein are clear and comprehensible, spell out clearly terms and conditions related to coverage of insurance policy, provide warnings on consequences of not giving information or give incomplete or inaccurate information, and further the information must be submitted by authorized representative of client and not by its employees. The specimen application must include an advice note informing clients to keep the documents in a safer place and the insurance company must provide the client with a copy of his insurance application.

    7

    Article 7

    Insurance Policy. The terms and conditions set out in the insurance policy must be certain and definite and not loose or vague so as to avoid any misunderstanding. The contents of the insurance policy should be clear, and easily readable. Arbitration clause must be printed in form of a separate agreement by way of accompanying annexure. The insurance policy must clearly describe and indicate the subject matter of insurance, procedures to be followed by insured upon the occurrence of the insured risk, along with insertion of a special clause on arbitration as a mean to settle the dispute between the parties. The insurance policy must further set out that any amendment to the policy shall not be valid unless expressly agreed by parties in writing.

    8

    Article 8

    Policy Renewal. The Directive requires insurance companies to inform their clients on renewal terms, inform that the insurance policy will not automatically renew (unless agreed otherwise). In the event, the insurance policy is nearing the end of the term, the insurance company must inform clients of the same. Policy renewal notice should also clearly set out additional information or documentation required from the client.

    9

    Article 9

    Claim Procedure.This article sets out the claims procedure. This article requires insurance companies to adopt suitable procedures, specimen forms, specify documentation, and determine the suitable term required to deal with claims. The insurance company must notify the client of progress and upon arriving at a decision – notify the client of same within fifteen days from the date of receiving the full claim. Reasons for rejection of claim should not be ambiguous. The company should maintain a separate file for each individual claim received.

    10

    Article 10

    Complaints Register. The insurance company must maintain individual records for every client and register complaints submitted by clients to establish particulars of information such as the date of the complaint, the name of complainant, and related details. The inspectors of Insurance Authority shall have the right to examine complaints' register to verify the information state therein.

    11

    Article 11

    Publicity and Advertisement. Article 11 requires insurance companies to provide the draft specimen of insurance policies, samples of advertisement or media to Insurance Authority prior to releasing the same or broadcasting it to the public. In cases where the information is presented involves statistical figures, such figures should be precise and presented in the accurate technical form. Article bars insurance companies from making any false or misleading disclosures and further provides that insurance company should not include incorrect information in respect of the financial situation of the company thereby giving an inaccurate impression to the public.

    12

    Article 12

    Advertising of Life and Capital Formation Insurance Policies. This Article requires insurance companies to exercise a higher degree of caution when releasing any information to the public in relation to insurance of individuals and fund operations.

    13

    Article 13

    Dealing with Insurance Authorities and Other Official Bodies. In dealing with Insurance Authority and other bodies, the insurance company must at all times transact in a transparent and professional manner. The insurance company must also provide data or information requested by the Director General of Insurance Authority for insurance applications that are rejected by the company.

    14

    Article 14

    Settlement of Disputes Between Insurance Companies and Payment of Balances. This Article sets out that insurance companies shall settle their balances and accounts to ensure smooth operation and with the aim of avoiding any disputes. The Article also encourages insurance companies to resolve their disputes amicably or through Emirates Insurance Association before seeking judicial involvement.

    15

    Article 15

    This Article replaces the Rules Organizing Dealings of the Insurance Companies in UAE Insurance Market implemented by the Ministerial Decree No.296 of 2004 issued by the Minister of Economy.

    16

    Article 16

    The Directive shall be published in the Official Gazette and put into effect following the expiry of three months as from the date of its publication, which is March 21, 2010.

    In the next feature, we will be covering more on insurance law including regulatory updates, Licensing Health Insurance Third Party Administrators and Regulation and Control of their Business, Insurance Brokers Regulations, and the DIFC/DFSA framework.

    ]]>
    Sun, 06 Mar 2016 11:58:00 GMT
    <![CDATA[Share Pledge for Commercial Facilities ]]>

    Diageo, a company more commonly associated with alcoholic beverages Smirnoff, Guinness and Johnnie Walker in the United Kingdom- held almost 27.8 percent stakes in a company called United Spirits Limited, one of the leading spirits company in the Indian market by volume.  A series of share pledges by United Spirits Limited in favor of banks for raising capital later resulted in the stake of Diageo being raised to be more than 57 percent. 

      A fierce and debatable subject which can be an interesting case study on the subject of share pledge is the story behind United Spirits. United Holdings pledged shares of the company United Spirits to raise funds for a distressed business. As it now holds, the bank decided to recall the loans given to Kingfisher Airlines by selling part of the collateral - the shares in United Spirits.    In a more structurally advanced legal system, share pledges have evolved as a means of fundraising for businesses. In the United Kingdom, for instance, a 'floating charge' can be created over the assets or shares of a company. Such a form of security is created in assets which are not constant. The security interest, therefore, floats over funds. Commercial companies or limited liability partnerships agree for events that trigger crystallization of 'floating charge'. Once the floating charge has crystallized due to the occurrence of the event of default, the owner can exercise his rights over the assets.   Countries like the United Arab Emirates are one of the most sophisticated economies in terms of the transactions they witness between the fine print.    Legally speaking, the region has evolved from the stages of infancy to that of toddlerhood. As such, it would be interesting to understand whether the United Arab Emirates, in fact, recognizes the concept of share pledges as collateral security for fundraising or not.    Within the UAE, there are at least six different types of mortgages or securities depending on the nature of collateral, pledge to be one of the kinds. Before discussing the effectiveness of pledges, let us understand what kind of assets qualify as security and could create on what is known as 'charge'.   UAE Civil Code defines immovable property as something which has a permanently fixed nature and may not be removed without damaging or altering its structure. Movable property is, therefore, anything but immovable property. In terms of movable property, a further sub-classification exists, i.e., tangible and intangible. Goods, cash, machines and related are tangible. Intellectual property, the capacity to contract, debts, licenses, and shares are intangible.1    Let us now take into consideration the concept of share pledge. Shares are part of a commercial business and covered under Article 39 of the Commercial Transactions Law. The general rules relating to a 'movable' property by definition are not necessarily applicable to 'commercial businesses' although it is classified as movable. Pledge by definition means the actual parting away of or delivering of possession from the pledgor (mortgagor) to the pledge (mortgagee). However, a pledge within commercial businesses does not follow this rule. In commercial businesses, the mortgagor may continue to enjoy possession of the commercial business.    Article 49 of the Commercial Transaction Law states that pledges in commercial businesses can only be created in favor of banks and not other lenders. In order for a pledge to be valid or effective against third parties, it must be recorded in writing at a registry along with particulars of the pledge to be well specified in such recording documents- the deed of the pledge.    Based on the definition of the pledge, lenders have been careful in creating share pledges in the UAE especially given the fact the most common form of company- an LLC does not involve the issuance of nominal or bearer forms of shares. A nominal share is one where the name of the registered shareholder appears on the share certificate, while bearer form of shares do not have a name appearing on the share certificate. Therefore the transfer of rights or shares for nominal shares is effected by a share transfer deed. In case of the bearer form of shares, such transfer can be effected by physically handing over the share certificate custody to the pledgor.    With the amendment to the Commercial Companies Law, the complexities surrounding the aforesaid have been resolved to great extent. Article 79 of the amended law provides that: 'a partner may transfer or pledge its shares in the company to another party or third party. Such transfer shall be made in accordance with the terms of the MOA of the company under an official document in accordance with the provisions of this law. Such transfer or pledge shall not be valid against the company or third parties until the date of its entry in the commercial register with the competent authority' In light of above, it is inferred that as long as the pledge can be registered on a commercial register- maintained by the regulating authority of a free zone, the economics department or the stock exchange regulators- the pledge will be considered valid and enforceable.

     

    ]]>
    Thu, 03 Dec 2015 12:00:00 GMT
    <![CDATA[Till Breach do us apart - The Law Surrounding Prepayment Premiums ]]>

    There is a severe need for consistency in the market dealing with publicly traded securities as rapid advancements in the legal diaspora can add unwitting complexity to the requirements of the debtors. If the contracts between borrowers and lenders do not outline distinct covenants which comply with the local laws and precedents of the court, it can result in inadvertent and protracted litigation which can be detrimental to both parties.

    The language of a contract is inadvertently the bone of contention between the contracting parties when it presents itself as a dispute that results in or sets a tone of litigation. Here, it is imperative to note that when two parties agree to be bound by contractual obligations, it is usually the result of several hours or even months of negotiation. On the other hand, a trustee that agrees to the terms and conditions of a debt security is not necessarily a party to the discussion or the drafting of the terms of the security but frequently finds himself wedged between the terms of the agreement and in the face of litigation. This two-part series paper seeks to explore and discuss the legal effect of prepayment premiums charged by banks. The First part deals with acceleration clauses found in debt instruments and the second part with the make-whole premiums which has the effect of offsetting the downside risk when the borrower, after enjoying a favorable interest rate on loan during the periods of rising interest rates, unilaterally opts to prepay the loan   The concept and use of make-whole premiums has been used widely in a variety of debt instruments and permits the borrower to redeem the debt before its maturity but subject to the condition that premium is paid.  In other words, borrowers pay a charge in the form of premium for prepaying the debt. One interpretation of such premium is that these charges are nothing but liquidated damages for loss of business (or; loss of revenue) to lender resulting from borrower's early settlement.    Debt instruments also provide for acceleration clauses whereby borrower's performance matures fully upon his/her breach of contract. A question that however arises is whether courts would allow and accept enforceability of contract whereby borrower upon default is required to pay:-
    • acceleration of payment of principal loan amounts;
    • accrued interest; and
    • other outstanding and charges arising from or agreed under the loan agreement.
    A question, therefore, arises whether liquidated damages are enforceable and whether such clauses are in fact penal and fair in nature. Liquidated damages covenants serve multiple purposes including certainty, cost, and expenses incidental to proving losses and in a broad sense - serve the public interest. It has also been argued that 'clauses which simply accelerate liability cannot be considered to be penalties.. the courts have usually enforced such clauses on the ground that they do not increase the contract breaker's overall obligations.'(i)  The other view holds that imposition of such high penalties (ii) are unreasonable, against the public order as well as against national interest iii.    Under what events or circumstances would courts come to the rescue of borrowers and rule in their favor and treat lender's acceleration fee as unreasonable or unenforceable? This questions and other aspects relating to the enforceability of such clauses as penalties under the English law were discussed and summarized in Edgeworth v Ramblas Investments. In September 2008, in the week leading up Lehman Brothers fallout, the acquisition of the Madrid headquarters of Banco Santander which was given the elucidatory name of Ciudad Financiera (Finance City) and considered the most significant real estate asset in Europe; also made the headlines. Marme Inversiones paid for the acquisition by partly using financing where Royal Bank of Scotland agreed to inject Euro 1.6 billion into Marme as a syndicated loan. The remaining sum as junior debt to Marme's parent- Ramblas, a Dutch company; and other loans such as a personal loan from RBS to the two owners of Marme and Ramblas (the Ramblas).   By an Upside Fee Agreement (the Agreement) relating to the junior debt, RBS would be entitled to a significant sum as fee if specific events such as nonpayment of personal loan triggered. Royal Bank of Scotland had transferred their rights and obligations under the Agreement in favor of Edgeworth Capital. With the financial crash affecting one and all across the globe, the breach of the personal loan by Ramblas resulted and like a domino set off an event of default under the junior loan which was accelerated Capital in 2010. Upon default, Edgeworth Capital instituted an action claiming payments under the Agreement and junior loans. Ramblas contended/asserted that a bare reading of the Agreement suggested that no fees became due or payable under the Agreement and further that Edgeworth's claim was in the form of a penalty and consequently inadmissible and unenforceable under English law. The Court held under:-   Edgeworth became entitled to claim the fee when Ramblas defaulted. The court noted that although the circumstances in which the financing contracts were executed were challenging and the fact that the junior loan was essentially a bridging loan, there was a definite commercial justification for Edgeworth to charge a substantial fee. In deciding whether a clause should be construed as the penalty or not, the court held:-  
    • a clause will be a penalty where it is "extravagant and unconscionable with a predominant function of deterrence."
    • a clause will not be a penalty if it is a genuine pre-estimate of loss.
    • even if it is not a pure pre-estimate of loss, it will not be a penalty where it is commercially justifiable, and it can be shown that its effective function is not deterrence.
      This brings us back to the question as to whether pre-payment premiums are liquidated damages or not (v).  An analysis of Edgeworth v Ramblas suggests that clauses such as acceleration clause setting out that monies must be settled upon triggering of one or series of defaults by one of the parties will be enforceable as liquidated damages as long as such claims are genuine pre-estimate of damages; and are not designed to pressurize or succumb a defaulting party to any pressure to perform or settle. The courts also have in other matters rejected arguments based on the premise that if contract provision includes a penalty element that also invalidates provision accelerating the payment of outstanding loan citing that the doctrine relating to penalties is not a rule of illegality but that of public policy (vi) (vii)      Security creation in the United Arab Emirates is categorized by distinct jurisdictions developed and existing under the realm of the federal on-shore legal systems namely -
    • the mainland legal system that is a civil law jurisdiction where the law is based broadly on sharia principles and the French legal system; and
    • the jurisdiction of the Dubai International Financial Centre that was established in the year 2004 which is subject to its own laws and court modeled closely on international standards and principles of common law.
      The DIFC Courts recognize and accept liquidated damages clauses in the agreements viii. Pursuant to Article 21 of DIFC Law number 7 of 2005 on Law of Damages and Remedies allows an aggrieved party to claim from defaulting party - the specified sum agreed under the contract irrespective of its actual loss.  Article 21 (2) of the same law provides that the amount by way of liquidated damages agreed under the contract may be reduced to a reasonable amount where it is 'manifestly disproportionate' to the loss envisaged as capable of results in relation to the loss resulting from the non-performance and to the other circumstances. Article 40 (2) of Law 7 of 2005 also allows DIFC Courts to award punitive damages.    Article 40 (2) reads as under:- "40 (2) The Court may in its discretion on application of a claimant, and where warranted in the circumstances, award damages to an aggrieved party in an amount no greater than three times the actual damages where it appears to the Court that the defendant's conduct producing actual damages was deliberate and particularly egregious and offensive."   Article 122 of the DIFC Law number 6 of 2004 (the DIFC Contract Law) also dealing with non- performance provisions allow an aggrieved party to claim from defaulting party - the specified sum agreed under the contract. Interestingly, however, part (2) of the same article provides that the amount by way of liquidated damages agreed under the contract may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances. We will examine and discuss Article 122 (2) in greater detail in part 2 of the series dealing with make-whole premiums as this clause (ix) forms the basis to decide whether that form of prepayment would be consistent and valid.     DIFC is a relatively new jurisdiction and till date, there are no DIFC court precedents that elaborately discuss the legal implications of liquidated damages causes in greater detail x.    Revisiting Edgeworth v Ramblas at this point would suggest that the provisions contained within the DIFC Contract Law as well as the DIFC Law of Damages and Remedies are consistent with commercial justification offered in the above precedent and DIFC courts would take in to account factors such as whether a clause is a genuine pre-estimate of loss, whether such clause qualifies as liquidated damages. Interestingly however DIFC Courts (pursuant to Article 40 (2) of Law number 7 of 2005) can also award punitive damages, something that will not be enforced by English Courts. Most foreign countries may also refuse to enforce Article 40 (2) on policy grounds xi.   Footnotes:
    • Richard Hooley, Penalty Clauses, Lecture notes dated 31 October 2008 referring to Protector Endowment Loan Co v Grice (1880) 5 QBD 592 and the Angelic Star [1988] 1 Llyod's Rep 122.
    •  A penalty is in the form and nature of a punishment for non-observance of a contractual provision; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation. An award of damages, on the other hand, serves as compensation to the claimant.
    • See Mohamed Aziz v Caixa d'Estalvis de Catalunya, Tarragona i Manresa (Catalunya Caixa)  (2013) Case C-415/11, [2013] 3 CMLR , The national court must in particular compare that rate with the statutory interest rate, and determine whether it is appropriate for securing the attainment of the objectives pursued in Spain and does not go beyond what is necessary to achieve them.
    • Edgeworth Capital (Luxembourg) S.A.R.L and another v Ramblas Investments B.V; [2015] EWHC 150 (Comm)
    • See for instance, Bank of New York Mellon v. GC Merchandise Mart, L.L.C., et al. (In re Denver Merchandise Mart,. Inc.), No. 13-10461 (5th Cir. Jan. 27, 2014) where the courts referring to Colarado law and section 506(b) of the Bankruptcy Code held 'a prepayment premium is not a remedy for breach of contract, but rather is consideration for a borrower's right or privilege to prepay (p. 5). Accordingly, a prepayment premium is not liquidated damages and is not subject to the reasonableness for liquidated damages.'
    • Oresundsvarvet Aktiebolag v. Marcos Diamantis Lemos (The "Angelic Star")[1988] 1 Lloyd's Rep 122, Sir John Donaldson MR  said "Clearly a clause which provided that in the event of any breach of contract a long-term loan would immediately become payable and that interest thereon for the full term would not only be payable but would be payable at once would constitute a penalty as being "a payment of money stipulated as in terrorem of the offending party".
    • For instance in South Africa, the Western Cape High Court of Cape Town placed reliance on borrower's argument citing that acceleration clause was the abuse of lender's position and consequently against the public policy. The court relying on Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (3) BCLR 219 (CC), Paragraph 22 said 'Many people enter into contracts daily and every contract has the potential not to be performed in good faith. The issue of good faith in contract touches the lives of many ordinary people in our country' and held that email demand made by the lender cannot be applied by the lender to gain the massive commercial advantage to the significant disadvantage of the debtor and further that acceleration clause in the present matter had draconian implications.
    • Pursuant to Article 390 of the UAE Federal Law Number 5 of 1985 (the Civil Transactions Law), parties may fix the amount of compensation in advance by making a provision in the contract or by a subsequent agreement. This would mean that parties under UAE law are not under the legal obligation to pay liquidated damages. Further Article 390 (2) permits the courts to vary the contract executed between the parties to reflect the actual loss.
    • In addition to other laws including Article 17 of the DIFC Law of Damages and Remedies.
    • The DIFC courts in (CFI 004 of 2007 between Arabtec Construction LLC v Ultra Fuji International LLC) enforced liquidated damages clause in favor of the claimant. Also, in CFI 034 of 2012 Amit Dattani and Others v. Damac Park Towers Company Limited, the DIFC courts of First Instance dealing with liquidated damages held
    • Refer DIFC Guide to Enforcement - Open for Consultation dated 25 April 2012 available on difcourts.ae. 'Few courts will enforce judgments for the recovery of taxation. Many courts in the Arab world will refuse to enforce a judgment which is contrary to the principles of Sharia.'

     

      ]]>
    Tue, 10 Nov 2015 12:00:00 GMT
    <![CDATA[Legal Functions and Framework in ADGM]]>  

    LEGAL FUNCTION AND FRAMEWORK IN ADGM

    What a year to be investing in the United Arab Emirates! According to statistics published by the International Monetary Fund (IMF), the nation's GDP hit USD 419,000,000,000 (US Dollars four hundred and nineteen billion) in December 2014 – a 4.8 percent increase on the preceding year. The IMF has predicted a four to five percent growth rate over the next seven years, thus indicating that our economy is forecast to go from strength to strength. And this is something of an achievement, given the continuing recession and economic collapses occurring elsewhere in the world at present, particularly in Europe. The advantages of investing in the UAE are, it seems, increasing, with previously-perceived deterrents, such as the lack of an exhaustive and comprehensive insolvency law, soon to be eradicated by the implementation of new laws and procedures.

    Yet the UAE is rife with investment opportunities – with an infinite number of ventures available across a huge expanse of market sectors spread throughout seven Emirates, identifying the most appropriate area in which to invest is by no means a small task. Obviously, the final decision will complement the nature of the activity at hand, but a commercially-astute and competitive investor in the financial market will no doubt want to establish himself in a world-renowned financial center. Until now his choices within the UAE and indeed throughout the Middle East would have been somewhat limited, with the Dubai International Financial Centre (DIFC) dominating the market. But the emphasis here in on the "until now"…

    Established pursuant to Federal Law Number 4 of 2013, Federal Decree Number 8 of 2004, Abu Dhabi Federal Decree Number 15 of 2013 and Cabinet Resolution Number 4 of 2013, the Abu Dhabi Global Market (ADGM) is almost ready to open its doors to investors. As a financial free zone governed by three independent regulatory bodies (namely The Financial Services Regulator, The Registration Bureau and The Courts) the ADGM has the ambition of becoming one of the world's leading financial centers. Despite it's close proximity to the DIFC the ADGM looks set to thrive on account of Abu Dhabi's strong and constant financial position, as supported by natural resources. Such factors promise to encourage financiers to seriously consider their options when selecting a Middle Eastern financial center henceforth.

    When considering a forum, however, an additional consideration will inevitably be the various rights and restrictions afforded therein. Promising potentials and returns are a strong attraction, but the rules and regulations observed by a center may also play a part in an investor's decision-making. In due consideration of such a factor, the ADGM states on its website that "In collaboration with other International Financial Centres, global institutions, and regulators, Abu Dhabi Global Market will develop and support member institutions with the regulatory framework, legal jurisdiction and attractive business environment they need for sustainable business growth."

    So what is the regulatory framework and legal jurisdiction of the ADGM? Until very recently the legislative system has been uncertain, but the latest announcements have confirmed that the underlying law of the ADGM will be that of the common law jurisdiction of England and Wales. For clarity, it seems prudent to note here that "common law" is a legal system in which the prevailing rules and regulations have been established as a result of court/tribunal decisions in previous cases. However in the majority of jurisdictions operating such a system (for example Singapore, Australia and England/Wales) the common law glues together a framework of statutes and statutory instruments. In other words, the prevailing law consists of a mixture of statute and common law, with the provisions of common law often created in order to fill gaps in the legislative framework where specific cases raise awareness of the fact that the law is lacking. For the most part, case law does not actually give rise to new legislation – more guides the courts to interpret certain laws in a specific way, owing to the way in which they were applied in the precedent case.

    Having two methods in place via which laws are created in the same jurisdiction can inevitably lead to complications, such as case law conflicting with the statute. Yet it is a clear feature of the English legal system in particular that where such provisions conflict, the statutory law will prevail. This is a principle which the ADGM will also adopt, which in turn shall help to solve another obvious problem in application of English/Welsh common law therein – namely, what if certain principles of common law developed by the jurisdiction of England/Wales in keeping with its own needs are contradictory to purpose in the ADGM? For example, what if a particular provision of employment law in force in English/Welsh common law opposes the approach that the ADGM wishes to take with regards to employment? Despite adopting the English/Welsh common law as the basis of its legislative framework, the ADGM shall additionally deploy its own set of rules and regulations in certain areas (which may be either drafted afresh, imported from other foreign legal systems, or both). And, just as statute prevails over case law in England/Wales, so the ADGM regulations will prevail over the common law provisions adopted therein. Of course, just as new laws are introduced from time to time in every jurisdiction across the globe, both the common law of England/Wales AND the ADGM will develop new principles in keeping with requirements. New common law provisions of England/Wales shall have the immediate effect in ADGM, yet these may be superseded by new ADGM regulations overruling the same.

    It, therefore, appears as though English/Welsh law is applicable in ADGM, but is not binding. If ADGM authorities (namely, the Board) consider a particular piece of common law to be contrary to requirements, they may simply draft a regulation deeming it as inapplicable. However, under Section 2(2) of the draft regulations currently proposed by ADGM, decisions made by the UK Supreme Court will have a binding effect on the ADGM courts. Given the fact that the ADGM courts shall neither have official links to any UK courts nor have any right to appeal to them or to challenge their decisions, questions have been raised as to whether compelling the ADGM courts to abide by rulings of the Supreme Court is in the ADGM's best interests. Yet given that any civil case escalated to the Supreme Court will have been considered by the UK County Court, High Court and Court of Appeal before reaching such a stage, it seems reasonable to assert that, at some point, a final presiding authority should close the matter. Allowing it's courts to divert from the decisions of the highest judicial authority within its legislative template would leave the AGM's legal system without boundaries, and may discourage participation by investors wary of the fact that the ADGM courts could, in theory, act contrarily to reasoned decisions or fail to establish a clear and precise legal position in relation to any particular matter. It goes without saying that a lack of confidence in a financial center's rules and laws will act as a huge deterrent, and nominating a final and presiding external authority guaranteeing regulation of the court system will go some way towards alleviating such a risk.

    Given that the legal architects developing the framework of ADGM law started with a blank canvas and were free to adopt any provisions that they considered to be appropriate, the decision to apply English/Welsh common law as a live instrument (as opposed to taking the principles thereof and writing them into ADGM law as specific regulations) has been called into question. Why not just "codify" the current common law, thus making the current provisions constantly applicable and more easily accessible? Given its capacity to fluctuate and divert from the statute, common law is often considered as hard to follow – yet despite this, the ADGM Board have decided not to adopt the "hybrid" approach. Although perhaps contrary to the wider UAE's efforts to implement simple and accessible laws, the ADGM's proposed approach pays consideration to the fact that the law is a living organism, and will grow and adapt in order to fulfill the needs of its jurisdiction. And just as a common law provision may rapidly be established when a case demonstrates a particular need for the said provision, a second case may just a quickly call for the implementation of an opposing law (such as the Hookway law, which was implemented in England and Wales in 2011 as case law, but superseded by further law introduced within weeks). Codifying case law would cement the law of a jurisdiction into one particular era, which may quickly render its provisions dated and inapplicable in new situations.  

    We have considered the way in which the ADGM will draft its own unique rules and regulations to operate in conjunction with English/Welsh case law, and have just referenced the codification of common law. But what of the implementation of English/Welsh law (whether common law or statute), amended to suit the requirements of the ADGM? The authorities thereof have recently released a list of UK statutes which shall have effect in the ADGM jurisdiction, many of which are qualified with commentary citing the adaptation or removal of various clauses. Whereas such an approach may defy the point of adopting English/Welsh law (why take the law of a different jurisdiction and amend it to fit? If it doesn't fit, why not disregard it all together and draft appropriate legislation from scratch?) it pays respect to an underlying principle of common law – namely, that there will always be exceptions, and no one law could possibly extend so far as to cover each and every applicable circumstance. Taking the existing law and adapting the same in keeping with current requirements is, by definition, within the spirit of the common law. Prohibiting the adaptation of statute would be contrary to the purpose of adopting a common law system, which by its very nature allows for change as needs arise.

    The list of applicable UK statues is lengthy, and the scope of considering each in turn enormous. Yet a scan of the titles of the various provisions alone will inevitably alert the reader to the fact that some of the laws included were implemented a very long time ago, with the most historic being the Statutes of Fraud Act of 1677. (Here's a random point of interest – the Statutes of Fraud Act actually has very little to do with fraud but instead provides certain guidance with regards to the form that various contracts, such as wills and land-related deeds, should take. Fraud is dealt with under the Fraud Act 2006, which applies in both the civil and the criminal courts). Although the current English/Welsh legal framework is vested in and built upon such historic provisions, the actual law in practice has been adapted and developed in accordance with the specific nation's needs. It consequently has regards to the history, culture and legal ethos of England and Wales specifically. Simply identifying the said law and transplanting it so as to apply in a foreign jurisdiction may, therefore, be a move that is subject to criticism. Although the lawsuits the needs of England/Wales, what evidence is there to suggest that it will suit the needs of the ADGM, which, despite being a free zone, will inevitably be influenced by the culture, religion and social customs of the United Arab Emirates? The legal system of the UAE is founded upon the principles of Sharia Law, and it is therefore likely that incompatibilities will arise between UAE practice and English/Welsh law. This is particularly the case when considering the fact that some of the statutes which the ADGM intends to adopt make specific reference to women (for example, the Law Reform (Married Women and Tortfeasors) Act 1935 and the Law Reform (Husband and Wife) Act 1962). It will be important for the ADGM to preserve the overriding cultural principles of the UAE, despite being legally independent, so as not to deter regional investors.

    It seems appropriate here to pay additional consideration to the fact that case law is not always easily accessible. Even when the adaptation of a particular statute meets no opposition, the fact that the provisions of the same may have been amended by case law in practice is not always obvious. This is the case with several of the statutes on the list proposed by ADGM. For instance, the list shows that various sections of the Law of Property Act 1925, including section 53 thereof, will apply in the ADGM. However, this specific provision (namely section 53(1)(c)) is subject to strict qualification owing to the case law of Saunders v Vautier and later Vandervell v Inland Revenue Commissioners. The decisions of the House of Lords in these matters have binding authority in the courts of England and Wales, and therefore will preside in the AGDM courts as well. However it is not clear to the layman that such provisions are in effect, and the inaccessibility of the law may discourage investors, particularly those accustomed to operating in civil law jurisdictions.

    The ADGM is currently welcoming commentary on its proposed legislative system, thus implying that amendments to the projected framework are still possible. It may, therefore, be the case that the present list of applicable statutes is amended. The addition of extra statutes seems particularly likely given the fact that more recent laws of corporate significance are notably absent, such as the Bribery Act 2010. Given its wide-reaching juridical scope and provisions tailored towards combatting offences which are particularly prevalent in the international finance market, the omission of the Bribery Act is a little confusing, and its inclusion in the list of statutes at a later stage would be far from surprising (albeit amended so as to provide for penalties enforceable in the ADGM jurisdiction). Although specific regulations pertaining to matters such as employment and real estate have been disclosed, the criminal law of the ADGM remains unclear, yet it is widely anticipated that UAE Federal Law Number 3 of 1987 (the Penal Code) will apply. This follows the position in DIFC and all other free zones throughout the UAE, on account of the fact that the respective Boards do not have the power to criminalize and de-criminalize acts.

    Despite being far from mutually exclusive of one another, the legal system and the court system are two separate areas of discussion. We have thus far concentrated on the way in which the ADGM law will be structured – but what of how it will be implemented? In other words, how will its courts be organized? How will they operate? The DIFC notably operates a two-tier system, with a Court of First Instance and a Court of Appeal, thus allowing parties to a matter to challenge the decision of the Court of First Instance in the permitted circumstances. Although the ADGM have revealed that there will be no right to appeal to any UK court, it is not yet clear as to whether an internal court hierarchy will provide any scope for challenging an initial ADGM court judgment. Moreover, there is at present no information available with regards to the enforceability of awards secured outside of the jurisdiction. For example, at present arbitration awards made in the Dubai International Arbitration Centre (DIAC) may be enforced via the DIFC courts as per section 42(1) of DIFC Law Number 1 of 2008. This extends so far as to cover the enforcement of awards made by arbitration tribunals outside of the UAE, particularly where the UAE has entered into a treaty regarding the mutual enforcement of judgments such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). However, it was suggested in the case of Meydan Group LLC v Banyan Tree Corporate PTE LTD that the execution of a judgment pertaining to assets held outside of the DIFC will be exceptionally difficult to conduct, as the cooperation of external authorities such as the police may be required. As yet there has been no announcement regarding the ADGM's powers to enforce awards made in the courts of Abu Dhabi or further afield and, more pressingly, no indication has been given as to any cooperation between the ADGM and other local authorities. Relationships with the Abu Dhabi police force and other significant authorities may, therefore, be an area on which the ADGM should concentrate prior to commencing operations, as this would permit a wider execution capacity.

    Just as the DIFC's common law basis incites many entities to nominate DIFC as its dispute resolution forum of choice, so it is expected that the ADGM will be a popular forum for those familiar with such a system. However as with any free zone, ADGM will take time to develop and grow, and although companies may begin to incorporate therein as soon as the doors are open for business, it will inevitably take some time for commerce to mature and disputes to rise accordingly. It is therefore likely that the ADGM courts will remain relatively quiet initially – unless, of course, the jurisdiction is opened up to entities operating outside of the ADGM. This is a realistic possibility given the fact that, pursuant to Law Number 16 of 2011, the DIFC jurisdiction became accessible to ANY party wishing to refer a dispute as of 31 October 2011, providing that both parties to the dispute had mutually agreed to submit to the jurisdictional authority of the DIFC in writing. When considering the benefits that this has afforded DIFC (in terms of both financial income and the weight carried by judgments issued therein) the ADGM may wish to implement such a strategy with immediate effect. This may be further encouraged by the way in which the DIFC courts are often favored above the Dubai Courts due to the approach they take with regards to awarding legal expenses. Although the UAE Civil Procedures Code allows a successful party to claim legal expenses from the other party this is rarely put into practice in the Dubai Courts, whereas the DIFC courts are proving themselves more likely to apportion expenses in favor of the successful litigant.

    Regardless of the scope of the jurisdiction of the ADGM courts, the tribunal shall be a "court' in the traditional sense – namely a forum in which disputes are heard by a judge or panel of judges, and an executable judgment handed down. The details of any presiding judges are yet to be released, but it is of note that DIFC seats a number of internationally-acclaimed judges, qualified in a number of jurisdictions including the UAE. However, despite the prevalence of traditional litigation as a common dispute resolution mechanism, agreements between parties to refer disputes to arbitration have increased dramatically (particularly in joint venture agreements, given that arbitration is the dispute resolution mechanism favored by parties to construction contracts using FIDIC models). The inclination towards arbitration incentivized DIAC to establish its own arbitration center, the DIFC LCIA Arbitration Centre, founded as a strategic partnership between DIFC and LCIA and operating under the rules of the latter. However in May 2014 Law Number 7 of 2014 announced the establishment of a central Dispute Resolution Authority within DIFC – namely, a singular body creating a "one-stop shop" for dispute resolution by uniting the three independent centres (the DIFC courts, DIFC LCIA Arbitration Centre and Dubai World Tribunal), presided over by the current president of the DIFC courts. No timeline for this unification has been announced, but it remains to be seen what position the ADGM will take with regards to arbitration. Although it may do well to heed to approach soon to be adopted by DIFC, it may be that the emergence of centers therein leaves space in the market for an independent arbitration center within a financial center.

    Despite the fact that the ADGM's proposed legal system differs greatly from that of the UAE it bears striking similarities to that of DIFC in many respects. Given DIFC's high ranking in the world league of financial centers, it seems reasonable to assert that the ADGM is on the right path not only to ensure its own success but also to assist the Emirate of Abu Dhabi in achieving the Abu Dhabi Economic Vision 2030.

     

    ]]>
    Thu, 05 Feb 2015 12:00:00 GMT
    <![CDATA[Abu Dhabi Global Markets]]>

    The financial sector has always been volatile. Yet, the increasing interest it has drawn from public sector initiatives across the globe remain noteworthy. In 2013, the Chinese government introduced the China Pilot Free Trade Zone which was speculated to provide a blueprint for reforming the financial sector. This free zone was a testing ground for the convertibility of Yuan and China plans to accelerate the process of making the Yuan convertible on the capital account allowing foreign investors to use it to invest in Chinese financial institutions. In the same year, the Government of Abu Dhabi also passed the Federal Law Number 4 of 2013 establishing a financial free zone in Abu Dhabi (the Decree). Many of the efforts within the GCC region in establishing financial centers are inspired by the success story of the Dubai International Financial Centre.  The introduction of the Dubai International Financial Centre (DIFC) in 2004 marked the beginning of a well-structured business environment for the financial services domain and sizable investment firms chose DIFC to set up their base in the Middle East. Later, the Qatar Financial Centre was set up in the GCC region however its ten percent corporate tax policy barred it from qualifying for the definition of a 'free zone' and restrained its success in terms of captivating interests of international investors. As such, the DIFC enjoyed unparalleled investor support owing to its world-class infrastructure, the tax-free regime and an independent legal framework.

    With the announcement for the introduction of Abu Dhabi Global Market (ADGM) - a financial free zone in the Emirate of Abu Dhabi pursuant to the Decree - comparisons between DIFC and ADGM are bound to take interesting leaps and bounds. Abu Dhabi is one of the most stable economies with rich oil reserves to boast of. However, it faces challenges in terms of attracting foreign direct investment in other sectors particularly banking and finance; and also those pertaining to increasing exports and making Abu Dhabi lucrative to the larger international market players. The laying down of the foundation of ADGM is a conscious decision by the law-makers and is no doubt a milestone in meeting these challenges.

    The Operations

    ADGM is expected to be operational in the year 2015.  In terms of Article 2 of the Decree, the objective for the formation of ADGM is the promotion of Emirate as a financial center, the development of the economy of the Emirate and the presentation of the same as both an attractive environment for financial investments and an effective contributor to the international service industry.' The Decree further lays down the core constitutive ingredients for the setting up of the ADGM. It states that ADGM will be operated by and between three autonomous bodies, namely (i) the Global Market's Registration Bureau (ii) The Financial Services Regulations Bureau and (iii) the Global Market's Courts; each of which shall have different regulatory, compliance and legal functions.

    Article 14 of the Decree provides that licensed ADGM establishments can carry out the following activities:

    (a)    Banking and financial services activities including funding services;

    (b)   Investment business, commercial and private banking, wholesale trading and electronic banking, managing, dealing and arranging investments;

    (c)    Accepting deposits (excluding deposits taken from the state's market or dealing in UAE Dirham), opening and maintain bank accounts of all types for third parties;

    (d)   Trading in and dealing with all types of financial instruments, currencies, commodities, metals and derivatives of all types (including trading and dealing on margin with spot and forward contracts or through the offering, buying and selling of financial           futures and options of all types) and short selling as permitted by Financial Services Regulation Bureau;

    (e)   Storage, processing, and delivery of all types of commodities and metals whether through actual delivery or the delivery of instruments representing such commodities and metals and related complimentary services;

    (f)    Financial and monetary brokerage including prime brokerage activities;

    (g)    Providing Islamic financing and Islamic banking;

    (h)   Establishment and management of assets and funds, trust, and fiduciary services;

    (i)     Custody, settlement, clearing and deposit activities;

    (j)     Transportation and shipping including sea, air and rail shipping;

    (k)    Selling, buying and issuing of shares, bonds, Sukuk, and other financial instruments;

    (l)      Providing insurance, re-insurance, and brokerage services in line with Federal law Number 8 of 2004;

    (m)   Auditing, accounting, legal and other ancillary services; and

    (n)   Support and assisting works for financial and banking activities.

    The Global Market will not just provide tax-free and internationally recognized legal jurisdiction but will also help in training and educate young Emirati.

    The Legal Framework

    Article 14 of the Decree provides for the establishment of a two-tier hierarchical system of courts within the ADGM- the Court of First Instance and the Appeal Court. A chief justice would preside in the ADGM courts whose remuneration shall be fixed by the government. 

    While the Decree goes on to provide clear indications on appointment, duties, and tenure of the judges it leaves much to apprehension in terms of the law governing operations within ADGM. Specialists debate that with DIFC providing a Common Law inspired legal framework, ADGM shall follow similar footprints. It is, however, clear that being a free zone, ADGM will be subject to the federal law governing the free zones in UAE.

    In Essence

    Government and administrative efforts are being streamlined to make ADGM operative by 2015 as planned. Whether this proposed new financial free zone which is in close proximity to DIFC will have an adverse effect on the growth of DIFC cannot be commented upon. What remains to be seen is whether this free zone, to be located on Al Maryah Island, will add any feathers to the cap of the financially stable Abu Dhabi economy or not.  Without a doubt, if ADGM is able to achieve the objectives enshrined in its preamble, the Emirate of Abu Dhabi will be a major commercial hub to look out for. In sharp contrast to the competitive side which is speculated, ADGM may, in fact, serve as an extended platform for DIFC, in the long run, should there be cooperation between the two bodies.

    For more information, please contact one of our lawyers in Abu Dhabi and lawyers in ADGM office today!

    ]]>
    Wed, 19 Nov 2014 12:00:00 GMT
    <![CDATA[Even CO2 sells! ]]>

    It is the striking imagery of global warming that opens our eyes to the idea of climate change. The melting snow caps, the stranded polar bears, declining air quality and the rising ocean temperatures are images that have had a searing effect on the human mind and encouraged dialogues about the changing face of our planet.

    The US government is divided when it comes to acknowledging the climate change or the effects of global warming.. On the other hand, the EU nations are already in a two-year trial phase of the European Trading Schemes, a scheme aimed at minimizing the carbon dioxide and related emissions. The rising prices of energy are having a global impact and people are concerned if not frightened, about their own carbon productions.

    The United Nations Framework Convention on Climate Change (UNFCC), an international treaty with 192 parties introduced the Kyoto Protocol (the Protocol) that came into force in the year 2005. This treaty imposes binding obligations on developed nations to reduce the release of greenhouse gases such as Co2, hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs). The Protocol acknowledged that the developed countries are principally responsible for the significant levels of greenhouse gas releases in the atmosphere. Historically and statistically, US is the highest emitter of greenhouse gases and although it is a signatory to the Protocol, it has not ratified the same till date. Consistent with the Protocol's objectives, a number of developed states committed to reducing Co2 and related emissions. These commitments are legally binding. Developing economies do not have binding targets under the Protocol but have committed to significantly reduce their carbon creation. After much debate and consideration, it was accepted by member nations that Carbon trading was the preferred method of regulating carbon emissions rather than carbon taxation.

    Carbon trading is the name given to a system to control carbon dioxide emissions. This system is based on the premise where a limit is set on carbon dioxide emissions by governments or international organizations. Carbon trading allows developed nations to trade their commitments under the Kyoto Protocol. They are permitted to trade their carbon emission quotas among themselves and also receive carbon credits for financing projects in developing countries that are aimed at reducing carbon emissions.

    The countries that are legally bound by the limits set and agreed to by the Protocol are referred to as compliance markets. Within the compliance markets, the responsibility to reduce carbon emissions falls on individual industries and companies to emit less carbon into the atmosphere. Let us illustrate this with an example:

    Company A and Company B are both allocated 100 carbon credits which permits them to emit 100 tons of carbon dioxide. Company A invests in environment-friendly machinery and installs upgrades to ensure that it only emits 90 tons. Company B has not implemented either of the options as they cannot afford a refurbishment of their machinery. They are emitting 110 tons of carbon dioxide which is 10 tons above their allowance. Now in order to comply with the Protocol and to ensure that it satisfies the rules governing carbon emissions, Company B can buy carbon emissions allowance (in cash) from Company A. And this, in turn, helps Company A recover some of the monies spend on the upgrade of their machines.

    Carbon credits have thus created a market by giving a monetary value to the cost of polluting the air. There are a significant number of national and regional carbon markets that are currently in the process of being developed.

    In addition to the above example, individuals, groups and organizations can also trade in carbon credits. The markets that cater to conscientious citizens and organizations that are looking to be carbon responsible can trade within the voluntary carbon markets (i.e. markets other than compliance markets that are not legally bound to adhere to a set limit on emission.

    All said these carbon credit transactions have raised alarms in the global trade community. It has been argued by economists that if the carbon market is left unregulated and allowed to operate freely, there will be no significant decrease in carbon emissions. They believe that there are not adequate incentives for companies to reduce emissions under the principle of carbon trading. It is a difficult concept to implement and regulate the voluntary carbon market. Lack of coherent regulations, absence of unified authority to monitor and control the carbon trade may become a boon for a few such as bankers and traders but leave a far more damaging effect on many in the global community.

    Clearly, unlike traditional commodities, carbon emissions are not very well understood by buyers and even some sellers. This lack of knowledge and understanding makes carbon emission trading highly vulnerable to fraud. This form of trading is still in its infancy and it is certain that as this market develops so will the complexity of trading. The carbon trading market can be fraudulently manipulated by claiming more carbon credits from certain projects that were actually obtained. There have been a number of instances where carbon credits have been sold to people with good intentions, but in essence, they never existed or belonged to someone else entirely (and not the person who posed as the seller). The complexity of the carbon markets has been taken advantage of by companies that have made false claims about the financial and environmental benefits of investing in carbon emissions to make such investments look attractive. An Australian company in the year 2009 ran a telemarketing campaign, claiming that carbon credits were the future and offering high returns on their investments. The company was prosecuted for having defrauded investors of over 3.2 million USD. [1]

     It has been reported that the weak regulations in this trading sector have been taken advantage of to carry out money laundering, tax fraud, and securities fraud. In Regina v Dosanjh and others, the Southwark Crown Court in London found three defendants who had established dummy companies that were seemingly importing carbon credits into the UK, guilty of defrauding the UK government of 39 million pounds of VAT (Value Added Tax) in just 69 days of trading. The stolen VAT was then transferred to bank accounts in the UAE to launder and legitimize.[2]

    The complex nature of the carbon credit market makes it easier to manipulate. It is critical that legal regulation is more stringent when it comes to the regulators and traders being permitted to trade in this commodity. This market is bound to get more multifaceted in the near future and there is a need for rigorous domestic and international legal review to protect the companies and individuals who are looking to be environmentally conscious. Today Co2 sells but what do can we expect the future to emit?

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    Mon, 05 May 2014 12:00:00 GMT