Entrepreneurial Litigation

Name: Chris Williams

Contact: chris.williams@bracewell.com

Company: Bracewell LLP (Dubai Branch)

Website: bracewell.com

Position: Managing Partner, Dubai

Date: 29.1.2020

Industry: Professional services

Tell us about your practice. How can entrepreneurs benefit from the services?

I am a company commercial lawyer whose practice involves advising clients throughout the world on their Middle East operations. This includes advising on mergers and acquisitions, joint ventures, complex commercial contracts, regulatory issues, employment matters (contentious and non-contentious) and general corporate advisory work. I also support our clients in their disputes, working in conjunction with local litigation firms. My clients come from a variety of different sectors and range from large multi-national corporations and defence contractors to start-ups and entrepreneurs.

Many entrepreneurs and start-up companies struggle with the question of whether they should consult lawyers in advance or only when troubles arise, and the answer is simple: yes, they should consult a lawyer early as possible. In a budget-conscious start-up and SME world, lawyers can be seen as an expensive luxury item when compared with competing pulls on tight budgets, but this does not need to be the case if you find lawyers that “get” start-ups and early stage SMEs and that those start-ups and early stage SMEs can buy into the value that a commercially minded lawyer can bring to their business.

We can guide start-ups and entrepreneurs in answering critical questions, including how to: protect ideas and concepts; manage their shareholder relations; pitch and structure external funding; enter into commercial agreements with clients and suppliers and; how to manage employee related matters.

We can help start-ups avoid simple mistakes that may come back to haunt a business in the future.  Our experiences means that we can problem-spot beyond legal issues.

What legal challenges do entrepreneurs face whilst incorporating a business in the UAE?

Entering any new market (the UAE included) brings with it multiple challenges for businesses and entrepreneurs, not least getting to grips with the legal framework governing that market, whether it be from the point of view of structuring a company and its ownership (particularly onshore where there are foreign ownership restrictions in place), entering into contractual arrangements with customers and/or suppliers, employing people or resolving disputes.

The most common challenge entrepreneurs face whilst incorporating a business in the UAE is understanding the difference between the various offshore jurisdictions and how those differ to setting up on-shore (including the various licencing options) and how such differences can affect the operation of their business. A particular challenge related to this is understanding the restrictions on company ownership by non-GCC nationals for onshore limited liability companies.

What are some legal actions entrepreneurs can take in advance to streamline the process?

Hiring a professional incorporation agent when establishing a new business entity can be money well spent and can certainly streamline the company formation process. 

Giving consideration as to where that entity is set up (onshore versus free zone, Dubai versus Abu Dhabi) not just from a day one perspective but from a future standpoint is important, e.g. nationality of shareholders and potential tax issues (particularly where people move from the UAE), ease of seeking future investment, ability to introduce different classifications of shares, shareholder exits, i.e. trade sales, private equity or public listing.

In tandem with the establishment of the business, I would strongly recommend instructing legal counsel to assist in the drafting of a Shareholders’ Agreement (or the like) that regulate the relationship between the various shareholders in the business/ Entering into a Shareholders’ Agreement forces the entrepreneurs to think about important legal issues they would in all probability never have considered, particularly at the outset when all parties views and thoughts are fully aligned and the thought of any dispute arising is not at the forefront of their minds.  These issues will include consideration of:

  1. voting and decision making;
  2. termination and liquidation;
  3. restrictions on the parties;
  4. minority protections, where shareholders do not carry the same shareholding and voting rights;
  5. resolution of deadlocks;
  6. transfer and issuance of shares; and
  7. termination and liquidation.

Can you explain the legal difference as well as the drawbacks and benefits to the same?

For existing businesses expanding into the UAE there are a number of different business structures that can be adopted.  The first, is to have no presence in country and instead appoint either an agent or distributor; the second is to establish either an onshore representative office or branch office, both of which are limited in their scope of permitted activities; the third is establishing a limited liability company whether in an economic free zone or onshore.  For businesses starting in the UAE option three is by far the most common.

The UAE Companies Law (subject to the newly enacted Foreign Direct Investment Law- which is covered elsewhere in this Q&A) provides that a non-GCC investor is permitted a maximum economic interest of 49% in an onshore limited liability company and that a UAE national must hold a 51% interest.  There are a number of common ways of structuring around this issue, but the point remains. 

Consequently, the economic free zones were established to permit foreign investors 100% foreign ownership. 

However, being registered and licensed in a free zone does not provide that entity with the rights to trade onshore, so for example if you are a manufacturer of widgets in Jebel Ali Free Zone and want to sell those widgets from into Dubai, you will need to appoint an agent or distributor to do so.  As such, consideration should be given as to what the nature of the business being undertaken, where the customer base is and where will services/activities be undertaken.  Again these are all matters that can be discussed with your professional advisors.

Once the entity is up and running what are some of the legal challenges businesses face whilst operating in the region?

Navigating the often complex administrative and regulatory landscape applicable to businesses and understanding what needs to be done from a compliance perspective is a common challenge businesses face whilst operating in the region. In addition, many businesses struggle with human resource matters, including issues relating to recruitment, talent management and compliance with legal obligations.

Word on the street is that there is always concern over companies and or consumers not following through on deliverables. a) for the consumer concern are we close to developing a functional consumer credit system such as a Experian or Equifax and b) what are the government doing to better regulate this concern for B2B providers?

This is a concern no matter where in the world you are undertaking business and is another good reason for having robust contracts which clearly set out what can be done when things do go wrong.  Consideration for example should always be given as to where disputes will be heard, for example, thought should be given about the use of both the DIFC and ADGM courts and recent developments relating to judgments of each being enforced through the Dubai and Abu Dhabi courts respectively.

The government have introduced the Al Etihad Credit Bureau which is now fully operational. The Al Etihad Credit Bureau is mandated to regularly collect credit information from financial and non-financial institutions in the UAE. The Al Etihad Credit Bureau aggregates and analyses this data to generate credit Scores and produce credit reports that are made available to individuals and companies in the UAE.

We have seen the regulations change over time for expatriates, a recent example would be the lifetime visa.  What changes are on the horizon that investors can look forward to?

The most exciting change, which we will continue to see play out over the next few years is the introduction of the Foreign Direct Investment law (“FDI Law”). The FDI Law establishes a framework and pathway towards enabling 100% foreign ownership of UAE Limited Liability Companies (LLC) outside of the various UAE designated free zones. Up until the promulgation of the FDI, all onshore LLCs in the UAE were subject to foreign ownership restrictions meaning a foreign investor could only hold a maximum of 49% of the share capital with a UAE national or company holding as a minimum 51% of the LLC’s shares. The FDI Law has removed the foreign ownership ceiling in certain sectors and has specified a total of 122 economic activities across 13 sectors which will be eligible for up to 100% foreign ownership. 

These sectors include:

• Administrative services;

• Agriculture;

• Art and entertainment;

• Construction;

• Educational services;

• Healthcare services;

• Hospitality and food services;

• Information and communication;

• Manufacturing industry;

• Professional, scientific and technical activities;

• Renewable energy;

• Space; and

• Transport and storage.

It is anticipated that the opening up of foreign investment in these sectors will stimulate new business opportunities in the UAE.  We expect to see significant interest in respect of projects involving e-commerce, supply chain, logistics and storage, biotechnology and laboratories, as well as opportunities in green technology.

Is it realistic that the introduction of VAT is a precursor to corporate tax?

It is certainly not unrealistic, particularly as the country together with its GCC neighbours seek to diversify their economies and in doing so their sources of income.  It is worth noting that the UAE already levies corporate tax on oil companies and foreign banks operating in the UAE. It has not yet applied corporate tax on other industries. We understand that the government is in the very early stages of studying a corporate tax framework for the country. However, it is unlikely that this will be implemented in the near-term and would likely involve a pan-GCC approach which was the case with VAT.

What is the best way for our readers to get in touch?

Please visit our website: https://bracewell.com/people/christopher-r-williams and feel free to contact me at chris.williams@bracewell.com we would be delighted to assist.