The Potential Impact of the new UAE Foreign Direct Investment Law and Side Agreements
This paper shall be divided into two main parts:
Part One: Foreign direct investment in the UAE is considered one of the main pillars and drivers for its economic growth. In 2017 alone, the UAE accounted for around USD 11 billion (approximately 22 percent) of FDI inflows to the MENA region. Thus, enactment the FDI law is a key decision where the UAE’s overall economy can leverage on to further strengthen its position as the region’s leading business and investment hub on both commercial and practical aspects.
Following the enactment of the UAE Foreign Direct Investment Law last year (Law 19 of 2018 – the FDI Law), there has been considerable commentary on the prospects for foreign direct investment (FDI) in the country. With $30.4bn in FDI in the UAE over the past three years and with the UAE already moving rapidly up the global rankings for attracting FDI, what is the likely impact of the FDI Law on investment flows into the UAE? Will the FDI Law stimulate even greater acceleration of investment into the country? The writer is expected to answer the previous questions analytical rather than descriptively.
The writer can rely on the articles and links provided and cite other articles (in total, 27 articles). He/she is also requested strengthen the argument by citing diagrams and statistics from the attachments provided (e.g. Articles and the thesis). The writer is requested to make the paper analytical rather than descriptive and end the paper with the positive answer and recommendations/suggestions for improvement.
Part Two: SIDE AGREEMENTS IN LIGHT OF THE FDI LAW
In light of the introduction of the FDI Law, questions have arisen around the impact it will have on existing Side Agreements (AGAIN, The writer is expected to address this part analytical rather than descriptively and end the paper with the positive answer and recommendations/suggestions for improvement; also note that we are not expecting you (i.e. writer) to cover both parts equally; it is your discretion).
To overcome the disadvantages associated with the foreign ownership restrictions in the UAE, many foreign investors carry out business in the UAE mainland by engaging a UAE national to hold 51% of the share capital of the UAE company, effectively as a nominee shareholder, on behalf of the foreign investor (UAE Nominee), with the foreign investor holding the remaining 49%. Typically, a separate set of private, meaning not subject to registration, side agreements’ are put in place between the foreign shareholder and the UAE Nominee.
In the meantime, UAE Courts have handed down a number of decisions where an NSA (NSAs are “side agreements”) was at stake. This section briefly presents four rulings that each epitomize the different approaches that the judiciary has taken on the issue thus far.
The first approach is based on the rule according to which “the contract is the law of the parties”. At the same time, the Court considered the status of the shares pursuant to the NSA as being in conflict with what had been provided in the Memorandum of Association (MoA). It declared the MoA null and void (although it was compliant with the previous law on companies), while upholding the validity of the NSA.
As a consequence, the judges ruled that the LLC had to be dissolved. An example of the straightforward enforcement of the parties’ contractual intent, the decision was rendered on the basis of Article 395 of Federal law No. 5/1985 (Dubai Court of Cassation – Case No. 2009/211).
The second approach draws on the concept of ‘true contract’ as opposed to ‘apparent contract’. In this case, the Court found that the parties had agreed to execute an apparent but untrue transaction which concealed the true relationship between them. As a result, the judges decided that the apparent contract – the MoA – was void because they regarded the NSA as the effective arrangement and therefore as the true contract. Like the ruling illustrating the first approach, the decision was based on Article 395 of Federal law No. 5/1985 (Dubai Court of Cassation – Case No. 2008/212.)
The third approach is premised on the principle that a registered agreement shall prevail over a non-registered one. In this case, the Court decided that the MoA should take precedence over the NSA. In fact, the judges argued that the former was registered and signed before a public notary whereas the latter was unenforceable given that it had failed to comply with the notarization and registration requirements. This decision was made on the basis of Articles 8, 10 and 11 of the former companies law No. 8/1984 (Abu Dhabi Court of Appeal 300 and 301 of 2012).
Fourth and finally, a more recent ruling addressed the question at issue in a very specific context. Unsatisfied with the financial performance of the company (at the time of the 2008 financial crisis), a national shareholder requested to enter into an NSA under which he would act as a sponsor of the company, thereby annually receiving a fixed remuneration but renouncing the benefit of the dividend payments.
After the company’s situation had improved following the recovery of the global economy, the sponsor requested the payment of dividends, in addition to the sponsor fee, for the years in which the company was making profit. After several years of litigation, the Court nullified the NSA, holding that the agreement had violated the Company Law. At the same time, the judges decided that the nullification shall have effect from the date of the court ruling and not from the date of the agreement (i.e. the nullification was not applied retroactively). Accordingly, the foreign shareholder shall be entitled to the profit in accordance with his actual shareholding (reflected in the NSA) if the national partner was receiving sponsorship fees. To sum up, the rights set out in the NSA, such as the distribution of profit, are protected notwithstanding the fact that the agreement is void (Abu Dhabi Court of Cassation and Civil Appeal 30 of 2015).
Legal developments
Over the last couple of years, there have been certain developments in the legal scenery in the UAE. These developments include:
i. the issuance of Federal Decree-Law No. 18 of 2017, which amends Article 10 of the CCL and authorises the UAE Cabinet to increase foreign investors’ ownership in companies in certain sectors of the economy;
ii. the introduction of the Foreign Direct Investment Law (Federal Law No.19 of 2018) (the FDI Law) under which foreign investors are be permitted to hold 100% of the share capital of companies operating in certain sectors of the UAE economy, which are yet to be identified by the UAE Cabinet; and
iii. the issuance a Cabinet Resolution (Resolution) (which has not been published in the Official Gazette as of the date of this article) setting out a total of 122 economic activities across 13 sectors which will be eligible for up to 100% foreign ownership (Positive List) following recommendations by the FDI Committee.
Future of Side Agreements
In light of the introduction of the FDI Law, questions have arisen around the impact it will have on existing Side Agreements in the following scenarios:
1. companies that became available for 100% foreign ownership; and
2. companies where foreign ownership has been increased beyond the current 49%.
Scenario 1
In this scenario, it is envisaged that foreign investors would be more inclined to request their UAE national shareholder(s) to:
a. terminate any existing Side Agreement entered between the parties; and
b. transfer the shares registered in the name of the UAE national(s) to the foreign investor.
This may lead also to change of shareholding structure of the company in the event that a single foreign shareholder would remain as a single shareholder in the company post the transfer of the UAE national shares.
Scenario 2
In contrast to the first scenario, in Scenario 2, instead of terminating the Side Agreement and transferring the entire shares of the UAE national(s) to the foreign investor, we expect to witness changes to existing Side Agreements and the transfer of shares to reflect maximum ownership percentages permitted to foreign investors according to the Positive List.
Despite the fact that the enforceability of Side Agreements, and their legality (as seen by some professionals, based on the Federal Law No. 17 of 2004 on Anti Commercial Concealment Law), is still in question, these types of arrangements are and will continue to be very commonly used in the UAE. Given the business-friendly attitude of the UAE Government and that the objective of the FDI Law is to attract foreign investors, it would be inconsistent with this approach for any measures to be taken to limit or prohibit Side Agreements.
In any event, as described in the scenarios above, the FDI Law will impact Side Agreements in a number of ways. It is therefore important for those who are party to a Side Agreement to revisit its terms and their own objectives.
Useful Links:
https://www.inhousecommunity.com/article/new-uae-foreign-direct-investment-law/
https://www.propartnergroup.com/blog/2020/04/uae-fdi-law-positive-list-allowing-100-foreign-ownership/
https://www.pinsentmasons.com/out-law/guides/the-uaes-foreign-investment-regime
The Potential Impact of the new UAE Foreign Direct Investment Law
https://www.inhousecommunity.com/article/new-uae-foreign-direct-investment-law/
https://amp.arabianbusiness.com/amp/article_listing/aben/comment/433305-attracting-capital-foreign-direct-investment-in-the-uae
http://www.hadefpartners.com/News/390/Side-Agreements-in-light-of-the-FDI-Law
UAE COURT JUDGMENT: IMPORTANCE OF SIDE AGREEMENTS IN PROFIT DISTRIBUTION BY LLC
https://www.kwm.com/en/ae/knowledge/insights/game-changer-in-uae-20180522
https://www.bonnard-lawson.com/nominee-shareholder-agreement-anti-fronting-regulations-uae/
