Author: afridi-angell

Making Monetary Sense: Understand Your VC Term Sheet, Entrepreneur Middle East

During the course of startup maturation, founders seek financing alternatives outside of banking, family, and friends. As a result, venture capital funding has been on the rise in the Middle East as trips in this region pursue greater and more sophisticated sources of capital, with Dubai thus far serving as the funding epicenter. This publication reveals everything you need to know.

Free zones in the UAE – an overview

Strategically located between Europe, Africa and Asia, the United Arab Emirates (the “UAE”) has become a hub for trade and commerce throughout the world. In order to further encourage foreign investment, more than 20 free zones have been established across Dubai and focus on a wide range of business sectors, ranging from manufacturing to technology. Free zones offer a number of advantages to foreign businesses, including zero taxation, repatriation of profits and 100% foreign ownership. It is important to note that each free zone has its own bureaucracy along with unique regulations and costs. We are often asked by our clients which free zone they should incorporate in, and the following provides a brief overview of several free zones located in Dubai, and identifies a number of factors a potential investor may wish to consider when making their choice. The factors that drive the selection of a free zone tend to relate to the nature of the business to be carried on, cost of formation, administrative ease or difficulty, and location.

 

Established in 1985, Jebel Ali (“JAFZA”) is the oldest free zone in the UAE. JAFZA has one of the world’s largest shipping container ports, and is home to many industrial and trading companies utilizing the port. JAFZA recently revised its capital requirements for onshore companies and instead of requiring minimum capital deposits ranging from AED 500,000 – AED 1,000,000, JAFZA will determine the required capital on a case-by-case basis. Generally the minimum capital requirement is equal to the first year operating expenses as estimated by the JAFZA sales team. Office space is required for the formation of an onshore company and the lease or purchase thereof is often one of the largest expenses associated with the establishment of the company.

 

JAFZA is currently in the process of opening a new business complex named JAFZA One, which will provide companies seeking to incorporate in JAFZA with so-called “virtual office” options, which are far more affordable. JAFZA also allows for the formation of offshore companies, which have no physical presence in the UAE and accordingly do not lease space, but instead require the appointment of a Registered Agent. A Registered Agent provides a mailing address for service in the UAE and may also provide minimal administrative functions for the offshore company, and has no ownership or management interest. The minimum capital requirement for offshore companies is AED 1 and only one class of shares is permitted. Offshore companies can open current accounts with certain banks in the UAE, but cannot carry on active businesses and as such cannot sponsor UAE residency visas. JAFZA offshore companies are typically used by non-nationals as holding companies.

 

The Dubai International Financial Centre (the “DIFC”) is a financial services free zone based on common law principles. Established in Dubai’s financial district in 2004, the DIFC was created to attract international financial firms with the objective of elevating Dubai’s position as a global hub with access to the emerging markets of the Middle East, Africa and South Asia.

 

Formation, licensing and other fees are generally higher in the DIFC but it provides a level of regulation and international credibility not found in other free zones. The Dubai Financial Services Authority (the “DFSA”) regulates financial services companies to a standard comparable to western financial regulators, and all DIFC entities are subject to privacy and data protection regulations in line with international standards. The DIFC also offers its own judicial system based on common law, and apart from hearing matters specifically related to DIFC companies, the DIFC Courts can also hear civil or commercial actions from outside the DIFC (including outside the UAE) if the parties have contractually agreed. Given the relatively high cost and administrative effort of establishing a DIFC entity, this free zone is generally chosen for specific business purposes rather than simply achieving 100 percent foreign ownership. Dubai Silicon Oasis (“DSO”) is a free zone focusing on technology-based industries, with specific incentives aimed at entrepreneurs and start-ups. While being located outside of the city centre, DSO provides access to a strong network of technology-focused venture capitalists as well as providing incubation inducements. Formation and licensing fees are competitive at DSO and office space is required with a minimum annual rent of AED 85,000.

 

The Dubai Airport Free Zone (“DAFZA”) offers a strategic advantage to freight and logistics companies as it is attached to Terminal 2 of the Dubai International Airport. DAFZA offers a variety of options for space, ranging from part-time desks to insulated industrial units. Formation and licensing fees are slightly higher than other free zones, but the required minimum share capital is competitive at AED 1,000. DAFZA’s administration is relatively easy to deal with.

 

Dubai Multi-Commodities Centre (“DMCC”) was created in 2002 to enhance commodity trade flow through the emirate. Dubai is among the top three trading hubs in the world for gold, tea and diamonds. DMCC is popular in part because it is centrally located in a popular district of Dubai with relatively attractive office premises available. DMCC is an attractive free zone for numerous industries in addition to commodities traders, including recruitment, information technology and advertising. Formation, licensing and office rental fees are higher than average, owing to DMCC’s desirable location.

 

Dubai World Central (“DWC”) is one of the newest free zones in the UAE and formation and licensing fees are competitive. Located between JAFZA and Al Maktoum International Airport (removed from the conventional Dubai city limits), DWC focuses on the aviation industry, including related logistics, commercial and residential projects and light industry in general, although other business categories are welcome as well. It is too soon to tell whether DWC will be a popular free zone, as it is undergoing constant administrative change and unpredictability of service while it matures.

 

Free zones are not unique to Dubai, and other emirates including Abu Dhabi, Ras Al Khaimah and Sharjah offer attractive options for foreign businesses. These free zones offer some competitive advantages compared to Dubai’s free zones, such as lower licensing fees and office rental costs. It should be noted that setting up a company in these emirates can create logistical hurdles. A company registered in a free zone outside of Dubai cannot lease space, sponsor Dubai visas or operate in Dubai. When the primary purpose of incorporation is attaining a UAE residency visa, forming a company in these free zones may be the most expeditious option.

 

While the UAE’s free zones offer many attractive features for investors, it is important to be aware that free zone companies are not permitted to carry on business outside of the physical boundaries of the relevant free zone. For businesses that intend to service or supply the Dubai market, a free zone company may not be an appropriate vehicle depending on the nature of the business, so it is critical to consider this carefully prior to incorporation. ■

UAE Competition Law – All bark and no bite?

Federal Law No. 4 of 2012 on the regulation of competition (the “Competition Law”) introduced a regime for the regulation of anti-competitive behavior in the UAE which previously did not exist. If implemented strictly its effects would be very significant on UAE business. The Competition Law came into force on 23 February 2013 and introduces merger/acquisition clearance requirements, prohibitions against anti-competitive agreements and activities which constitute abuse of a dominant position, as well as some anti-competitive trade practices. The six month transition period allowing entities to become compliant with the Competition Law expired on 23 August 2013.

 

To date, the Competition Law has not been enforced in practice even moderately. One reason for this is that the Competition Law left key details to be set out in regulations that were to follow. The anticipated regulations have recently been issued but, disappointingly, they do not provide the clarity that was needed. Nonetheless, compliance with the Competition Law is (ostensibly) mandatory as it is a current, valid UAE law. With the recent issuance of the regulations it is foreseeable that this law could start to enjoy some level of enforcement. It is worth noting that, while the newly issued regulations do not provide a great deal of clarity on some key points under the Competition Law, they do set out a mechanism for making complaints against parties allegedly in breach of the Competition Law and the Ministry of Economy’s duty to investigate once a complaint is accepted.

 

Scope of Application

 

The Competition Law applies to all entities undertaking commercial activities in the UAE and to entities operating outside the UAE but whose activities affect competition inside the UAE.

 

Certain types of entities and industry sectors are expressly exempted. These include:

 

  • federal and local government entities and entities owned or controlled by federal or emirate governments;

 

  • small and medium size entities (not defined in the Competition Law or the regulations); and

 

  • entities operating in telecoms; financial services; pharmaceutical production and distribution; cultural activities; oil and gas; postal services including express delivery; electricity and water production and distribution; sewage and waste disposal; transportation and railway.

 

Prohibitions

 

The Competition Law requires that entities seek merger clearance from the UAE Ministry of Economy if they are contemplating a transaction that:

 

  • will result in the acquisition of a direct or indirect, total or partial interest or benefit in assets, equity, and/or obligations of another entity to which the Competition Law applies;

 

  • will create or promote a dominant position; and/or

 

  • may affect the level of competition in the relevant market.

In addition, the Competition Law prohibits entities from entering into agreements or arrangements (these terms should be construed very broadly) the aim, object or effect of which is to restrict competition. This includes, amongst other things, agreements or arrangements which directly or indirectly fix purchase or selling prices, grant exclusivity with respect to products or geography or other market division (other than through registered commercial agencies), and agreements or arrangements which involve collusion in bids and tenders. These restrictions would impact many distribution agreements in the UAE.

 

The Competition Law provides for potentially far-reaching penalties in the event of violation. These penalties include:

 

  • fines of between AED 500,000 and AED 5 million for entering into restrictive agreements or abusing market dominance; and

 

  • fines of between 2% to 5% of the infringing entity’s annual revenue derived from the sale of the relevant goods and services in the UAE for a failure to notify a transaction which is required to be notified pursuant to the Competition Law.

 

In addition, an entity violating the provisions of the Competition Law exposes itself to possible criminal sanctions.

 

Exemptions

 

The Competition Law allows for entities to seek an exemption to the Competition Law from the UAE Ministry of Economy. The procedure for seeking such an exemption is set out in the regulations to the Competition Law. It involves a written application seeking an exemption for a transaction. The entity seeking the exemption must provide copies of its constitutive documents and financial statements (for the last two financial years). In addition, it must submit an economic rationale for the transaction and its reasons for requesting the exemption. All documents submitted must be in Arabic, but may be accompanied by an English translation. The Ministry of Economy must respond to such a request within 90 days, but may extend this period by a further 45 days. In the event that no response is received within this time frame, approval is deemed to have been given.

 

Implications

 

Compliance with the Competition Law is now mandatory. Accordingly, businesses must consider the effect of the Competition law on their business. It remains to be seen how the UAE Ministry of Economy will interpret or enforce the Competition Law or the implementing regulations. As a minimum, the Competition Law and its potential effects need to be considered by any business operating commercially in the UAE or which intend to acquire a UAE business. ■

Anti-Money Laundering Regulation in the UAE, India Business Law Journal

Money laundering was formally criminalized under the AML Law of 2002, but it had long been a crime to knowingly possess the proceeds of criminal activity, at least as regards criminal activity carried out in the UAE. Moreover, many techniques used to conceal the origins of funds (like forging documents) are themselves crimes under the UAE’s
Penal Code. Charles Laubach reveals everything you need to know about the new regulations in place.

Cyber Security 2014, A Virtual Roundtable, Corporate Live Wire

Cyber Security has presented itself as a major thorn in the side of many companies in recent years, which has demanded firms go the extra
length to mitigate any potential risks. In this Roundtable, we take a look at some of the trends of the past year as well taking a look at what the
future holds. Nine experts from around the world have come together to offer opinions on the prevalent issues surrounding the topic.

The DIFC in focus

DIFC Rent Cap

 

A new Dubai Decree on rental increases issued at the end of last year has significant implications for the current practice of landlords in the DIFC. Previously, there was no rent cap law in the DIFC. Now, Decree No. 43 of 2013 on Determining the Increase in the Real Estate Rentals in the Emirate of Dubai also determines the extent to which rents may be increased in the free zones, and expressly refers to its applicability in the DIFC. As a whole, the Decree applies to landlords in all of Dubai.

 

 

The Decree provides a mechanism for calculating the maximum rent increase permitted, if at all, upon renewing a lease. The calculation is determined by reference to the average rental value in the area where the property is located and the percentage to which the rent pre-renewal falls short of that. Article 1 of the Decree sets out the maximum increase in rent allowed depending on the difference between the rental amount and the average rent paid in the area. No rent increase is permitted where the rental amount is up to 10 percent less than the average rental in the same area.

 

 

The Decree also stipulates that the average rent is determined by the RERA rent index for which the Rental Increase Calculator is available online. The Rental Increase Calculator allows a landlord or tenant to enter the current annual rent paid for the type of property in a particular area and calculate the permitted rent increase. The Rental Increase Calculator has just this month been adjusted for rental prices and now also includes properties in the DIFC.

 

 

Further, it should be noted that the Rental Disputes Settlement Centre of the Dubai Land Department will handle all rental disputes arising between landlords and tenants in the Emirate of Dubai (including the free zones). However, this does not apply in respect of rental disputes arising inside free zones that have courts competent to settle rental disputes arising within their boundaries. Therefore, the DIFC Courts would have jurisdiction over any rental dispute in the DIFC. Moreover, in this regard the DIFC Small Claims Tribunal (Resolution of Rental Disputes) Order No.2 of 2014 issued this month directs and expressly provides that the Small Claims Tribunal will hear and determine all rental disputes where the amount of the claim does not exceed AED 500,000.

 

Revised Procedural Rules of the DIFC Courts

 

Following a two-month consultation period, the 2014 edition of the Rules of the DIFC Courts have now been published. The Rules governing the Courts’ procedures have been revised to incorporate several important changes including provision for a cost-free trial for pro bono litigants under Part 38, whereby the Pro Bono Panel may decide, subject to certain criteria, to grant such litigants a trial without the risk of legal costs being awarded against them if they lose, and changes to Part 28 which governs the production of documents.

 

With respect to the revised Part 28, the intention is to bring the provisions more in line with the International Bar Association’s disclosure rules. Importantly, the revised part provides for co-operation between the parties where the volume of documents to be searched is likely to be extensive requiring the parties, where possible, to exchange preliminary production requests in draft form before standard production of documents takes place. Any such exchange should not limit the parties’ rights to submit further requests to produce documents thereafter. Also of significance is that the grounds for excluding documents from production have been extended to include considerations of procedural economy.

 

Memorandum signed between DIFC Courts and Federal Court of Australia

 

Further to the memoranda signed between the DIFC Courts and the UK Commercial Court in January 2013, and the Supreme Court of New South Wales in September 2013, in March this year the DIFC Courts have signed a similar memorandum with the Federal Court of Australia addressing the reciprocal enforcement of money judgments.

 

As with previous such memoranda signed by the DIFC Courts the intention is to assist investors and those interested in doing business from the relevant jurisdiction in the region, and encourage and develop closer trade and investment relations between that jurisdiction and Dubai by increasing confidence and certainty in the legal system.

 

Amendments to the DIFC Arbitration Law

 

DIFC Amendment Law No.6 of 2013 (the Arbitration Amendment Law) enacted in December 2013 amends the DIFC Arbitration Law No. 1 of 2008 and gives the DIFC Courts the power to stay court proceedings in favour of arbitration with a seat outside of the DIFC. The amendment seeks to clarify the law and bring it in line with the New York Convention, to which the UAE is a signatory. The amendment was necessary to effect the obligation under Article II(3) of the New York Covention which requires that a court of a Contracting State, if seized in a matter in respect of which there is a valid arbitration agreement between the parties, shall refer the matter to arbitration.

 

Previously, Article 13(1) of the DIFC Arbitration Law No.1 of 2008 was held in the case of Injazat Capital Limited v Denton Wilde Sapte (2012) only to empower the DIFC Courts to stay arbitration proceedings where an arbitration agreement stipulated the DIFC as its seat. The judgment acknowledged that it “would thwart the promotion of the DIFC as a jurisdiction supportive of arbitration.” The amendment to the law has been welcomed as one that resolves this issue by expressly providing that the DIFC Courts’ power to stay proceedings under Article 13(1) also applies where the seat of arbitration is not the DIFC. ■