Category: inBriefs

Evolving Landscape for Whistleblower Protection in the UAE

Whistleblowing or simply put, the act of drawing attention to or complaining about perceived wrongdoing, misconduct, unethical activity within one’s organisation has been a topic of great relevance in the last few years. While there is no federal law relating to whistleblowing in the UAE, there have been significant legal developments in this area.

 

The Dubai Law No. 4/2016 on Dubai Economic Security Centre which applies to all entities licensed in Dubai and the freezones established the Dubai Economic Security Centre (DESC). The DESC is tasked to fight corruption, crimes of fraud, bribery, embezzlement, damage to public property, forgery, counterfeiting, money laundering, financing terrorism and monitor financial violations and markets. This law defines a whistleblower as a person who notifies or cooperates with the DESC about any matter that may prejudice the economic security of Dubai. DESC is required to ensure confidentiality and provide the necessary protection to the whistleblower from retaliation or discrimination. However, this law has not seen much practical implementation and is yet to be tested.

 

In this inBrief, we look at whistleblowing policies that have been adopted by three freezones in the UAE: the Dubai Multi Commodity Centre, the Dubai International Financial Centre, and the Abu Dhabi Global Markets.

 

Dubai Multi Commodity Centre (DMCC)

 

Subsequent to the establishment of the DESC, the DMCC, one of Dubai’s most prominent freezones, also issued a whistleblowing guidance note for its members on 10 November 2019. The DMCC has defined whistleblowing very widely to include any concern regarding actual or potential illegal activity, or unacceptable or undesirable behavior of public concern which may have reputational impact including financial malpractice, fraud, failure to comply with a legal obligation, human rights abuses, dangers to health and safety or the environment, etc. The guidance extends to (i) employees and former employees; (ii) consultants; (iii) accredited members of DMCC clubs; (iv) owners, residents and visitors to DMCC free zone; and (v) owners’ associations and management companies.

 

Any such complaint must be made to the dedicated email ID of DMCC Authority and may be made anonymously. It also contains principles relating to confidentiality and protection if such complaint is made in good faith and with reasonable suspicion.

 

Dubai International Financial Centre

 

The Dubai Financial Services Authority (DFSA) published its own Whistleblowing Regime in April 2022 that applies to a registered auditor, a DFSA Authorised Person (an entity licensed to undertake financial services in the DIFC), or a Designated Non-Financial Business or Profession (which includes real estate developers, dealers in precious metals, law firms, accounting firms, company service providers or a singly family office). All these entities need to put in place appropriate and effective policies and procedures to facilitate the reporting and assessment of regulatory concerns. The whistleblowers may make a complaint to its organisation or directly to the DFSA. Legal protections are available to the whistleblowers only when the disclosure relates to a reasonable suspicion that the organisation has contravened any law or is engaged in money laundering, fraud or any other financial crime provided that the disclosure is made in good faith. These provisions have been given legal effect by making adequate amendments to the DIFC Regulatory Law 2004.

 

The Abu Dhabi Global Markets (ADGM)

 

The ADGM, the other financial freezone in the UAE aside from the DIFC, is the latest entrant to this regulatory space. The ADGM issued Guiding Principles on Whistleblowing in December 2022 and, unlike the DIFC, the ADGM has issued a non-binding Guidance which is proposed to complement its regulatory framework and act as guidance for all ADGM entities when designing and implementing a whistleblowing infrastructure. It is worth noting that the ADGM Authority and its financial regulator, the Financial Services Regulatory Authority, also provide infrastructure (on their websites) to make such complaints directly to the authorities. However, it is advised (but not mandated) that the complainant tries contacting the relevant entity directly in the first instance as this can often lead to a swift and efficient resolution of the issue.

 

The ADGM Guidance is very comprehensive and sets out the following principles:

 

1. Guiding Definition of Whistleblowing: ADGM encourages entities to use a broad definition of whistleblowing which could include references to fraud, money laundering, corruption, breaches of legal or regulatory requirements, unethical conduct and/or acts to cover up wrongdoing. It should be clear that whistleblowing is distinct from an employee grievance or a customer complaint.

 

2. Non-Retaliation: A whistleblowing framework should at all times adequately protect whistleblowers from any and all forms of retaliation or disadvantage arising from their whistleblowing. The policy of non-retaliation should be credible and convincing.

 

3. Confidentiality and Due Process: ADGM entities should have controls in place to prevent unauthorised access to whistleblowing reports or any information that might inadvertently or inappropriately reveal the identity of a whistleblower or the subject of the complaint. Disclosure of information to appropriate external whistleblowing channels – such as a regulator or independent investigator – should be expressly exempt from confidentiality requirements.

 

4. Reporting in Good Faith: Protection to whistleblowers is only afforded if the report is made in good faith, i.e. based on an honestly held belief that the information offered at the time of disclosure is true. While a genuine misunderstanding should still be protected, deliberate false disclosures or those made exclusively in self-interest do not meet this criterion.

 

5. Components of a Whistleblowing Framework: No one-size-fits-all approach. Each entity has the flexibility to decide its own policy and reporting requirements depending on its size, business, risk profile and complexity. Independent assessment and investigation should be supported with appropriate training and awareness sessions for staff and managers.

 

6. Culture: The Guidance insists on a ‘tone from the top’ approach and emphasises that a robust whistleblowing approach is ineffective if not supported in practice. It highlights issues such as under resourcing, low responsiveness, inadequate investigation and poor confidentiality as roadblocks and insists that the entity culture should be such that whistleblowers feel safe to raise issues, and that there are credible channels they are aware of and can use.

 

The ADGM Guidance adds to the regulatory regime applicable across UAE and provides entities with several key issues that they must consider while drafting their internal whistleblowing policies. Similar to the DIFC, it can be expected that the existence of an effective whistleblowing policy, and measures taken by an entity to enforce it, may be considered as a relevant factor while determining any penalties or sanctions imposed by the ADGM against such an entity. This would imply that an ADGM entity should take adequate measures to formulate and maintain its internal policies in line with the Guidance. ■

Key clauses in Sale and Purchase Agreement for off-plan properties in Dubai

Introduction

 

Off-plan properties are those which are sold in advance of completion and can offer attractive payment plans and potentially high returns on investment. Therefore, the acquisition of off-plan property has always been a favored form of investment for those seeking to profit from the booming Dubai Real Estate market.

 

However, it is vital for buyers to understand the risks involved. The governing document that is put in place between developers and buyers to regulate the purchase of off- plan property is a Sale and Purchase Agreement (SPA).

 

In this article we will examine a number of key clauses usually present in a SPA to which buyers should pay particular attention.

 

Key clauses

 

1. Completion and Risk

 

The completion clause present in a SPA typically outlines the date upon which a developer anticipates that a property will be completed. Generally, such a clause will permit a developer to vary this date for specific reasons if required (typically for a period of twelve months). A buyer of off-plan property should keep in mind such obligations under the SPA including financial obligations when reviewing the completion clause as it is necessary for these to be fulfilled by the completion date specified in order for a buyer to take possession of a property.

 

The passing of risk is also dealt with within a completion clause in a SPA. It is vital that buyers of off-plan property understand fully at what point they will assume rights and responsibilities including risk in relation to a property. The passing of risk occurs upon the handover of a property to a buyer.

 

2. Purchase Price

 

A SPA will contain a clause outlining the amount and timing of the purchase payment required for the buyer to acquire a property. A payment schedule is typically attached which a buyer of off-plan property should ensure that they can adhere to as a failure to maintain these payments may result in the termination of the SPA and the forfeiture of sums paid to a developer. This clause may also set out the consequences of a late payment, which would usually involve the application of interest.

 

3. Handover

 

A handover clause will specify the condition in which an off-plan property will be handed over to a buyer. A SPA will usually detail the quality of finishes, fixtures and fittings that a developer should provide as well as outlining the process in relation to any defects present in the property and the repair of same. Typically, buyers of off-plan property are permitted to inspect a property in order to identify any deficiencies present. The handover clause is essential to ensure that the buyer receives the property in the agreed condition.

 

4. Restrictions on Disposals

 

Buyers of off plan property do not receive a full title deed to a property until completion occurs. Until such time, they acquire the right to own a property once it is completed provided that they comply with their obligations as contained in the relevant SPA.  Many investors often seek to sell off-plan properties during the construction process to take advantage of spikes in property prices. However, it is important to note that developers will usually include restrictions in a SPA that will limit a buyer’s right to dispose of an off-plan property during construction. Such restrictions will usually be linked to a payment of a certain percentage of the overall purchase price for an off-plan property.

 

5. Termination

 

The termination clause contained in a SPA will outline the circumstances under which a SPA may be terminated by either party and the consequences of such termination. Termination usually consists of a failure to meet contractual obligations (such as payment), inability to secure financing, insolvency of one of the parties, or any other specified circumstances. Typically, such clauses are drafted in favour of the developer and a buyer of off-plan property should review these clauses carefully to ensure that they understand the circumstances that could give rise to a termination of a SPA and their ramifications.

 

6. Dispute Resolution

 

A dispute resolution clause outlines the process for resolving any disputes that may arise between the buyer and the developer. The SPA should specify the method of dispute resolution, such as court, arbitration, mediation, or other forms of alternative dispute resolution. The dispute resolution clause is essential to provide a clear process for resolving any disagreements between the parties. Buyers of off-plan property should be mindful of this clause and ensure that the dispute resolution mechanism prescribed is acceptable.

 

Conclusion

 

Acquiring off-plan properties can be a lucrative form of investment, however it is important that buyers conduct the essential due diligence on the specific project, the developer and the SPA before making such an investment.

 

Given the potential risks involved in such an investment, potential buyers of off-plan property in Dubai should seek the advice of a qualified lawyer in reviewing and explaining the terms and provisions of an SPA prior to signing. ■

 

VARA Compliance and Risk Management Rulebook

The Virtual Assets Regulatory Authority (VARA) is a regulatory body established by the government of Dubai to oversee and regulate the virtual assets industry. In line with its mandate, VARA has issued a number of rule books, in particular the Compliance and Risk Management Rulebook (CRM), which sets out the regulatory framework for virtual asset service providers (VASPs) operating in Dubai. The purpose of this brief is to provide an overview of the CRM, and to analyze its implications for VASPs operating in Dubai.

 

I. Overview of the Compliance and Risk Management Rulebook

 

The CRM is a comprehensive regulatory framework that sets out the requirements and standards that VASPs must comply with to operate in Dubai. The CRM covers a wide range of issues, including licensing, customer due diligence, risk management, compliance, and reporting.

 

A. Licensing Requirements

 

All VASPs operating in Dubai must be licensed by VARA. To obtain a license from VARA, VASPs must meet a number of requirements, including:

 

  • demonstrating that they have adequate financial resources to operate their business;
  • implementing robust customer due diligence procedures;
  • having effective policies and procedures for managing risks associated with virtual assets;
  • having systems in place to detect and prevent money laundering and terrorist financing;
  • having effective governance and internal controls; and
  • ensuring that their senior management and staff are fit and proper to carry out their roles.

 

B. Customer Due Diligence

 

The CRM requires VASPs to implement robust customer due diligence (CDD) procedures to identify and verify the identity of their customers. The rulebook sets out minimum requirements for CDD, which include:

 

  • obtaining and verifying the customer’s identity;
  • obtaining information about the purpose and nature of the business relationship;
  • conducting ongoing monitoring of the customer’s transactions and activities; and
  • having systems in place to detect and report suspicious transactions either linked to money laundering or financing of terrorism.

 

While the virtual asset ecosystem relies on complete anonymity through decentralized platforms and exchanges, private wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of fund flows, the CDD requirements set forth in the CRM require VASPs to ensure that they understand the nature of their relationships with their customers prior to commencing business with them. It will be interesting to see how VASPS in Dubai, in particular VASPS that are not providing exchange or custody services, will comply with the CDD requirements set forth in the CRM.

 

C. Risk Management

 

VASPs must have effective risk management policies and procedures in place to identify, assess, and mitigate the risks associated with virtual assets. The CRM sets out the minimum requirements for risk management, which include:

 

  • conducting a risk assessment of the VASPs’ business and customers;
  • having policies and procedures for managing the risks identified in the risk assessment;
  • having effective systems in place to monitor and manage the risks associated with virtual assets; and
  • regularly review and update the VASPs’ risk management policies and procedures.

 

D. Compliance

 

VASPs must put in place and maintain effective compliance policies and procedures to ensure that they comply with all applicable laws, regulations, and standards. The CRM sets out certain minimum requirements, which include:

 

  • having a compliance officer who is responsible for overseeing the VASPs’ compliance program;
  • having effective policies and procedures for monitoring and reporting on compliance issues;
  • providing regular training to staff on compliance matters; and
  • conducting regular internal audits of the VASPs’ compliance programs.

 

E. Reporting

 

The CRM requires VASPs to provide regular reports to VARA on their activities and compliance. The CRM sets out the requirements for reporting, which include:

 

  • providing regular financial statements and other reports to VARA;
  • reporting any suspicious transactions or activities to VARA;
  • providing regular updates on the VASPs’ risk management and compliance program; and
  • providing any other information or reports that VARA may require.

 

We consider that this is a positive step in light of the myriad of scandals caused by VASPs elsewhere and VARA’s initiative in advancing a comprehensive and sound regulatory and compliance framework is welcome.

 

Implications for VASPs

 

The CRM has significant implications for VASPs operating in Dubai. VASPs must comply with the CRM’s requirements to obtain and maintain their license to operate in Dubai.

 

A. Increased Compliance Costs

 

Complying with the CRM will require VASPs to incur significant compliance costs. VASPs must invest in robust compliance, risk management, and governance systems, as well as in training and educating their staff on compliance matters. This may require VASPs to hire additional staff, implement new systems and procedures, and incur other costs.

 

B. Increased Regulatory Scrutiny

 

VASPs operating in Dubai will be subject to increased regulatory scrutiny and oversight as a result of the CRM. VARA will monitor VASPs to ensure that they comply with the CRM’s requirements and may conduct regular inspections and audits to assess compliance.

 

C. Improved Customer Protection

 

The aim of the CRM is to improve customer protection by requiring VASPs to implement robust customer due diligence procedures and other risk management measures. This will help to prevent money laundering, terrorist financing, and other financial crimes, which will enhance the integrity of the virtual assets industry and protect customers from financial harm.

 

D. Increased Confidence in the Virtual Assets Industry

 

The CRM further aims to enhance the credibility and reputation of the virtual assets industry in Dubai. By setting clear regulatory standards and requirements, the CRM will help to increase public confidence in the industry and attract more investors and businesses to Dubai’s virtual assets market.

 

II. Conclusion

 

The CRM provides a comprehensive regulatory framework that sets out the requirements and standards that VASPs must comply with to operate in Dubai. The CRM aims to improve customer protection, enhance the integrity of the virtual assets industry, and increase public confidence in the industry. However, compliance with the CRM will require VASPs to incur significant compliance costs. VASPs should carefully review the CRMs requirements and ensure that they have robust compliance, risk management, and governance systems in place to meet these requirements.■

Corporate Criminal Liability in the UAE and the Duty to Report Crime

Introduction

 

Recent years have seen the UAE making regular updates to its laws in order to guarantee a legal regime that is forward-looking, and consistent with international standards and principles. The leaders of the UAE have been particularly cognizant of the need to have a robust criminal law regime to encourage legitimacy in business, and dissuade any unscrupulous activities that could reflect negatively on the UAE as a determined and fast-developing economy. This is especially true of Dubai, whose ruler, HH Sheikh Mohammed bin Rashid Al Maktoum, recently unveiled plans to catapult Dubai into the top three cities by economic strength by 2033, and to place it within the top four global financial centres.

 

In such circumstances, it is particularly important for companies based in and operating out of the UAE to stay abreast of legislation which penalises criminal conduct of directors, employees and other representatives. Crimes that are more relevant for corporate entities would be fraud, bribery, forgery, and money laundering.

 

Brief overview of the criminal justice system 

 

All laws in the UAE are codified, and there is no system of stare decisis or binding precedent, as understood in a common law jurisdiction, that is followed. Consequently, each case is decided on its own merits, though previous decisions may serve as useful guide and have some persuasive effect on the courts.

 

The principle that no one shall be punished for any act which did not constitute a criminal offence under the law at the time when it was committed is safeguarded in Article 27 of the Federal Constitution which states that ‘[l]aw shall define crime and penalties. [n]o penalty shall be inflicted for any act performed or abandoned before the enactment of the law stipulating it.’

 

Additionally, although the UAE law has not expressly recognised traditional common law standards of proof such as the balance of probabilities test in civil claims, or the beyond reasonable doubt standard for criminal matters, the courts in their decisions have consistently reiterated that allegations in criminal cases must be proven to a degree that leaves no reasonable doubt.

 

In terms of the Criminal Procedure Code, the public prosecution has exclusive jurisdiction to lodge and pursue criminal cases, excluding cases otherwise specified by law.  Cases relating to any criminal offence will generally be filed and prosecuted by the public prosecution before the criminal courts of first instance (save for example, certain crimes involving national security which will be heard directly by the Union Supreme Court). In practice, when presented with complex crimes or crimes which heavily feature commercial aspects, the court will appoint an expert to conduct an inquiry and submit a report to the court with findings and recommendations. More often than not, the courts adopt the view of the expert, unless there are serious errors which are evident on the face of the record.

 

Can companies in the UAE be held liable for criminal conduct of employees?

 

Juristic persons, including companies based in the UAE, can attract liability for offences committed by directors, employees and other agents. Federal Decree Law No. 32/2021 On Commercial Companies (the Companies Law) provides that companies shall be liable for damage caused due to unlawful acts committed by the company’s chairman and board members while managing the company. The Companies Law also provides for personal liability of board members and executive management of companies to the company, shareholders, and third parties, for acts of fraud and abuse of power.

 

Federal Decree Law No. 31/2021 on the Issuance of the Crimes and Penalties Law (the Penal Code) goes beyond the provisions of the Companies Law which appears to be limited to acts of the company chairman, board, and executive management. Article 66 of the Penal Code provides that juristic persons shall be criminally liable for crimes committed by their representatives, directors, or agents acting on their behalf or in their names. Although the law does not expressly mention “employees”, it is likely that a court in the UAE would interpret “representative” or “agent” to include an employee acting on behalf of the company. The provision clarified that juristic entities may only be sentences to a fine, confiscation and other penalties prescribed by law. Where the law provides for a principal penalty other than a fine, the penalty for juristic persons would be restricted to a fine not exceeding AED 5 million, unless otherwise provided by law.

 

Corporate criminal liability is also recognised under Federal Decree Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and Financing of Unlawful Organisations (the Anti-Money Laundering Law), which states that the legal person can be criminally responsible for the crime if it is committed in its name or for its account intentionally.

 

While the position in some other jurisdictions is that only the criminal acts of a senior person representing the company’s controlling mind and will can incur liability on the company, the law of the UAE does not make such distinction. All that is required for a company to attract liability is for the individual concerned to have committed the criminal act in the company’s name or when acting on behalf of the company. As noted above, the courts are likely to interpret the provisions widely to include employees exercising some level of managerial powers and acting on behalf of the company. However, where an employee commits a criminal offence in the pursuance of some personal interest or agenda, the company will not be criminally liable.

 

Do companies have a duty to report crimes or suspicious transactions?

 

It is important to note that the Penal Code imposes a general duty on all persons who have knowledge of a crime to report it to the competent authorities, and failure to do so is a punishable offence. Where there is concern of potential money laundering, the Anti-Money Laundering Law imposes a specific duty on financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) who suspect, or have reasonable grounds to suspect, that a transaction or funds constitute proceeds of crime, to report to the Financial Intelligence Unit (FIU) of the Central Bank “without delay” and provide it with a detailed report including all data and information on such transaction and the connected parties. The Anti-Money Laundering Regulations define DNFBPs to include independent legal professionals and independent accountants. Article 251 of the Companies Law imposes a separate obligation on auditors of Public Joint Stock Companies to notify the Securities and Commodities Authority within 10 days of detecting any crime. Article 104 (1) of the Companies Law provides that the provisions on Joint Stock Companies apply to Limited Liability Companies (LLCs) to the extent they are consistent with their nature. Therefore, auditors of LLCs may also be bound by the obligation to report crimes under Article 251.

 

Is it still money laundering if the proceeds were obtained overseas?

 

The provisions of the Anti-Money Laundering Law apply where any person willfully does any of the acts mentioned under Article 2 (1) with proceeds or funds having knowledge that the proceeds or funds are the proceeds of a Predicate Offence. The law defines Predicate Offence as any act which constitutes a felony or misdemeanor under the UAE law, whether it is committed within the UAE or elsewhere, provided it is punishable in the State where it was committed as well as in the UAE.

 

When should a crime be reported?

 

The Penal Code is silent on the time-frame within which a crime must be reported. The Anti-Money Laundering Law only states that financial institutions and DNFBPs (which includes independent auditors) must report suspicious transactions to the FIU “without delay”, and does not specify any further.  On the other hand, the Companies Law requires company auditors to report any crime within 10 days of detecting the crime. Read with the Companies Law, it is likely that the duty imposed on independent auditors to report “without delay” under the Anti-Money Laundering Law means that the report must be made within 10 days or less.

 

It is also important to note that while the Penal Code and the Companies Law require crimes or violations of the law to be reported, the duty to report under the Anti-Money Laundering Law is much wider and requires the relevant persons to report upon suspicion. This is in keeping with the intention of the drafters of the Anti-Money Laundering Law, that is the strict deterrence of any money laundering activities in the UAE. ■

Family Governance in Trust Structures

When contemplating a family wealth structure that is intended to endure, such as a family trust or foundation, it is important to consider how the structure will be governed, particularly in the longer term after the founder’s lifetime. Governance mechanisms that are designed to encourage ongoing family involvement in the structure have proven to be effective at averting second, third and future generation conflicts that can undermine the structure. The most common family governance mechanisms are the family charter and the family council. This inBrief will provide an introduction to those mechanisms and explain why they can be useful for many families.

 

Trust Governance versus Family Governance

 

Most family trusts are fully discretionary, meaning the trustees are given very broad discretion to manage the trust assets and distributions. Such trusts are also normally made subject to some common governance and control mechanisms which set out either firm rules or soft guidance for the trustees. Those mechanisms typically consist of the terms of the trust deed, the appointment of a trust protector, and the issuance of a letter of wishes. These governance structures are discussed in more detail in our inBrief “A Matter of Some Discretion: Controlling Your Trust.”

 

The usual control mechanisms for a trust are a necessary starting point; however, if the trust is intended to survive through multiple generations and successfully serve the needs of the family, family governance becomes very important. When a family wealth structure fails over time, it is most often because of relationship breakdown among family members, no matter how well-drafted the trust deed was or how effective the tax planning. It would be rare, for instance, for a founder to be able to successfully lay out the detailed investment and distribution scheme for a trust beyond one or two generations into the future, after which that exercise becomes overly cumbersome and complex and will probably be incorrect.

 

The main purpose of a family governance structure is to enable long term harmony between family members; it achieves this by keeping all family members engaged with and informed about the trust, and by placing some important decision-making powers in their hands.  When a grandchild or great-grandchild is a beneficiary of a trust, they will likely lack personal context around the ancestor (founder) who established it and why, and they may quite naturally view the trust through the lens of self-interest without any broader family context.  They may not know or care about the ongoing future success of the structure. The natural outcome over time is conflict between family members or with the trustees or both.

 

Family governance mechanisms can be especially important when there is a family business that is owned by the trust, since trust ownership can lead to a lessening of family members’ emotional attachment to the business over time. There is also a natural divide between passive family member beneficiaries, and family members who are involved in the family business.

 

Good family governance seeks to remedy these disconnects and prevent that sort of conflict by ensuring each family beneficiary, over generations, is kept informed about the structure and has a voice along with other family members in decision-making for the trust.

 

Family Charter and Family Council

 

A family governance structure sets out how a family makes decisions in the context of a wealth structure like a family trust, how family members are kept informed, and how family governance integrates with other structures such as a trust or family business. Family governance usually consists of two main components: the family charter and the family council.

 

The Family Charter

 

The family charter is essentially the family’s constitution or code of conduct. Its contents are unique to the particular family’s needs and wishes and should retain some flexibility for amendments so it can adapt to future needs. It is a document that should have moral and ethical value to the family, while operationally it is intended to set out how family decisions will be made, when such decisions are required, and some principles or guidelines to inform those decisions. It has been aptly described as a bridge between family and business, or family and trust. Some of the topics typically addressed in a family charter include[1]: a preamble for important context; the family history; core values or goals of the family; adherence by family members; formation of a family council and its functions, decision making and voting rights; relationship with the family trust/business structure; family philanthropic/charity/education goals; conflict resolution; and procedures to amend the family charter.

 

Although family charters are generally not intended to be legally binding documents, that possibility is not ruled out. While it is not an area that has been sufficiently tested given the private nature of such documents, there is a growing belief that family charters can be legally binding (at least in part) if they are drafted and executed in a manner that indicates a clear intention to be bound.  Even where a family charter is not legally binding, it can of course remain very morally persuasive.  Importantly, it can carry tangible consequences by properly linking compliance with the terms of the family charter to one’s ongoing entitlement to benefits from a family wealth structure.  That is, a family member might be given reduced or suspended entitlements to receive trust distributions in case of non-compliance with requirements set out in a family charter, and such consequences can be given effect by a family council using influence or control that it enjoys over the role of trust protector, for example.

 

The Family Council

 

If the family charter is the family constitution, then the family council is the parliament or board of directors, made up of representative members of the family.  The family council is tasked with giving effect to the family charter, making decisions on behalf of the family as a whole, balancing competing interests, and communicating trust and company business to the other family members who otherwise would not have visibility into or involvement with the family wealth structures.

 

The family council can build harmony by communicating with the broader family and representing their interests at family council meetings thereby giving them a voice through representation, among other things.  It can also advise on how and when to make distributions equitably across branches of the family and across generations, taking into account the purpose of the structure, individual needs, or current versus future needs.  Sometimes the family council can also be a useful vehicle to track informal shared ownership arrangements in which one family member may be tasked with owning property for the broader benefit of other family members, in an arrangement that relies on family integrity rather than legally enforceable obligations.  Such informal arrangements can be very beneficial because they do not generally trigger reporting, disclosure, registration, attribution, FATCA/CRS, tax, and other consequences that arise when formal trusts are created.  This is a benefit of greater family strength, and is one way in which tangible value is produced by good family governance.

 

Integration of Family Governance

 

As noted above, family trusts are usually the sole creation of a founder with little or no input from family members (although that dictatorial approach seems to be softening these days). One way to promote the success of a family trust over multiple generations is to have the founder consult representatives of the family members during the trust planning process, and in particular in the family charter drafting process. The trust document may integrate the family charter and family council and include ways for the family representatives to select, remove and replace the trustees, or to act collectively as trust protector or trustee advisory committee.   It could also include dispute resolution provisions to avoid future litigation among beneficiaries and trustees.  Allowing for future members of a family council to exercise control over a trust, in the role of protector or otherwise, ensures that the trust’s operations remain flexible over time and are adapted to best serve the family through evolving needs and successive generations.  Having room to adapt to changing family and legal environments is crucial to the long-term success of any wealth structure.

 

Vesting trust protector and advisor powers in a diffuse, multi-person committee can also be important from a tax planning point of view.  Where only one person has effective control over the trust in the role of protector, there is a risk that trust income will be taxable in such person’s hands, or that the trust itself will be deemed tax resident in the place of such person’s residence.

 

This inBrief has focused on family governance in the context of a family trust. We would note that the same concepts apply to private foundations as well, and to family businesses through the terms of shareholders’ agreements, partnership agreements, or other comparable constitutional documents.   In all cases, the goal is to provide for a vehicle through which family interests are represented and communicated, in an effort to achieve a fair and sustainable balance between family interests versus business interests, and immediate needs versus future needs.

 

Finally, although our focus as a firm is to ensure a robust legal and tax structure, we would be remiss if we did not acknowledge the fact that family governance structures can be valuable beyond the wealth management context, and we encourage families to capture their broader beliefs, values and goals and reflect them in their family charters.

 

Planning with trusts, foundations and business structures is complex, and particularly so in the cross-border context. It is critical to obtain legal and tax advice from experienced professionals before embarking on such planning. Please don’t hesitate to contact us and we will be delighted to discuss how we can assist.■

 

–

 

[1] This is not an exhaustive list of topics that can be included in a family charter. For further information on the drafting and substance of family charters, please contact the author.

Invest in Start-ups in Canada: Qualify for Canadian Citizenship

Venture capital (investing in startups) has been a popular form of investment for many over the years. In recent years, Canada’s Start-up Visa Program has offered Canadian permanent residency (leading to Canadian citizenship upon qualification) to immigrant investors as well as immigrant entrepreneurs with the skills and potential to build businesses in Canada that are innovative; can create jobs for Canadians; and can compete on a global scale.

 

 

A qualifying immigrant investor can now invest a minimum of CAD115,000 in a qualifying Angel Fund and a qualifying startup (and an approved immigrant entrepreneur can manage and operate such start-up) in order to qualify for Canadian permanent residency. Based on past cases, it takes between two to two and a half years to process such application and to obtain Canadian residency if all proceeds in the ordinary course. Such investor and entrepreneur could further qualify for Canadian citizenship by remaining in Canada for three years (during a five year residency).

 

 

Under this program, designated organizations (certain venture capital funds, angel investor groups or business incubators) choose which startup investment business proposals to review and to invest in. The startup does not even have to be in Canada: it can be a foreign startup and then the immigrant entrepreneur can relocate with the start-up to Canada and become eligible for Canadian residency. Each designated organization has its own intake process for proposals and criteria used to assess the proposals. If a designated organization chooses to support the start-up business idea, it will give applicants a Letter of Support. For example, for an incubator, such Letter of Support will mean that the incubator is willing to accept the start-up into its program and help the business grow in Canada while providing guidance and expertise. As a result, the investor and entrepreneur are not alone in growing the start-up: they receive support and direction from the incubator, in addition to obtaining Canadian residency leading to Canadian citizenship upon qualification.

 

Finally, it is important to note that the ability to communicate and work in English, French or both languages will help a start-up succeed in Canada. As a result, applicants will have to take a language test from an approved agency. Applicants will also need to give proof that they have sufficient initial funds to support themselves and their dependents after arrival in Canada. For example, this requirement can be satisfied for a family of four if an applicant and family bring CAD25,000 to Canada. ■

VARA issues full market product regulations

The Virtual Assets Regulatory Authority (VARA), established in March 2022 to regulate all activities relating to virtual assets in Dubai, has issued its much-awaited regulatory framework. So far, VARA was only issuing MVP (minimal viable product) licenses on a select basis. In addition, VARA had, in August 2022, issued its Marketing Regulations governing the marketing activities relating to virtual assets in Dubai.

 

On 7 February 2023, VARA has issued its full market product regulations and introduced the following regulations applicable to all virtual asset service providers:

 

1 – Virtual Assets and Related Activities Regulations 2023

2 – Company Rulebook

3 – Compliance & Risk Management Rulebook

4 – Technology & Information Rulebook

5 – Market Conduct Rulebook

 

In addition, VARA has introduced several activity-specific Rulebooks to cater for risks associated with the provision of each virtual asset activity. These will apply depending on the category of license obtained by the relevant entity:

 

1 – Advisory Services Rulebook

2 – Broker-Dealer Services Rulebook

3 – Custody Services Rulebook

4 – Exchange Services Rulebook

5 – Lending & Borrowing Services Rulebook

6 – Payments & Remittances Services Rulebook

7 – Management & Investment Services Rulebook

 

VARA has also issued a VA Issuance Rulebook which provides for registration requirements for issuing permitted virtual assets and approval requirements for issue of any other virtual assets.

 

Pursuant to the new regulations, all entities seeking a license from VARA have to adhere to the licensing process as prescribed by VARA from time to time, which shall include compliance with the VARA regulations. The licensing procedure and application forms are awaited. ■

Termination of a Commercial Agency Contract under the (New) Commercial Agency Law

The importance of the UAE as a trading and consumer goods hub resulted in a protective approach of the authorities towards distributors and franchisees. The UAE Federal Law No. 18 of 1981 on Commercial Agencies (Old Law) was drafted with the intent of protecting the interests of UAE nationals (and companies wholly owned by UAE nationals), and was protective towards the interests of registered commercial agencies. In the last few years, there has been a gradual shift away from such protectionist measures and this shift has now led to the issuance of a new Federal Law No. 3 of 2022 Regulating Commercial Agencies in December 2022 (New Law).

 

The New Law repeals the Old Law and will come into effect in June 2023. Kindly refer to our inBrief of 26 January for a snapshot of the key changes to the regime. In this inBrief, we focus on the termination of commercial agency contracts and disputes that may arise.

 

1 – Term and termination: Expiry or termination of a registered commercial agency has been the most contentious issue under the Old Law. The Old Law provided that the principal is not permitted to terminate or refuse to renew a commercial agency contract unless there is mutual consent of both parties or there is a fundamental reason justifying the termination. The term ‘fundamental reason’ was not defined and was determined by the court or the Commercial Agencies Committee (Committee) at their discretion. The New Law has proposed major amendments in this regard and provides that:

 

(a) Unless otherwise agreed between the parties, if the contract requires the agent to establish display buildings, commodity stores, or maintenance or repair facilities, there shall be a default contract term of five years.

 

(b) The commercial agency contract shall expire in any of the following cases:

 

  • upon expiry of the contract term unless renewed;

 

  • pursuant to the terms of the contract;

 

  • by mutual agreement of the principal and the agent; or

 

  • by court order.

 

The ability of the principal to terminate the contract in accordance with its terms or at expiry of the term is a deviation from the Old Law which had very restrictive termination provisions.

 

2 – How to terminate? The party intending to terminate the agency pursuant to the terms of the agency contract is required to:

 

(a) send a termination notice to the other party of their wish to early terminate the agency contract. Unless otherwise agreed in the agency contract, the notice period for the termination notice should be not less than one year notice prior to the effective date if termination or prior to the lapse of one half of the contract term, whichever is less. This requirement can be dispensed with if agreed by the parties; and

 

(b) either party may submit a detailed report prepared by a specialized professional body on the settlement of dues, guarantees of non-interruption of after-sales services, estimation of assets and expected damages, consequent to the termination.

 

In case of non-renewal of the contract, the party wishing to not renew the contract is required to notify the other of non-renewal one year before expiry of the term or before the lapse of one half of the term, which is less, unless the two parties agree otherwise.

 

3 – How to challenge termination: A party may challenge the termination notice before the Committee. The Committee is required to give its decision within 120 days from the date of the request. If it does not give its decision within this timeline, the challenge is deemed rejected. The ability to terminate / not renew and the strict timelines for resolution of the challenges to termination are very principal friendly. This is a major departure from the earlier regime which practically saw a timeline of four to six months for the Committee to issue its decision on such matters.

 

4 – Compensation on termination: The New Law lays down certain provisions relating to the compensation that may be claimed upon termination/expiry of the agency contract. The New Law permits the parties to agree to ‘no compensation’ provisions in the contract in the event the contract is terminated due to expiry of the contract term. This however appears only to relate to circumstances  where the contract terminates due to the expiry of the contract terms. In circumstances where the agency contract is terminated pursuant to the terms of the contract, the agent shall be entitled to compensation, if it proves that their legitimate activity has contributed to the achievement of visible and significant success of the products of the principal, has led to the promotion of such products or the increase in the number of customers and that the termination of the contract would deprive the agent of their lost profit.

 

5 – Commercial Agencies Committee: In line with the Old Law, the New Law also provides that disputes in relation to commercial agencies shall be referred to the Committee prior to being referred to Court. This however does not appear to be the case if the parties have agreed to arbitration. The New Law introduces a timeline of 120 days for the Committee to issue its decision. Failure to comply with the timeline grants the parties the right to approach courts within 60 days of lapse of the deadline.

 

6 – Arbitration: In a major departure from the Old Law, the New Law recognises the parties’ right to agree to arbitration. While the default seat of arbitration has been identified as ‘within the UAE’, the parties are free to agree on a different seat. Note however that this provision does not apply to agency contracts in respect of which a dispute is being heard before the Committee or the competent courts before the New Law is issued. Also, if a party initiates arbitration after the issuance of the Committee’s decision, the Committee’s decision shall be disregarded and have no effect or consequences. The effect of this is likely to be that the Committee could be circumvented by a party, if the agency contract contains an arbitration clause.

 

7 – Application of termination provisions to existing agencies: In order to protect the existing agencies, the provisions relating to termination due to expiry of term or termination in accordance with the contract terms shall apply to existing agency contracts only after two years from the effective date of the New Law. Further, in case of agencies that have been registered for the same agent for more than ten years or agencies in which the volume of the agent’s investment exceeds AED 100 million, such provisions shall only apply ten years after the New Law comes into effect in June 2023.

 

Further clarity is awaited on penalty provisions, release of certain activities from the requirement of being undertaken only through commercial agency and provisions relating to import of goods and services into the UAE during the period of dispute between the parties.

 

Overall, the New Law introduces much expected changes. The provisions on commissions and exclusivity have been retained and existing agents have been protected from termination for a specified time. This would soften the blow on the existing agents who enjoyed full protection and advantages under the Old Law. ■

UAE Commercial Agencies Regime (2023)

The UAE commercial agency regime has been a central pillar of commerce since the issuance of UAE Federal Law 18 of 1981 (the 1981 Law). While piecemeal amendments to the 1981 Law have been introduced from time to time, the UAE government has now issued UAE Federal Law 3 of 2022 concerning commercial agencies (the New Agencies Law) which repeals and replaces the 1981 Law in its entirety.

 

The New Agencies Law represents a substantial modernisation of the 1981 Law and will no doubt contribute further to the development and expansion of the UAE economy and its integration into global commerce. This inBrief considers some of the salient issues concerning registration and termination of commercial agencies under the New Agencies Law.

 

Requirement for registration as a commercial agent

 

The New Agencies Law provides that the following shall be permitted to act as “commercial agents”:

 

– natural persons who are UAE nationals; or

 

– a body corporate that is wholly owned by:

 

(a) one or more natural persons who are UAE nationals; or

 

(b) a public company (subject to what is stated below).

 

A separate regime is contemplated for UAE incorporated public joint stock companies that are (or propose to be) registered as commercial agents under the New Agencies Law. Such companies may be registered as commercial agents notwithstanding that they do not have 100 per cent UAE national participation (but provided that UAE national participation is not less than 51 per cent) however, additional specific implementing regulations are contemplated.

 

In addition, the New Agencies Law provides that the UAE Federal Cabinet may, upon the recommendation of the Minister of Economy, permit an “international” business not owned by UAE nationals to promote and sell its own products in the UAE (and presumably to be registered as its own “commercial agent” in accordance with the New Agencies Law) provided that:

 

– there is no commercial agent registered for the relevant product(s) in the UAE; and

 

– there has not previously been a commercial agent registered for the relevant product(s) in the UAE.

 

The scope of this carveout for a foreign principal is anticipated to be supplemented by a decision of the UAE Federal Cabinet and we look forward to further clarity on what is no doubt going to be an issue of interest.

 

As with the 1981 Law, a written contract is required to be entered into and default jurisdiction for commercial agency disputes is reserved for the commercial agencies committee within the Ministry of Economy and subsequently the onshore courts of the UAE. However, the New Agencies Law allows for the parties to a commercial agency contract to provide for the resolution of disputes by arbitration. This is an important change to the 1981 Law which did not provide for such an alternative.

 

Expiry or termination of  registered commercial agencies

 

It is common knowledge that the 1981 Law provided substantial safeguards against termination to a registered commercial agent. The New Agencies Law provides that a commercial agency shall “expire” upon the expiry of the contractual term stated in the contract of commercial agency. The New Agencies Law also provides that a commercial agency contract may be terminated unilaterally by either principal or agent in accordance with the provisions of the commercial agency contract. Both of the foregoing concepts concerning expiry and termination are new and fundamentally change the previous position with respect to termination, as stated in the 1981 Law.

 

In addition, the New Agencies Law provides that a party wishing to terminate a commercial agency contract at the end of its term (i.e., a “non-renewal”) shall serve notice on the other party not less than either:

 

(a) one year prior to the expiry of the term of the underlying commercial agency contract; or

 

(b) prior to the lapse of half of the stated contractual term,

 

whichever of (a) and (b) is shorter.

 

Application of the New Agencies Law to existing commercial agencies

 

The New Agencies Law is stated to come into effect six months after the date of its publication in the Official Gazette. The New Agencies Law was published in the Official Gazette on 15 December 2022 and accordingly will come into effect in June 2023.

 

Notably however, the New Agencies Law provides that the stipulation concerning the expiry of a commercial agency (as summarised above in this inBrief) shall not immediately apply to commercial agency contracts in force at the time of the issuance of the New Agencies Law and shall only apply to such contracts after the lapse of two years of the date of application of the New Agencies Law (i.e., two years from June 2023). Equally importantly (and by way of exception to the two-year period above), where a commercial agency has been registered for a period of ten years or a commercial agent’s investment into the development of the relevant agency exceeds AED 100 million, the provisions of the New Agencies Law concerning expiry of a registered commercial agency shall only apply after the lapse of ten years from date of its application (i.e., ten years from June 2023) in relation to such agencies. Further implementing regulations concerning this carveout are contemplated in the New Agencies Law.

 

Key takeaways

 

As noted, the New Agencies Law represents a substantial modernisation of the 1981 Law. New provisions concerning the expiry and termination of registered commercial agency contracts have been introduced and will be very important in any negotiations concerning commercial agency contracts proposed to be entered into. A number of key provisions remain subject to further supplementary rules and legislation. As with all legislative updates, the application and enforcement of the New Agencies Law will determine the further development of the UAE commercial agencies regime. ■

Venture Financing

This inBrief highlights the different aspects of venture capital, an important source of raising money for start-up companies which do not have access to capital markets. We discuss the different types of venture financing through which start-ups can raise money and which are taken into account when assessing valuations.

 

Types of Venture Financing

 

Although there are different forms of venture financings that can be utilised by start-ups depending on their needs and goals, it should be noted that generally a start-up can only raise financing through issuing equity or debt. Therefore, venture financing is fundamentally provided as a form of debt or equity. When deciding which form of equity or debt to pursue, it is important to bear in mind ‘maturity’, ‘valuation’ and any other ‘preferences’ awarded to investors.

 

Below we set out the common types of structures for venture financings and the typical terms which may apply.

 

1 – Convertible Promissory Notes 

 

This form of venture financing is a debt security convertible into equity upon the occurrence of a certain conversion event. Such conversion event could encompass a financing round, a liquidation event or even an initial public offering. This is an effective method for start-ups to raise capital without the cost, time, and complexity of a preferred stock financing as it involves minimal negotiations with investors and significantly less volume of documentation. As these notes are a debt security, the start-up does not require to conduct a company valuation. While these convertible promissory notes are considered as debt, investors could benefit from accrued interest payable to the note holder upon maturity as stipulated in the terms of issuance of these promissory notes.

 

Upon the occurrence of a financing event, the notes often convert at a price that is lower than the price paid by the investors purchasing shares in a qualified financing round. This is because the conversion price is often determined and calculated based on either a discount rate (which is typically a percentage of the qualified financing’s issue price) or a valuation cap (a cap on the pre-money valuation at which such notes may convert).

 

2 – Simple Agreement for Future Equity (SAFE)

 

A SAFE is similar to the process of issuing a convertible promissory note. A start-up could issue a SAFE to the investor as a promise of repayment. This typically means that the SAFE converts in the same manner as a convertible promissory note, but because a SAFE is not considered a debt instrument, it does not accrue any interest and it does not have a maturity date. Consequently, a SAFE is left outstanding until a qualified financing or corporate transaction triggers conversion of or payment on the SAFE. Upon conversion, the SAFE coverts into a number of shares of preferred stock, determined by dividing the purchase price of the SAFE by the applicable conversion price, which is normally calculated based on either a discount rate (which is typically a percentage of the qualified financing’s issue price), or a post-money valuation cap at which the SAFE may convert. The terms of the SAFE often stipulate that the choice of calculation would be the calculation which results in the greater number of shares.

 

3 – Preferred Stock Financings

 

This type of equity financing involves issuing preferred stock to venture investors at a substantial premium over the price charged to the founders or the seed investors. As a justification to the premium paid for the shares, investors are given preferential treatment. This could take form of a liquidation preference and other preferential rights over holders of common stock as well as certain voting rights. This helps startups classify shares according to the investment rounds and also justifies a lower price (lower than is paid by preferred investors) for common stock to its employees.

 

Assessing Valuations

 

Pre-money valuations of a start-up are provided as an indication in a given financing round which investors take into consideration when determining the company’s development stage and assess their investment potential prior to investing.

 

The pre-money valuation is carried out based on the price per share that the investors are offering to pay the start-up company multiplied by the total number of shares outstanding (including options, other convertible securities and shares reserved for employee stock options).

 

The standard position for start-ups to determine valuation is by contrasting the company’s position in the future with the desired rate of return by the investors for the near future. However, in practice venture capitalists tend to estimate the amount of cash required to achieve some development milestone and equate that amount to a certain percentage of the company. It is often the case that a start-up company in the UAE is likely to be valued on a similar scale at what valuations venture capitalists have been giving to other companies with a similar business model. Following a financing round, the start-up company’s post-money valuation can be determined by adding the amount of money invested in the financing to the pre-money valuation. ■