Doing cross-border deals in Dubai

Interview with Vanessa Abernethy, Simmons & Simmons, Dubai office by Richard Parnham

Are there any options for structuring a cross-border deal which are specific to Dubai?

If lawyers aren’t brought in early enough, tax advisers will often advise companies to base their operations in various jurisdictions in Dubai, because there is no corporation tax in the region. The problem is, from a corporate law perspective, Dubai often doesn’t work well as a base for the holding company in many cross-border M&A transactions.

For example, local ownership restrictions mean that foreign companies wishing to establish in the country must be 51 per cent owned by UAE nationals. Western companies can negotiate some degree of minority shareholder protection, but for many, a minority interest requirement is very difficult for them to accept. In addition, as the legality of minority shareholder protections is substantially untested in court it is difficult to give a legal “sign-off” on the enforceability of such arrangements in a form which will satisfy the client.

As an alternative to minority ownership, Western companies can establish in one of Dubai’s several free zones, which do allow up to 100 per cent foreign ownership. There are specific free zones within Dubai for industries, including finance, telecoms, logistics, ports – even education providers. However, most free zones require companies to have a physical presence in order to operate within their borders, and rent for property in those locations can be very expensive.

The final option is to establish in one of the UAE’s offshore jurisdictions, which do permit establishment of holding companies without the requirement to have physical office space – however, the company law regimes in those jurisdictions are not always suitable.

In general, if foreign companies are considering establishing a holding company in Dubai, there aren’t many options that work well. Companies are well advised to establish here only if they actually intend to trade here. We generally recommend international companies establish their holding companies in offshore jurisdictions such as in the British Virgin Islands or the Cayman Islands instead.

Are there any signs that these foreign ownership restrictions will be abolished in the next few years?

A new companies law has been talked about for the past few years, but we do not expect it to be implemented in the immediate future and we do not advise our clients to wait for it. It is possible that foreign companies will be allowed to establish majority owned companies in Dubai in the future, but no-one knows for sure.

In relation to the proposed new companies law, the issue has been discussed extensively in the local media. And, as a firm, we have been involved in working on some specific proposals for reform. But the Dubai government itself is keeping fairly quiet about its plans for the future.

What are the key regulatory and corporate governance requirements for local UAE companies?

As a whole, the market is less unregulated within the UAE than in more developed markets. Employment law is less onerous here than in most developed jurisdictions, as are environmental, data protection and privacy laws.

In terms of local company law, the current regime is also lightly regulated – corporate governance regulation for private companies is limited, although we expect to see this being an area of focus for the authorities in the future.

Are there any other significant regulatory challenges for companies operating in Dubai?

Residency for foreign workers is a major issue for multinational companies, because no one is permitted to work in the UAE without having residency status and a work permit – and generally local entities must sponsor foreign nationals to obtain residency status and work permits. In theory, foreign employees aren’t allow to do any business in the region – even on a “fly in and fly out” basis. If a multinational company plans to ask its employees to spend a lot of time working in the UAE, we recommend these employees are formally sponsored for residency and work permit purposes.

How robust do you believe the local legal system is, in light of the current economic slowdown?

The UAE legal system is based on civil law and, as a result, the court system is not run on the basis of the law of precedent in the same way as the Courts in England are. As a rule, we regard using the local courts as an option of last resort. We generally recommend arbitration.

When writing arbitration clauses into our client’s agreements, we tend to recommend international venues such as London or Paris – although the rules of The Dubai International Arbitration Centre are also fairly robust.

Last updated - 23 April 09

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