Joint ventures in the UAE: The benefits of using the common law

CVML

Published on October 12 , 2023

When considering a joint venture in the UAE, the jurisdiction to incorporate the JV corporate vehicle and the applicable laws, along with the dispute resolution forum that will apply to such corporate vehicle, ought to be prudently thought-out.

In this article we list the salient points to consider in a similar scenario:

Different classes of shares – Is it necessary?
Consider “Injunctive Relief” as an accessible remedy?
Will the JV conduct its activities onshore or offshore?
What kind of terms will govern the transfer of shares? and
Which jurisdiction is the most convenient for your JV corporate vehicle? Offshore? Free zone? Or mainland?
What governing law serves your purposes better? And is it relevant to the chosen structure and jurisdiction?

Features to be considered:

Once you have the conclusive answers to the above questions, there are certain additional elements to consider:

Different classes of shares – is it necessary?

When you have more than one shareholder, it is possible in certain jurisdictions to issue different types of shares depending on the conditions and drives of the founder(s) and the other shareholders.

In a limited company incorporated under the laws of Dubai International Financial Centre (DIFC) or Ras Al Khaimah International Corporate Centre (RAK ICC), or Abu Dhabi Global Market (ADGM) free zone (as an example), it is possible through multiple types and classes to weight shares in terms of what such shares can do for the shareholders, including the possibility of controlling voting rights, gaining tax remuneration, or appointing directors. This would be accompanied by the choice of DIFC/ADGM law as the governing law of the JV or shareholders’ agreement itself. Most significantly English Law can be used in the above-mentioned jurisdictions, positioning such jurisdictions on high demand due to their sophisticated approach and an evolving legal system.

When setting up a JV, there is no one-size-fits-all set of shares to use. SMEs usually issue “Ordinary Shares” granting shareholders full rights to dividends, voting at meetings and a right to the assets in the event of winding-up of a company. Nevertheless, in more complex structures, a JV can issue multiple classes of shares, granting different voting powers, rights to dividends, etc.

Consider “Injunctive Relief” as an accessible remedy?

If damages caused by certain breaches of certain provisions may not be an adequate remedy, such as confidentiality of trade secrets or other arrangements of restrictive covenants, the probable capacity to seek injunctive relief could be imperative. It is therefore essential to take into consideration that an injunctive relief cannot be obtained from the traditional UAE Courts, except in certain events such as an infringement of a UAE registered trademark, while it is a common and regulated process under the DIFC and ADGM Courts, and yet it remains difficult to enforce outside the DIFC and ADGM jurisdictions.

Will the JV conduct its activities onshore or offshore?

The structure of the JV corporate vehicle should be designed to comply with the nature of the activities to be conducted. In the event where the JV will conduct it business in the mainland, whether that be for sales, distribution, or other services to be provided to customers in the UAE, the JV must obtain a relevant license from Dubai Economy (and other local authorities as the case may be, depending on the nature of the activity) in order to conduct such activities onshore; as opposed, to a free zone entity, where the JV will be license to operate within the borders of the licensing free zone.

An offshore company may be used only as a “Holding Structure” or as an operating company to conduct its activities outside the United Arab Emirates. An offshore company is restricted from doing business inside the United Arab Emirates.

What kind of terms will govern the transfer of shares?

The transfer of shares is the process of transferring current shares along with their rights and liabilities from one shareholder to another. The said process applies to existing shares being transferred from an existing shareholder only.

It is a common practice for shareholders to thoroughly document in the shareholders’ agreement the process to be followed by shareholders when they wish to transfer shares. When considering these provisions, the shareholders should scrutinize as to the laws under which the JV is incorporated, to ensure that such the shareholders agreement provisions do not conflict with the practical process that applies by default to dealings in shares transfer under the laws of the jurisdiction in which the JV is incorporated. For example, the shares in a company incorporated in the DIFC or ADGM may be transferred by way of a signed share transfer form, without need for executing documentation before a notary public (which is an essential prerequisite to effect shares transfer in onshore companies). Therefore, it would be considered irrelevant if the shareholders agreement or the articles of association of an onshore company dictates a process for shares transfer that is based on the process applicable in DIFC or ADGM.

What governing law serves your purposes better? And is it relevant to the chosen structure and jurisdiction?

A JV agreement or a shareholders’ agreement relating to a JV company incorporated onshore in the UAE, and which is to be governed by the federal laws of the United Arab Emirates, will not benefit fully from common law terminology and concepts such as “warranties”, “representations”, “best endeavors” or “reasonable endeavors”, as such terms have neither established nor pre-defined definitions under the UAE federal law, even though these terms are well established and customarily used under DIFC and ADGM laws based on Common Law, for example. Also, the UAE federal laws include, in certain events, overriding concepts of good faith which do not always apply in the DIFC/ADGM Courts. Where notions such as these, as understood under common law, are important to the shareholders or partners in a JV incorporated under Dubai Economy, alternate terms which would have, so far as possible, a similar legal effect under the UAE federal laws, will need be included in the JV or shareholders’ agreement. DIFC/ADGM laws also do not contain multiple considerations and potential uncertainties that may arise under the Sharia Law to the extent that applies onshore UAE. It should also be noted that DIFC offers the DIAC arbitration regime whilst ADGM does not offer its own arbitration system but works within other arbitration protocols.

In this overall context it may be very helpful when setting up and documenting a joint venture, to have a dual-qualified English Law and UAE Law consultant/practitioner, and we at CVML can offer this dual expertise.