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Relaxing or Constraining Foreign Ownership Structure in the United Arab Emirates

Vallander, Anna LU (2013) JURM02 20131
Department of Law
Abstract
This essay covers the subject of foreign ownership restrictions in LLCs in UAE mainland. In the beginning the study will guide us through an overview of the incorporation process and recognized company structures, which further specifies the differences between free zone and mainland. Accordingly, the study narrows down to focus on mainland LLCs, where the 49/51 rule, which restricts foreign investors to own more that 49% of a company in UAE mainland, will be presented.
As the restriction on foreign ownership rights often results in conflicts between concerned shareholders, the paper investigates strategies to resolve such disputes. What we find is that conflicts between a foreign owner and a local owner usually origin in the ownership... (More)
This essay covers the subject of foreign ownership restrictions in LLCs in UAE mainland. In the beginning the study will guide us through an overview of the incorporation process and recognized company structures, which further specifies the differences between free zone and mainland. Accordingly, the study narrows down to focus on mainland LLCs, where the 49/51 rule, which restricts foreign investors to own more that 49% of a company in UAE mainland, will be presented.
As the restriction on foreign ownership rights often results in conflicts between concerned shareholders, the paper investigates strategies to resolve such disputes. What we find is that conflicts between a foreign owner and a local owner usually origin in the ownership structure. The problem is to determine which is the “valid” structure: is it the registered structure (accordingly with the 49/51 rule)? Or, is it a different structure agreed in a separate contract, i.e. side agreement? Side agreements usually stand as an affirmation of trust to specify that the UAE shareholder is not in fact the real owner of 51% share capital but rather the agent holding the same for the benefit of the foreign shareholder. Several studies are included to provide diverse conclusions and perspectives on foreign ownership restrictions, and a significant passage through case law presents deliberations of side agreement’s “validity”.
UAE’s legal development in terms of the New CCL and the Anti-Fronting Law is then identified and explained. While the New CCL aims to relax foreign ownership restrictions in certain sectors, the Anti-Fronting Law’s target is to prohibit side agreements. It is found that the UAE will face a period of thoughtfulness, as it is necessary to find a balance between the country’s intentions of attracting international capital whilst ensuring a central role for UAE nationals in the domestic economy.
It is also discovered that prohibiting side agreements could have a rather harsh impact on minority shareholders, who often relies on such arrangements. This further strengthens the support against the adoption of the Anti-Fronting Law.
Ultimately, the thesis will outline advantages and disadvantages while considering if foreign ownership structure should be restricted or relaxed in light of the two new laws and of side agreements. It is determined that the New CCL’s positive implications overtake the negative aspects. Side agreements are proven valuable tools, if it keeps all parties satisfied and reflects the true agreement. Evidentially, it is found that the there should be no adoption of the Concealment Law. Focus should lie on the New CCL, providing relaxed ownership structure toward foreign investors. Side agreements should instead be acknowledged along with the 49/51 rule in the New CCL. (Less)
Abstract (Swedish)
Denna uppsats behandlar restriktioner för utländskt ägande i aktiebolag i Förenade Arab Emiraten (UAE). Till en början kommer studien att guida oss genom en översikt av bolagsetablering samt bolagsstrukturer i landet, vilket sedermera leder till att specificera skillnaderna mellan frizon och fastland. Följaktligen avgränsas studien för att snävare fokusera på aktiebolag i fastlandet. Här presenteras ”49/51 regeln”, vilken begränsar utländska investerare att äga mer än 49 % i ett sådant bolag.
Eftersom en restriktion av utländsk äganderätt ofta resulterar i konflikter mellan berörda aktieägare, undersöks olika strategier för att lösa sådana tvister. Vad vi finner är att konflikter mellan en utländsk aktieägare och en lokal aktieägare ofta... (More)
Denna uppsats behandlar restriktioner för utländskt ägande i aktiebolag i Förenade Arab Emiraten (UAE). Till en början kommer studien att guida oss genom en översikt av bolagsetablering samt bolagsstrukturer i landet, vilket sedermera leder till att specificera skillnaderna mellan frizon och fastland. Följaktligen avgränsas studien för att snävare fokusera på aktiebolag i fastlandet. Här presenteras ”49/51 regeln”, vilken begränsar utländska investerare att äga mer än 49 % i ett sådant bolag.
Eftersom en restriktion av utländsk äganderätt ofta resulterar i konflikter mellan berörda aktieägare, undersöks olika strategier för att lösa sådana tvister. Vad vi finner är att konflikter mellan en utländsk aktieägare och en lokal aktieägare ofta har sitt ursprung i just ägarstrukturen. Problemet är sålunda att avgöra vilken struktur som är den gällande: är det ägandestrukturen som har registrerats hos myndigheterna (i enlighet med 49/51 regeln)? Eller, en annan, olik, struktur som överenskommits i ett separat kontrakt, dvs. sidoavtal? Sidoavtal mellan aktieägare i UAE utgör ofta en bekräftelse på att den lokala aktieägaren i själva verket inte är ägare till 51 % av aktiekapitalet, utan snarare en ”agent” innehavande samma ägandeandel till förmån för den utländska aktieägaren. Ett flertal studier analyseras och bidrar till olika perspektiv gällande äganderestriktioner och en betydande vandring genom rättspraxis presenterar diskussioner och beslut gällande sidoavtal.
Följaktligen genomgår uppsatsen UAE:s rättsliga utveckling i förhållande till the New CCL och the Anti-Fronting Law. Medan the New CCL bland annat syftar till att minska restriktioner för utländskt ägande i vissa sektorer, är the Anti-Fronting Law:s mål att förbjuda sidoavtal kringgående 49/51 regeln. Resultatet visar att det blir nödvändigt för UAE att, i ljuset av dessa två lagar, finna en balans mellan landets avsikt att attrahera internationellt kapital och samtidigt bevara en central roll för lokala medborgare i den inhemska ekonomin. Vidare framför studien att ett förbud mot sidoavtal, i syfte att undkomma 49/51 regeln, kan ha en relativt drastisk påverkan på minoritetsägare som ofta förlitar sig på sådana uppgörelser. Detta påvisar bland annat stöd emot antagandet av the Anti-Fronting Law, samt en positiv inställning till sidoavtalets existens.
I slutändan utvärderas fördelar och nackdelar med restriktioner av utländskt ägande. Detta skildras i bemärkelsen av de två nya lagarna samt i betydelsen av sidoavtal. Vi finner att the New CCL:s positiva verkningar övertar de negativa aspekterna. Sidoavtal bevisas var en fungerande metod; om alla parter hålls nöjda samt om sådana avtal återspeglar den verkliga ägandestrukturen. Följaktligen resoneras att the Anti-Fronting Law inte bör implementeras. Fokus torde istället ligga på the New CCL som syftar till att minska restriktioner för utländskt ägande i vissa sektorer. Sidoavtal bör erkännas tillsammans med 49/51 regeln i the New CCL. (Less)
Please use this url to cite or link to this publication:
author
Vallander, Anna LU
supervisor
organization
course
JURM02 20131
year
type
H3 - Professional qualifications (4 Years - )
subject
language
English
id
3958753
date added to LUP
2013-11-29 11:37:51
date last changed
2014-01-30 12:36:32
@misc{3958753,
  abstract     = {This essay covers the subject of foreign ownership restrictions in LLCs in UAE mainland. In the beginning the study will guide us through an overview of the incorporation process and recognized company structures, which further specifies the differences between free zone and mainland. Accordingly, the study narrows down to focus on mainland LLCs, where the 49/51 rule, which restricts foreign investors to own more that 49% of a company in UAE mainland, will be presented.
As the restriction on foreign ownership rights often results in conflicts between concerned shareholders, the paper investigates strategies to resolve such disputes. What we find is that conflicts between a foreign owner and a local owner usually origin in the ownership structure. The problem is to determine which is the “valid” structure: is it the registered structure (accordingly with the 49/51 rule)? Or, is it a different structure agreed in a separate contract, i.e. side agreement? Side agreements usually stand as an affirmation of trust to specify that the UAE shareholder is not in fact the real owner of 51% share capital but rather the agent holding the same for the benefit of the foreign shareholder. Several studies are included to provide diverse conclusions and perspectives on foreign ownership restrictions, and a significant passage through case law presents deliberations of side agreement’s “validity”.
UAE’s legal development in terms of the New CCL and the Anti-Fronting Law is then identified and explained. While the New CCL aims to relax foreign ownership restrictions in certain sectors, the Anti-Fronting Law’s target is to prohibit side agreements. It is found that the UAE will face a period of thoughtfulness, as it is necessary to find a balance between the country’s intentions of attracting international capital whilst ensuring a central role for UAE nationals in the domestic economy.
It is also discovered that prohibiting side agreements could have a rather harsh impact on minority shareholders, who often relies on such arrangements. This further strengthens the support against the adoption of the Anti-Fronting Law.
Ultimately, the thesis will outline advantages and disadvantages while considering if foreign ownership structure should be restricted or relaxed in light of the two new laws and of side agreements. It is determined that the New CCL’s positive implications overtake the negative aspects. Side agreements are proven valuable tools, if it keeps all parties satisfied and reflects the true agreement. Evidentially, it is found that the there should be no adoption of the Concealment Law. Focus should lie on the New CCL, providing relaxed ownership structure toward foreign investors. Side agreements should instead be acknowledged along with the 49/51 rule in the New CCL.},
  author       = {Vallander, Anna},
  language     = {eng},
  note         = {Student Paper},
  title        = {Relaxing or Constraining Foreign Ownership Structure in the United Arab Emirates},
  year         = {2013},
}