Dubai Court Ruling on Non-Registered Distribution Agreement:
- No automatic renewal of a limited-term Distribution Agreement by the continuation of Trade
- No compensation for non-renewal/termination of a Distribution Agreement
Azhari Legal Consultancy successfully defended its client, a German manufacturer (the “Client”), in a lawsuit against a UAE authorized distributor (the “Distributor”) seeking compensation for the termination of an authorized distributor agreement before the Dubai Courts.
The Client appointed a UAE-based trading company as its exclusive distributor for the UAE and other GCC countries. Since the distributor agreement was not registered with the Ministry of Economy, the provisions of the UAE Agency Law did not apply.
The Client and the Distributor entered into a distributor agreement (the “Distributor Agreement”), in 2011, which had a fixed term of 3 years and contained a provision that the Distributor Agreement can be renewed if agreed so by the parties in writing. After the expiry of the Distributor Agreement, the parties negotiated the terms of a new distributor agreement. However, the parties failed to agree on all terms of the new agreement, and consequently, they never signed a new agreement. The Client did not appoint a new authorized distributor in the UAE. Instead, the Client only delivered to the Distributor whenever a purchase order was received from the Distributor.
Later on, as the Distributor failed to pay the purchase price, the Client initiated legal proceedings with the aim to get a judgment regarding its outstanding purchase price amounting to EUR 300,000.
During the legal proceedings the Distributor raised counter-claims requesting an amount of approximately AED 2 million as a compensation for the ‘termination’ of the Distributor Agreement. The counter-claims sought to recover expenses of marketing, costs of training of employees and renting of warehouses as well as a compensation for loss of business and income because of the termination.
The legal question in this case was – inter alia – whether the existence of the trading relationship between the Client and the Distributor after the expiry of the Distributor Agreement constituted an implied extension of the expired Distributor Agreement.
In its final judgment, the Dubai Court opined that (1) the continuation of the trading relationship between the parties did not constitute an implied extension of the expired Distributor Agreement as this Agreement provided that any extension requires to be in written form and (2) the non-renewal of the Distributor Agreement does not give rise to a compensation claim against the Client. Moreover, the Dubai Court regarded the Client as merely a supplier and the Distributor as an independent merchant and compelled the Distributor to pay the claimed amount.
Registered vs Non-registered Commercial Agency
The case decided by a final judgment of the Dubai Courts refers to a non-registered commercial agency.
If the commercial agency agreement would have been registered with the Ministry of Economy, the outcome might have been different in a drastic way for the Client.
The UAE Commercial Agency Law (Federal Law 18 of 1981) has strict requirements that govern the relation between the commercial agent and the principal. For instance, the commercial agent must be a UAE national (or a legal entity 100% owned by a UAE national(s)) and the agreement between the agent and the principal must be attested (notarized) and registered with the Ministry of Economy.
Termination or non-renewal of an agency agreement (or the distribution agreement), once registered with the Ministry of Economy, requires legal ground. Without a justifiable legal ground, which is defined very narrowly by the courts, or mutual agreement, it can be extremely difficult to terminate the agency agreement. Moreover, depending on the circumstances of the termination, the courts may give the agents substantial compensation for the damages suffered as a result of the termination.
In practice, even though the idea of entering the market through a local agent has its perks, such as the agent’s knowledge of the market, it could be more attractive for the principal to enter into an agreement which is not subject to the UAE Commercial Agency Law, as a registered agreement would be extremely difficult to terminate (even if there are fixed terms), would give exclusivity to the agent and ultimately substantial control for the agent over the subject matter of the agreement.
Therefore, it is very crucial to carefully draft an agency agreement, whether subject to the UAE Commercial Agency Law or not, in order to avoid adverse legal consequences.
Azhari Legal Consultancy (“ALC”) is currently representing a significant client, a foreign engineering and architecture company, in an International Chamber of Commerce (“ICC”) Arbitration case in Dubai. In this case, ALC team of attorneys and professional staff is offering its breadth of experience and knowledge to arbitrate a dispute in connection with one of the most distinguished construction projects of the region. We will keep you updated on the progress of the case.
On November 14, 2016, Nima Michael Moshggoo, Esq., attorney-at-law from Azhari Legal Consultancy, held a presentation as part of a seminar in respect of financial planning in the UAE. Titled “Protection and Financial Planning in UAE,” the talk focused on what expatriates in the UAE can do to properly manage their finances and protect their assets. Nima covered the topic of Wills and Guardianship and explained the different solutions for protecting the expats’ assets and children when the family goes through difficult times of losing a loved one.
The UAE has witnessed a rising number of franchise models over the last years. In particular, numerous international and national brands are recognizing the significance of the model and expanding their business to the UAE and other GCC Countries. But also small and mid-size companies are exploring franchise opportunities in Dubai and the UAE.
2. What is Franchise
Franchising is when a business realizes that its products or services and brand have created value that other investors want to replicate its proven concept. In order to benefit from its brand reputation and achieve scalability, the business owner becomes a franchisor. In the franchise model, the franchisor sells the rights to benefit from its business model in a particular territory to a Franchisee.
3. Legal Framework
In the UAE there is no uniform franchise law. Instead, the UAE Civil Transaction Law and the Commercial Transaction Law govern the franchise agreements. Moreover, there is some uncertainty as to whether franchise models are governed by the UAE Commercial Agencies Law (“Agencies Law”).
A Franchise Agreement will only be governed by the UAE Commercial Agencies Law, if the Franchise Agreement is registered with the UAE Federal Ministry of Economy (“Ministry of Economy”). A Franchise Agreement, however, is only eligible to be registered with the UAE Federal Ministry of Economy if it meets the following requirements:
- The Franchisee must be a UAE national or a company wholly owned by UAE nationals;
- The Franchise Agreement must grant exclusivity over all or parts of the UAE; and
- The Franchise Agreement must be notarized.
In practice, however, most Franchisees are not UAE nationals nor companies entirely owned by UAE nationals. Such Franchise Agreements are per se not eligible to be registered with the Ministry of Economy. If, however, the Franchisee is a UAE national or a legal entity entirely owned by UAE nationals, it is, generally speaking, eligible to get registered with the Ministry of Economy.
If the Franchise Agreement is registered with the Ministry of Economy, the Franchisee may enjoy – inter alia – the following rights and privileges:
- As long as the Franchisee is registered with the Ministry of Economy, the Franchisee may block parallel imports by instructing the UAE ports and custom authorities to prohibit any goods covered by the registered Franchise Agreement to enter the UAE.
- The Franchise Agreement is difficult to terminate by the Franchisor, who needs to have a “justifiable cause.” As such, termination clauses have to be drafted cautiously.
- The UAE Courts have exclusive jurisdiction, i.e. registered Franchise Agreements and other registered agency agreements are not arbitratable.
The DIFC-LCIA Arbitration Rules have been slightly amended with effective date of October 1, 2016. In a nutshell, the new DIFC-LCIA Arbitration Rules have incorporated provisions regarding the access to emergency arbitrator (see Article 9B); provision for multi–party disputes (see Articles 1.5 and 2.5); measures to increase efficiency and avoid delays in proceedings (see Articles 9C, 10 and 11); and online filing and commencement of proceedings (see Articles 1.3 and 2.3). It seems clear that the amendments have the purpose to expedite and simplify the arbitration proceedings.
However, the introduction of an ‘Emergency Arbitrator’ gives a party access to interim relief even prior to the constitution of the Arbitration Tribunal.
What is an Emergency Arbitrator?
The constitution of the Arbitration Tribunal, i.e. the appointment of the arbitrators, inevitably can be time-consuming. A problematic situation might arise where interim relief is needed by one party before the tribunal has been constituted. In order to bridge this time-gap, most arbitration rules contain provisions for the appointments of an emergency arbitrator. As such an emergency arbitrator deals with requests for urgent interim relief, such as an interim injunction, before the main tribunal is constituted.
In light of the above situation the newly included Article 9 B provides:
- 9.4 Subject always to Article 9.14 below, in the case of emergency at any time prior to the formation or expedited formation of the Arbitral Tribunal (under Articles 5 or 9A), any party may apply to the LCIA Court for the immediate appointment of a temporary sole arbitrator to conduct emergency proceedings pending the formation or expedited formation of the Arbitral Tribunal (the “Emergency Arbitrator”).
- 9.5 Such an application shall be made to the Registrar in writing (preferably by electronic means), together with a copy of the Request (if made by a Claimant) or a copy of the Response (if made by a Respondent), delivered or notified to all other parties to the arbitration. The application shall set out, together with all relevant documentation: (i) the specific grounds for requiring, as an emergency, the appointment of an Emergency Arbitrator; and (ii) the specific claim, with reasons, for emergency relief. The application shall be accompanied by the applicant’s written confirmation that the applicant has paid or is paying to the DIFC-LCIA Arbitration Centre the Special Fee under Article 9B, without which actual receipt of such payment the application shall be dismissed by the LCIA Court. …..
- 9.8 The Emergency Arbitrator shall decide the claim for emergency relief as soon as possible, but no later than 14 days following the Emergency Arbitrator’s appointment. This deadline may only be extended by the LCIA Court in exceptional circumstances (pursuant to Article 22.5) or by the written agreement of all parties to the emergency proceedings. The Emergency Arbitrator may make any order or award which the Arbitral Tribunal could make under the Arbitration Agreement (excepting Arbitration and Legal Costs under Articles 28.2 and 28.3); and, in addition, make any order adjourning the consideration of all or any part of the claim for emergency relief to the proceedings conducted by the Arbitral Tribunal (when formed).
The application fee is fixed at AED 50,000 (appr. USD 13,600) and the Emergency Arbitrator’s fee amounts to AED 120,000 (appr. USD 32,700)
By inserting Article 9 B the DIFC-LCIA Arbitration opens the door for granting interim relief for the parties of an arbitration prior to the constitution of the Tribunal.
The Enforceability of an Emergency Arbitrational Award
The practical impact of the introduction of an “Emergency Arbitrator” seems to be limited, as the nature of an interim injunction normally requires a sudden and immediate execution, e.g. in the case of an attachment of certain assets. If, for example, the claimant fears that the respondent will dissipate assets outside a specific jurisdiction, a request for an interim injunction before an Emergency Arbitrator might even increase this risk, as Section 9.4 of the DIFC-LIAC Rules 2016 requires that the Applicant and the Arbitration Centre respectively have to notify the Respondent with the request to issue an interim junction. By doing so, the Respondent will be aware of the request and has sufficient time to defeat the purpose of the interim measure, i.e. transferring his funds to a safe haven.
In contrast, in most jurisdictions the national courts issue interim junctions without notifying the Respondent about the request to issue an interim junction, so called ex parte (without notice). Arbitration tribunals, however, never hear ex ante or make ex parte orders.
If the national courts issue an interim junction, it can be executed immediately and it reaches the Respondent without any warning. As such, interim junctions issued by national courts, have – compared to an interim junction of an Emergency Arbitrator – more “bite” and are more effective.
Moreover, the enforceability of an award of an Emergency Arbitration cannot be compared with the recognition and execution of final arbitral awards. The recognition and execution of a final arbitral award is governed in most jurisdictions by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“The New York Convention”). As the award of the emergency arbitrator is not (even) binding for the Tribunal that will at a later stage deal with the dispute, it is at least controversial whether an Emergency Award is governed by the Convention. Thus, if it comes to an award of an Emergency Arbitration one has to consider the position of the local courts that have jurisdiction regarding the execution whether they will enforce such award.
In light of the above, the appointment of an ‘Emergency Arbitrator’ still might make sense in the following cases:
- An interim relief of an ‘emergency arbitrator’ serves its purpose in ongoing contractual relationships mostly in construction case, e.g. an application for specific performance under an existing agreement or the release of an interim payment under a construction contract.
- The Appellant seeks to keep the entire dispute confidential.
- It is clear or expected that the Respondent will apply voluntarily with the interim injunction of the Emergency Arbitrator
- The competent local courts are inefficient or might be partial
In this context, it is worthwhile to mention that Article 9B provides that it shall not prejudice any party’s right to apply to a state court or other legal authority for any interim or conservatory measures before the formation of the Arbitration Tribunal.
The practical impact of emergency arbitration will be limited due to the above mentioned practical obstacles. In certain situations, it will be a case by case decision whether Emergency Arbitration is worth the candle.
An important means for Employers to protect their business, confidential information and secrets from departing employees is the arrangement of so-called post termination restriction clauses.
Article 127 of the Labour Code of the UAE provides that an employer may agree on a post-contractual non-competition clause with an employee who, due to their employment with the employer, has knowledge of the clients of the employer or confidential information or business secrets, as long as the employee is at least 21 years of age. A valid non-competition clause must be limited in time and is restricted both geographically and to a specific business area. In addition, the severity of the non-compete clause must be necessary in order to protect the legitimate interests of the employee.
Alongside this – with fewer restrictions for the employee – the following post-contractual clauses can also be agreed upon:
- Non-Poaching Clause: Undertaking by the employee not to poach any other employees in the event of leaving the employer;
- Non-Solicitation Clause: Prohibition against soliciting customers of the employer to oneself or to a new employer, following departure from the company; or
- Non-Dealing Clause: Prohibition against maintaining professional contact with clients of the employer, independent of the question of who established the contact.
A violation of a Non-Competition Clause or of the other above-mentioned Post-Termination Restrictions may lead to claims for damages of the employer against the (former) employee. The burden of proof – for instance, of a violation of the Non-Competition Clause – and of the damages lies with the (former) employer. As a general rule, the violation of the Non-Competition Clause can be proven relatively easily. This is not the case with the damages or the amount of the damages, as the existence of damages is not sufficiently demonstrable in numerous cases, as a result of which the (former) employer would lose the case.
However, there is a possibility that in a contract, in addition to the Post Termination Restriction, a contractual penalty is agreed upon for the case in which the Post-Termination Restrictions have been violated by the employee. Insofar as a contractual penalty of this kind has been agreed upon, the burden of proof will be reversed. The employer now only has to prove the violation of the restriction clause and will demand the agreed contractual penalty from the (former) employee. The employee now has to demonstrate that these agreed damages have not arisen, or are disproportionate. As the Civil Code, with regard to contractual penalties, contains provisions whereby a judge may ‘open’ a contractual penalty clause, caution is advised in the formulation of a contractual penalty.
The claim for damages against a former Employee must be made at the competent Labour Court. In this case it is important that before the commencement of the lawsuit – as in all matters of employment law – the parties have to take the case to the ‘Labour Department’, which will attempt to bring about an amicable settlement. It is only when these ‘conciliatory proceedings’ have failed that cases can be taken to the Labour Court. It should be emphasized that the ‘Dubai Court of Cassation’ has decided that failed ‘conciliatory proceedings’ due to unpaid wages do not entitle the employer to make claims for damages due to the violation of a Post-Termination Restrictions by a (former) employee. Separate ‘conciliatory proceedings’ are to be carried out for this purpose.
Court of Cassation Rejects the Recognition of a California Judgment – DIFC Courts as “Conduit” Jurisdiction
Azhari Legal Consultancy defended successfully the recognition and enforcement of a judgment issued by a California District Court. The judgment of the Dubai Court of Cassation rejecting the recognition and execution of the US-judgment is not a “milestone” judgment. It rather confirms the traditional case law related to the recognition and execution of foreign judgment in the UAE.
In this context, the question raised is whether it would have been advisable for the Claimant to have used the DIFC Court as a “conduit” jurisdiction for the recognition and execution of the US-judgment?
On May 11, 2014, an action was filed before Dubai Court of First Instance by a U.S. company (“the Claimant”) against a UAE company (“the Defendant”), represented by Azhari Legal Consultancy, for recognition of a judgment from a foreign court – the U.S. District Court, Northern District of California. The Court of First Instance dismissed the case on the grounds that (i) there is no applicable enforcement treaty between the United States and the United Arab Emirates (the “UAE”) and (ii) the judgment by the foreign court was issued in absence of one of the parties (Default Judgement) and as such cannot be deemed a final judgement and therefore it is subject to challenge. Subsequently, the Claimant appealed the judgment to the Court of Appeal.
In its appeal memorandum, the Claimant argued that under the agreement in question, a distribution agreement, the legal procedures must have been followed under the laws of California and accordingly they did a proper service of notice which lead to the Default Judgment. Further, the Claimant cited a UAE Court of Cassation Ruling that all judgements or orders issued by foreign courts may be executed within the UAE if all elements of Article 235 of UAE Civil Procedures Law (the “CivPro Law”) are met. Article 235 of the CivPro Law enumerates the conditions under which a foreign judgement can be executed within the UAE. The Court of Appeal accepted the Claimant’s argument and reversed the Court of First Instance’s decision. Consequently, the Defendant challenged the decision and filed an appeal before the Court of Cassation.
The Court of Cassation (Case No.: 517/2015 date of judgment 08/28/2016) confirmed the Court of First Instance’s decision and opined that in the absence of an applicable enforcement treaty between the UAE and a relevant foreign jurisdiction in which the judgement originated from, a foreign judgment may be executed within the UAE; however, the Claimant failed to prove that all elements of Article 235 of the CivPro Law are met for recognizing and executing the foreign judgement.
This ruling should not surprise anyone since it is fair to say that the enforcement of foreign court judgments, in the absence of an applicable enforcement treaty, are extremely challenging, let alone the uncertainties and risks involved. Practically, in the absence of an applicable enforcement treaty between the UAE and a foreign jurisdiction, the odds of a successful enforcement through the courts of Dubai are slim.
DIFC-Courts as “Conduit” Jurisdiction
Alternatively, the DIFC Court’s enforcement regime may open up a wider route to enforce foreign court judgements within the UAE. According to Article 7(6) of the Judicial Authority Law (the “JAL”) and Article 24(1)(a) of the DIFC Court Law (DIFC Law No. 10 of 2004), the DIFC Courts have jurisdiction to ratify any judgment of a recognized foreign court for the purposes of enforcement in the courts of Dubai.
Several recent judgments by the DIFC Court of Appeal have confirmed that it has jurisdiction to recognize and enforce foreign court judgements. In DNB Bank ASA v Gulf Eyadah Corporation and Gulf Navigation Holdings PJSC, the DIFC Court of Appeal found that: “a foreign judgment when granted recognition in the DIFC Courts, becomes a local judgment of the DIFC Courts and should therefore be treated as such by the Dubai Courts”.
The most important issue to be addressed then would be whether the courts of Dubai are willing to enforce “conduit” DIFC Court judgments. Recent developments in the UAE legal system and in particular the increasing level of cooperation between the Dubai Courts and the DIFC Courts systems suggest a new channel of enforcing foreign court judgments through the DIFC Courts system, even though in practice it yet remains to be seen how the courts of Dubai would react.
In light of DNB Bank ASA v Gulf Eyadah Corporation and Gulf Navigation Holdings PJSC, it would have been certainly advisable for the Claimant to have sought recognition and execution of the California judgment before the DIFC Courts.
The Untimely Death of “Double-Irish Dutch sandwich”?
The ruling of the EU-Commission by which Apple Inc. (“Apple”) was compelled to pay EUR 13 billion is without exaggeration a historical decision.
There have been several comments and reactions on the EU-Ruling. Some comments suggest the end of the “Irish Double” and see international tax optimization structures in peril.
The Ruling of the EU-Commission has just been announced and it needs to be examined diligently prior to jumping to any conclusions. However, so far as known publicly, the merits of the case are the following:
In the 1980ies Apple founder Steve Jobs decided to set up affiliates outside the US, namely in Ireland. At that time, the Irish government supported such industrial locations by granting generous tax reliefs. Till date, Apple uses several affiliates based in Ireland in order to conduct its international business. Theoretically, the profits of these affiliates were subject to the normal corporate tax in Ireland of 12.5 %.
The normal corporate tax rate in Ireland is 12.5 %. Apple Inc. set up a holding in Ireland and negotiated with Ireland a specific tax-arrangement, i.e. the so-called “Double-Irish Dutch sandwich”, by which Apple could almost avoid any taxation of royalties paid from Apple’s European affiliates to the Irish Companies.
The Structure of a “Double-Irish Dutch sandwich”
The recipe of a “Double Irish Dutch sandwich” is rather easy. You use two Irish Companies and in the middle you have a Dutch Company.
The underlying tax principle of a “Double Irish” are provisions in the Irish tax laws according to which a corporation is only subject to [corporate] tax, if it is registered in Ireland and it has its place of business (i.e. the place where the management is located) in Ireland.
In light of this tax framework, one company (offshore) will be registered in a tax haven (e.g. Bermuda, UAE or Cayman Islands) that will have its place of business in Ireland, without being subject to tax in Ireland (the First Company). The Second Company will be registered in Ireland and will also have its place of business in Ireland.
The Second Company receives loyalties from its affiliates’ operation in [European high] tax jurisdictions. However, if the Second Company would directly pay the royalties to the First Company (registered in a tax heaven outside the EU), Ireland would levy a so called withholding tax. In order to avoid such withholding tax, the Second Company first transfers the profits to a Dutch subsidiary, as there exists a Double Taxation Agreement between Ireland and the Netherlands which exempts royalties from withholding taxes. By sending the money first to the Netherlands and then to the First Company registered in a tax haven, no taxes will be levied. This particular structure is called “Double-Irish Dutch sandwich).
The Ruling of the EU-Commission
The decision of the EU-Commission is not challenging the corporate tax rates in Ireland which are significantly lower than in most other European countries. Instead, the EU-Commission considers agreement between Apple and Ireland, by which Ireland reduced its tax rates for a particular tax payer, i.e. Apple, an illegal subsidy.
In this context it is important to know that in the European Union subsidies are – generally speaking – prohibited in order to safeguard a fair and competitive business environment. The Ruling of the European Union considers the tax agreement between Ireland and Apple an illegal subsidy violating the principles of fair competition as the “normal” business man has to pay corporate taxes of 12.5 % of his reported profits.
In light of the above, the Apple Ruling does not jeopardize as such international optimized tax structures. However, the Ruling proves that the European Union is able to react to any unfair competition caused by an abuse of tax agreements between its member states and some [privileged] tax payers.
Untimely Death of “Double-Irish”
Coming back to the question raised above, one needs to mention that “Double-Irish” was for many years an eyesore for most European countries and as such they put significant pressure on Ireland in order to change its tax regime. As a consequence, the Irish government suspended this structure since 2015. However, the Irish government granted all existing “Double – Irish” tax structures a transition period till 2020.
Apple and the Republic of Ireland announced to appeal the decision of the European Commission, and the final outcome yet remains to be seen. However, as the “Double-Irish” is, since 2015, no longer an available tax structure, the decision will only have an impact on the still existing “Double-Irish” structures.
As such, the decision will have only very little impact on new tax optimization structures as long as these structures cannot be considered as (illegal) state subsidies.
On June 9, 2016, H.H. The Ruler of Dubai issued Decree 19/2016 (the “Decree”) to establish the ‘Judicial Tribunal for the Dubai Courts and the DIFC Courts.’ Given the uncertainties as to how DIFC Courts and Dubai Courts should have jurisdiction, the Decree could become an important development in Dubai’s legal system. The intentions of the Decree are to rule on (i) conflicts of jurisdiction; and (ii) conflicts of judgments, between the DIFC Courts and the Dubai Courts.
Even though it is still unclear when the Judicial Tribunal will become operational or what precise procedure an applicant should follow, certain significant developments are expected to occur, thanks to the Decree. A few important ones are the following: a) Binding and non-appealable decisions on jurisdiction must be rendered within 30 working days of filing an application; b) the Judicial Tribunal will comprise the President of the Dubai Court of Cassation (as chairman, who holds the casting vote), 3 judges from the DIFC Courts (including the Chief Justice, and 2 nominated by the Chief Justice) and 3 judges from the Dubai Courts (including the Secretary General of the Judicial Council and Presidents of Courts Appeal and First Instance); and c) Applications to the Judicial Tribunal will result in a stay of the underlying proceedings, including stopping of the clock for the purposes of statute of limitation, in both the DIFC Courts and the Dubai Courts.
While the actual ramifications of the Decree are yet to be seen, it is fair to say that the Decree will provide more certainty on the already-existing conflicts of jurisdiction between the DIFC Courts and the Dubai Courts and perhaps an expansion of the jurisdiction of the former.
Mergers & Acquisition
Due to the positive economic development and the fact that no taxes are levied there, the UAE are an interesting business location. Some foreign companies decide to enter the local market through the acquisition of already existing companies. By this means, the foreign company saves time and money for the market launch and the gaining of market share and also has the opportunity to achieve synergies in the context of acquisition.
In the acquisition of companies in the UAE, essentially the same criterion is applied as in the acquisition of a company in Germany. A legal and financial due diligence is carried out. In the absence of local tax law, a tax due diligence is not necessary. The following peculiarities, among others, should be emphasized, however:
1. Control of Mergers
With the 'Federal Law No. 4 of 2012 Concerning Regulating Competition', a competition law was introduced in the UAE with the aim of ensuring free competition. The law is applied to numerous economic transactions that could have effects on free competition. This law is also always applied to company purchases and company mergers. In this respect, in the case of company mergers, 'merger approvals' must if necessary be acquired from the UAE Ministry of Economy.
Despite the Cabinet Resolution No. 37 of 2014, which clarified several open points, the law leaves many questions open. Thus, the law contains a provision that is not to be applied to small and medium companies, without defining the term 'small and medium companies'.
Because of the existing uncertainties that have arisen from the still relatively recent law, it is of utmost importance in the company acquisition contracts to clearly regulate who is responsible for any necessary approval.
2. Local Sponsor
Any LLC that is not domiciled in a free trade zone has a local sponsor that holds 51% of the shares. In a company acquisition, the buyer should carefully check the articles of association and the side agreements (even if the legal enforceability of the latter is fraught with risk). Independent of this, the acquiring party should gain a personal impression of the 'Local Sponsor'. One should also take into consideration in each individual case whether one should activate as a 'sponsor' an LLC that is held 100% by UAE citizens and in which the foreign investor or a person appointed by the foreign investor shall take over the management.
3. Payment of Purchase Price – Earn-out Clauses
In numerous acquisitions, a contractually agreed fixed payment is made when a company takeover is completed. Further payments are made provided certain 'milestones' are reached by the company; certain profit expectations should be met on a regular basis. These 'milestones' and downstream purchase price payments are defined in so-called 'earn-out clauses'. Provided that the existing management undertakes, on the request of the acquirer, to continue to manage the company for a certain period, 'earn-out clauses' of this kind are fair and acceptable to both sides. If, however, an acquirer is not interested in the old management, the enforcement of 'earn-out clauses' may become difficult for the acquirer, as it is difficult to make the former management responsible for the reaching of or failure to reach 'milestones'.
4. Annual Financial Statements
In the case of smaller acquisitions, often only a very brief legal and financial due diligence is carried out in Europe. In the financial due diligence, the commercial and tax balance sheets are only checked summarily. For reasons of cost, this approach makes sense in the case of small acquisitions in jurisdictions with a functioning financial administration. In the UAE, by contrast, balance sheets are only audited for reasons of 'compliance'. The audit for 'compliance' reasons is performed by the auditors only in a very superficial way. It is thus important in the case of smaller companies to not 'blindly' trust the balance sheets, and to work carefully on the drafting of the contract. The purchase price should be paid in instalments and the acquiring party should demand accounts warranties from the seller.
5. Contractual Clauses and Practical Handling of the Acquisition
When drafting the contract, the local circumstances should be taken into account in the completion of the transfer of shares. The procedure of transferring shares varies from emirate to emirate and can be very time-consuming. Moreover, in the context of completing a company purchase, follow-up contracts (more or less standard contracts of the notaries) must be concluded. Here it is important to ensure that these do not conflict with the actual company purchase agreement.
Company purchase contracts should contain provisions that determine when the company acquisition has to be completed. Following the expiry of this deadline, the seller is normally entitled to withdraw from the contract and to enforce certain contractual penalties. When determining the time frame, one should take into account any 'merger approvals' and the sometimes time-consuming transfer procedure at the local authorities, in order to reach a fair and also enforceable agreement.