Special:
Side Agreements & Side Letters
for LLCs in Dubai and the UAE

 
► Control of Commercial Harbouring (Anti Fronting)
     in UAE furthermore unclear - implemented or not?

KLP already informed in October 2007 about the implementation of the Federal Law No. 17/2004 per 15.11.2007, its huge obstacles especially for foreign investors and entrepreneurs – as well as the hint on available legal solutions to eliminate “Side Agreements” from the files of each and any domestic commercial entity, especially LLC companies.

What happened meanwhile?
Much and nothing really definite, we have to state unfortunately.

Unease over the effect of the Fronting Law has already been widespread since its publication in 2004. But till December 2007 nothing really essential came up from the government. It is therefore a little surprise that the implementation of the Fronting Law probably was quietly shelved in 2007.

Cabinet Decision 229/12/2007, which at the time of writing is still awaiting official publication, instructs the Ministry of Economy to:

• Present a detailed study setting out a mechanism and
  methodology for phasing in the law

• Make recommendations for sectors to which the Fronting Law
  should be applied initially and the priorities for its application

• Consider the sectors within which foreign investors should be allowed
  to own in excess of 50% of the shares of a limited liability company

• Prepare an awareness campaign, including a
  guidance note on the law's application

Interestingly, the cabinet decision doesn’t contain a direct and definite postponement of the law implementation. But it acknowledges by implication the need to reach a long awaited conclusion on amendments to the UAE's Companies Law and on the introduction of a foreign direct investment law.

The given economic growth in UAE plus the ongoing liberalisation and proliferation of free zones did overhaul UAE's legislative policy for economic issues regarding foreign direct investment. Reforms are here a clear matter of urgency, the implementation of the Fronting Law without such reforms risks to be a step back.

Nevertheless, the respite for the Ministry of Economy to reply on the catalogue listed above is December 2009! And the implication of several annotators is that this shall also be the new postponement of Fronting Law implementation.

Following the Principle of Caution, we strongly recommend acknowledging the Fronting Law as implemented, how it is stated in the official publication of Law No. 17/2004! The defined penalty structure of this law – Fines up to 100K AED, deportation and entry ban, de-registering and jail terms – should be considered, when taking the risk of misinterpretation of the Cabinet Decision.

It is also misleading to believe that existence of Side Agreements might only be disclosed in case of disputes in front of courts. The implementation of economic investigation (or prosecution) bodies is in preparation, authorized to review and audit company books and files!

Should the December 2009 respite be also an indication of the timetable for much anticipated regulatory changes regarding new company laws and foreign investment regulations – foremost the fall of the “Sponsor Principle” – it would be most disappointing.

Disappointing as well are the circulating recommendations of international & local law firms, how to deal with this bewildering situation – not rarely published in advertisements and “law columns” – for existing and to be founded LLCs: The tenor is, to waive the signing of Side Agreements, but to utilize all formation rules in the laws and Articles of Association.

Frankly, this is a very helpless recommendation – we only need to take a look at the common regulation of profit shares, variant from the relation of company shares: The maximum variant profit share in a 51:49% shareholder structure is 20:80%! Nevertheless, fixed profit share agreements and amounts are not allowed by law.

We guess that acceptance of these frames, proven by UAE legislation, is in most cases of foreign investments more than a burden – if not inacceptable.

If law specialists – except some serious market players we are constantly dealing with – have no better answer on these obstacles, we still have it out of our own corporation practice. The KLP Investment AND Sponsor Protection Contract System is a proven and notarized solution by utilizing several contract segments of legal and serious origin. As an innovative factor combination, helping “Locals” and “Foreigners” as well to do business in this fast growing economy without “one leg in jail”.

 
► Side Agreements in UAE Companies always in risk
     to be banned and criminalized!!!

Originally effective November 15, 2007 an amendment to the UAE Commercial Company Law was set to ban the so-called “side agreements” forged by foreign and local co-owners of UAE firms and businesses. This concerned any LLC in the UAE with foreign (Minority)Partners and a Local Sponsor, who holds at least 51% of the company shares. See also the publication from 03.10.2007 in the local newspaper XPRESS.

November 13, 2007 the implementation of this amendment was postponed till 2009. But nevertheless, "fronting" is a problem for all involved parties, local sponsors as well as foreign investors. The so called anti fronting initiative means, all differently agreed regulations with regards to authorization, profit share etc. become only a "mutual handshake" in the maximum. In most cases this seems to be more than poor, if not out of the question. Especially if the Sponsor, like in most cases, only "invested his good name" into the company, but neither capital funds, nor work force etc.

Nevertheless, these Side Agreements never have been court relevant so or so. In the maximum there exists a piece of paper - at least valid in mutual relation -, which brings in case of disputes the Local Sponsor eventually in a moral conflict. Validity of this situation is always under risk to be wiped out by new legal initiatives! 

Efficient solutions by going concern of the own LLC like before are available! In case of interest please contact us or send us an E-Mail.

In case of interest, please review also our Press & Media Release from 06.10.2007 (PDF).

Copyright: XPRESS Dubai