10 Jul 2019

Guide to Joint Ventures – Case study

Authored by: Hadef & Partners, Sector Groups

This case study accompanies our Guide to Joint Ventures which can be found here.

Background

  • Our client was a European manufacturer and distributor.
  • Our client was selling its products to a local third party distributor in the UAE as it did not have any distribution company established in the region to sell its products directly to UAE customers.
  • Our client entered into a distribution agreement (“Distribution Agreement”) with a UAE company (“UAE Co”) under which UAE Co was responsible for, among other things, marketing and selling our client’s products in the UAE (“Products”).
  • The Distribution Agreement was to be terminated and our client wished to establish a new company which would be licensed to carry out the sale and distribution of the Products in the UAE (the “Licensed Activities”).  The Licensed Activities were to be carried out in onshore UAE and, accordingly, it was necessary to establish an onshore LLC in order to carry out these activities (“UAE Distribution LLC”).
  • The shareholding of UAE Distribution LLC would need to comply with Foreign Ownership Restriction.  However, the commercial agreement was for UAE Distribution LLC to be a 50:50 JV between our client and UAE Co.
  • Our client wished to implement a robust corporate structure for the purpose of owning, managing, marketing, distributing and selling the Products in the UAE via a 50:50 JV with UAE Co.

Solutions provided by Hadef & Partners

We created a robust and flexible structure for our client, the key features of which are set out below.

  • Our client owned forty nine per cent (49%) of the legal interest and fifty percent (50%) of the beneficial interest of the entire issued share capital of a joint venture company limited by shares incorporated in the DIFC (“DIFC JVCo”), whilst UAE Co held fifty one percent (51%) of the legal interest and fifty percent (50%) of the beneficial interest of the entire issued share capital of DIFC JVCo. UAE Co held, on behalf and to the account of our client, one percent (1%) of the legal interest of the entire issued share capital of DIFC JVCo (the “Nominee Shares”) for the purpose of complying with the Foreign Ownership Restriction.
  • Our client and UAE Co incorporated a nominee holding company in the Jebel Ali Free Zone (JAFZA Offshore Co”) for the purpose of complying with the licensing regulations requiring a second shareholder for UAE Distribution LLC. Our client and UAE Co held, in the same proportion as DIFC JVCo, the legal and beneficial interest in the share capital of JAFZA Offshore Co.
  • DIFC JVCo and JAFZA Offshore Co together held the shares in UAE Distribution LLC.
  • Accordingly, our client was the indirect legal owner of 49% of the share capital in UAE Distribution LLC and UAE Co was the indirect legal owner of 51% of the share capital in UAE Distribution LLC, therefore complying with the Foreign Ownership Restriction.
  • The relationship between our client and UAE Co in respect of DIFC JVCo was governed by the memorandum and articles of association (“DIFC JVCo MOA”) and a shareholders agreement subject to DIFC law (the “SHA”).  Unlike the position under UAE law, where the only remedies for breach of contract are generally damages and/or rescission, DIFC law allows scope for the remedy of specific performance.  A court order for specific performance will require a party under a contract to fulfil a contractual obligation which it has otherwise failed to satisfy.  Accordingly, contractual provisions in the DIFC JVCo MOA and the SHA which required the transfer of shares should be enforced by the DIFC courts – such provisions included, amongst others, put/call options, drag along/tag along rights and compulsory share transfers on default events.
  • Given that this was a 50:50 JV, the composition of the board of each of JAFZA Offshore Co, DIFC JVCo and UAE Distribution LLC was comprised of an equal number of directors appointed by our client and UAE Co. Therefore, the SHA included share transfer mechanisms to deal with potential deadlocks. As noted above, and unlike other free zones or in onshore Dubai, such share transfer mechanisms are more likely to be upheld in the DIFC. 
  • Another key advantage of using a DIFC company was the greater degree of protection it offered in respect of our client’s beneficial interests in the Nominee Shares, which was achieved by way of the following:
  • a pledge was registered in respect of the Nominee Shares at the DIFC Security Register (it is not always possible to perfect a pledge over shares in this way in onshore UAE or in one of the other free zones);
  • an irrevocable power of attorney was issued by UAE Co in favour of our client to deal with the Nominee Shares; and
  • the concept of a trust is not recognised in the UAE but is recognised as a matter of DIFC law.  Accordingly, a declaration of trust was executed pursuant to which UAE Co acknowledged and undertook that it held the Nominee Shares on trust for the benefit and to the account of our client.

 

Corporate Structure Chart

 

For more information, please contact us on sectors@hadefpartners.com.