15 Apr 2020

Joint Ventures in the UAE: Location of JVCO Incorporation, and its relationship with Governing Law and Dispute Resolution Forum

Authored by: Hadef & Partners, Sector Groups

In brief:

  • When contemplating a joint venture in the UAE, the optimal location of incorporation of a JV company and the applicable laws, coupled with the dispute resolution forum to which the JV company and its owners will be subject, should be carefully considered.
  • There are many factors to be taken in to account which will be specific to the parties, and there is no “one size fits all”.
  • In this article we look at a few of these factors:
    • whether there will be multiple classes of shares;
    • whether injunctive relief ought to be an available remedy;
    • whether the JV company’s activities will take place ‘on-shore’ or not;
    • provisions in relation to the transfer of shares; and
    • what is needed from the governing law.

When establishing JV companies in the UAE, the following are key questions to be asked at the outset:

  1. Where in the UAE is the optimal location within which to incorporate the JV company - onshore or in a free zone, and, if in a free zone, which one?
  1. Which law will the JV or shareholders’ agreement be governed by, and does this ‘fit’ with the location of incorporation?
  1. What is the appropriate dispute resolution forum?

Factors to be taken into account

When considering these questions, there are a number of factors to be taken into account, including:

  • Multiple classes of shares – do you need them?

If it is important to the parties that the JV company can accommodate multiple classes of shares, for example, if the parties have agreed that certain groups of shareholders should have greater voting power than other groups, or that a certain group of shareholder should receive dividends in priority to others, then incorporating the JV company in mainland UAE (onshore) will not be appropriate. This is because onshore companies cannot have more than one class of share.  In such circumstances, a free zone, like the Dubai International Financial Centre (DIFC) free zone, may be a good choice within which to incorporate. DIFC law, which will apply to the governance of all companies incorporated in this free zone at a fundamental level, recognises multiple share classes in companies. This would be complemented by the election of the parties to have DIFC law, or English law for example, as the governing law of the JV or shareholders’ agreement itself.

  • Injunctive Relief – might you want it?

If damages are not foreseeably going to be an entirely satisfactory remedy for a breach of certain significant provisions of your JV or shareholders’ agreement, for example, where confidentiality of trade secrets or other forms of restrictive covenants are going to be a key aspect of, or basis for, the JV partners or shareholders working together, the potential ability to seek injunctive relief could be important. It is therefore necessary to bear in mind that injunctions are not typically a remedy available from the onshore UAE courts (other than in very specific cases in relation to UAE registered trade mark infringement). It is, however, possible to be granted injunctive relief by the DIFC courts, and this could be enforced throughout the DIFC. Although an injunction would not likely be easily enforceable outside of the DIFC (where damages are the more likely available remedy), and therefore an injunction’s significance to parties may be limited, dependent on the circumstances, if, perhaps based on the nature of the business and the location of potential competitors, the ability to enforce the restriction within the DIFC would be valuable, then having the relevant JV or shareholders’ agreement stated to be governed by DIFC law, subject to the jurisdiction of the DIFC courts, could be a practical asset to the parties.

  • On-shore activities – are there any? What are they?

The nature of the business of your JV company may require the conducting of business in onshore UAE, whether that be for sales/distribution, services provision to customers or marketing and promotion, for example. UAE law only permits entities licensed to conduct such activities onshore, to carry out these activities, so incorporating the JV company as an onshore limited liability company (as opposed, to a free zone entity) may be a necessity to provide the JV company with the ability to operate as the parties intend.

  • Transfer of shares – what’s the process and does this ‘marry up’ with the place of incorporation?

Often JV partners/shareholders will want to document carefully in the JV or shareholders’ agreement how and in what circumstances each of the parties may (or perhaps must) deal with or transfer their shares in the JV company. When considering these provisions, parties should be mindful as to where the JV company has been (or is to be) incorporated, to ensure that such rules they set out in the JV or shareholders’ agreement do not conflict with the practical process which will apply by default to dealings in shares, due to the location of the JV company’s incorporation. For example, the shares in a company incorporated in the DIFC may be transferred by way of a signed share transfer form, without need for executing documentation before a notary public (which is a fundamental requirement to effect share transfers in onshore limited liability companies). It would therefore not only be inappropriate, but could also render the relevant provisions in-actionable and therefore worthless, if the onshore company process for share transfers was stipulated in a JV or shareholders’ agreement relating to a JV company which was incorporated in the DIFC, as the process which must be followed.

  • Governing Law – does it provide you with what you need?

Conversely, a JV or shareholders’ agreement relating to a JV company incorporated onshore in the UAE, and which is to be governed by UAE law, ought not to include common law terminology such as “warranties”, “representations”, “best endeavours” or “reasonable endeavours”, because such terms have no established, pre-defined meanings and consequences under UAE law, even though these terms are well established and customarily used under DIFC law, for example. However, where the legal import of these terms, as understood under common law, has relevance to the shareholders or partners in a JV company incorporated onshore, alternative terms which would have, so far as possible, a similar legal effect under UAE law, will need be included in the JV or shareholders’ agreement.

In our ‘Guide to Joint Ventures – Enabling parties to establish Joint Ventures with confidence’, available here, our Corporate team provide more information about Joint Ventures in the UAE and provides a case study of how we structured a recent JV for a foreign client, which illustrates our structuring expertise.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.