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Business Law in the Middle East


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A practical guide to doing business in the Middle East.

By Christopher Gunson
Pillsbury Winthrop Shaw Pittman LLP

Published in: Business
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Business Law in the Middle East

  1. 1. Pillsbury Winthrop Shaw Pittman LLP Business Law in the Middle East A practical guide for multinationals 4 March 2014 Christopher Gunson Counsel Pillsbury Winthrop Shaw Pittman LLP
  2. 2. Contents  What is the ‘Middle East’?  Legal system  Business Establishment and Foreign Investment  Commercial Agency  Other legal and business considerations  Dispute resolution 1 | Business Law in the Middle East
  3. 3. What is the Middle East?
  4. 4. What is the Middle East? (1): MENA Countries  “The Middle East and North Africa” (MENA) (but excluding Israel, to be discussed later in this presentation).  Similar systems of laws, but very different political economies  Oil-Producers v.s. Non-Producers  Big v.s. Small Populations  Monarchies v.s. Republics Yemen Egypt Saudi Arabia UAE Qatar IranIraq BahrainKuwait Turkey Oman Jordan SyriaLebanon Libya Tunisia Algeria Morocco 3 | Business Law in the Middle East
  5. 5. What is the Middle East? (2): GCC  Gulf Cooperation Council (GCC)  Union of Saudi Arabia, UAE, Kuwait, Oman, Bahrain and Qatar established in 1981 following Iranian Revolution and Iran-Iraq War.  Significant transnational union with coordinated laws and regulations.  Substantial foreign investment and major projects in region. 4 | Business Law in the Middle East
  6. 6. What is the Middle East? (3): Oil & Gas  Oil Producers  Major producer and exporter is Saudi Arabia.  Other major producers are Iran, Iraq, Kuwait, the UAE and Algeria.  Other important exporters include Qatar, Oman and Libya.  Additionally, Qatar is a major exporter of LNG. 0.7 10.2 (9.3 in 2010) 2.8 0.2 1.2 3.5 (4.2 in 2010) 2.5 0.12.5 0.2 0.8 0.4 0.1~1.0 (1.6 in 2010) 0.08 2.1 0.03 Millions of barrels produced per day (mbbl/day) (2011) 5 | Business Law in the Middle East
  7. 7. What is the Middle East? (4): Populations  Population  Egypt, Turkey and Iran have largest populations.  Countries with smaller but substantial populations include Morocco, Algeria, Syria, Iraq, Saudi Arabia and Yemen.  Countries with very small populations, such as UAE, Bahrain, Oman, Qatar and Kuwait, are centers of foreign investment. Figures in millions of people (2010) 2 82 26 8 22 2 7731 1 4 72 23 6 10 36 32 4 6 6 | Business Law in the Middle East
  8. 8. What is the Middle East? (5): Government  System of Government  Nationalist and socialist revolutions achieved independence (Algeria, Tunisia, Lebanon) or overthrew monarchies (Turkey, Libya, Egypt, Iraq, Syria, Yemen, Iran) during the 20th century.  Royal families survive in the GCC countries, Jordan and Morocco. ▲ = Monarchy ▲ = Republic (date of revolution) (1953) (1967/1970) (1979) (1949) (1969) (1956) (1962) (1943) (1958) (1922) 7 | Business Law in the Middle East
  9. 9. What is the Middle East? (6): Arab Spring  Arab Spring  Protests that began in Tunisia in January 2011 quickly spread (protests erupted in every Arab country except Qatar and the UAE).  Republics have been most vulnerable, whereas monarchies have appeared more resilient, enjoying greater popular loyalty, and have circled the bandwagon to protect each other. ▲ = Regime change following protests ▲ = Regime change threatened 8 | Business Law in the Middle East
  10. 10. Overview of the Legal System
  11. 11. UAE Legal System (1)  No written law when the Gulf Emirates became protectorates of the British Empire in the 19th century. Sheikhs ruled based on the Shariah Law and tribal custom.  First written law when the British sent in magistrates from Sudan to prescribe the oral decrees of the Sheikhs.  Independent police force and courts established in the 1950s with British influence (although court system adopted Egypt/Civil Law model).  UAE Constitution established in 1971, uniting six (later seven) Emirates into one federation. Abu Dhabi in 1960 10 | Business Law in the Middle East
  12. 12. UAE Legal System (2)  Egypt adopted a Shariah-influenced version of the French Civil Code in 1949. This law was adopted across the region as the basic civil and  In the UAE, modern federal legislation:  1980: Labour Law, Central Bank Law  1981: Commercial Agency Law  1984: Commercial Companies Law  1985: Civil Code, Islamic Banking Law  1992: Civil Procedures Law  1993: Commercial Code  2002: Modern IP legislation  No banking law, arbitration law, bankruptcy law, or comprehensive administrative law. Abu Dhabi in 1980 11 | Business Law in the Middle East
  13. 13. A note on Saudi Arabia  The UAE, as a Shariah-influenced Civil Law system from Egypt, is similar to most Arab countries from Morocco to Oman – except for Saudi Arabia, which is truly unique in its administrative, legislative, and judicial system.  Sharia principles forms the basis of all law. The “Basic Law” if 1996 provides that the Koran is the Constitution.  No Civil Code (only such country in the MENA region along with Oman)  No Commercial Code (only such country in the MENA region).  No Penal Code (only such country in the MENA region).  Judges are not trained jurists but Islamic scholars who make decisions based on Shariah principles more than legislation or.  Plenty of rules are not written but customary or enforced due to government discretion (e.g. prohibition on women from driving cars).  Limited legislation is more specialized and includes Labour Law, Companies Law, Foreign Investment Law, IP, and Tax. 12 | Business Law in the Middle East
  14. 14. What is Sharia (Islamic Law)?  Sharia is the moral and religious law of Islam based on the Koran and other religious texts, with core concepts that include:  prohibition on uncertainty (including prohibition on gambling)  equality of (economic) rights  prohibition on usury and interest  Sharia forms “a principle source of legislation” (except in Saudi Arabia), but direct applicability generally limited to family law and inheritance for Muslims.  “Islamic finance” is a way to structure Sharia-compliant financial products, using different types of security and no payments of “interest.” These structures are rarely based in legislation.  Sharia can impact business in the following ways:  enforceability of option contracts (prohibition on gambling/uncertainty)  insurance business structure (prohibition on gambling/uncertainty)  payment of default interest (prohibition on interest)  business succession (Sharia prohibits wills)  different classes of shares not permitted (principle of equality of rights). 13 | Business Law in the Middle East
  15. 15. Challenges in Middle East Business Law  Challenges:  Often, there are no provisions of written law.  When there is written law, it is vague, with varying levels of ambiguity and room for interpretation.  When there is clear written law, the administrative authorities may take a different approach, and government agencies openly follow some practices that are not consistent with certain provisions of law.  Information is often not clear and rumor-based.  People are reluctant to say “no” in Arabic culture (making tasks seem simple when explained, when they are in fact more challenging)  Required approach:  Do not rely solely on written law, nor on spoken advice  Take an appropriately practical approach 14 | Business Law in the Middle East
  16. 16. Business Establishment and Foreign Investment 15 | Business Law in the Middle East
  17. 17. Foreign Investment Restrictions on Share Capital (1) Kuwait Up to 49% (100% permitted in certain strategic sectors) UAE Up to 49% (100% permitted in freezones)—restriction on foreign investment may soon be lifted with new Companies Law Oman Up to 70% (100% permitted for US investors under terms of US-Oman Free Trade Agreement) Qatar Up to 49% (100% permitted in certain strategic sectors), limited to 25% in listed companies Saudi Arabia 100% (subject to the “negative list” of prohibited sectors, and other sectors limiting foreign investment; also, license from Saudi Arabia General Investment Authority (SAGIA) is required) Bahrain 100% The Six GCC Countries 16 | Business Law in the Middle East
  18. 18. Turkey 100% (generally follows EU rules) Jordan Up to 49% Lebanon 100% (no land may be owned by company with foreign shareholders) Egypt 100% (subject to approval from General Authority for Foreign Investment, GAFI) Iraq 100% (no land ownership; certain sectors restricted) Syria 100% as of 2009 (certain sectors restricted) Iran 100% (but extremely rare in practice) Yemen 100% as of 2009 Libya Up to 65% in specific sectors, otherwise no investment without investment license (but 100% often permitted when license granted) Tunisia Up to 50%, greater foreign investment requires approval Algeria Up to 49% Morocco 100% (generally few restrictions) Foreign Investment Restrictions on Share Capital (2) 17 | Business Law in the Middle East
  19. 19. Legal restrictions on foreign investment Bahrain, Syria, Yemen, Saudi Arabia, Egypt, Morocco, Iraq, Iran, Turkey UAE, Libya, Oman, Tunisia Kuwait, Qatar, Algeria, Jordan Less restrictive More restrictive Letter of the law is only one aspect… Responsiveness of government More responsive Less responsive UAE, Bahrain, Oman, Morocco Qatar, Turkey Tunisia, Jordan Algeria, Lebanon Libya, Syria, Kuwait, Yemen, Saudi Arabia, Egypt, Iraq, Iran 18 | Business Law in the Middle East
  20. 20. Dubai’s Freezones  Dubai “Free Zones”: epicenter of multinationals in the Middle East, free from foreign capital restrictions  Development and History  First free zone was the Jebel Ali Port, established as “customs free zone” in 1980 (goods for re-export were exempt from customs).  Jebel Ali developed into an area exempt from municipal law and foreign investment restrictions (100% ownership by foreign investors), managed by an independent authority.  Over the last decade, the free zone model was applied to numerous sectors focusing on media, e-commerce, technology, healthcare, outsourcing, commodities, and more.  Dubai International Free Zone (DIFC) is its own independent common law jurisdiction.  Today, more than 25 free zones in Dubai. 19 | Business Law in the Middle East
  21. 21. Dubai Free Zone Map  There are so many free zones – is there a map available?  Good question!  The answer is: no.  Therefore, Pillsbury has made one
  22. 22. 49% 80% Foreign capital investment in a UAE LLC (outside the free zones) 1. Shares and Voting Rights Strictly limited to 49% maximum—possible criminal liability for any encumbrance or restriction on 51% of shares held by local nationals. 2. Company Management Full Control of Manager and/or Board Permitted—can be placed in company articles. 3. Dividends Generally, public notary and government authorities will recognize 49% foreign shareholder the right to receive up to 80% of dividends—this also can be placed in company articles. General Manager and/or board of managers 21 | Business Law in the Middle East
  23. 23. Structuring foreign investment  Share Ownership  At the share ownership level, a foreign company cannot own more than 49% of shares.  Be warned—seeking to exceed the limits set by law (such as through sideletters and powers of attorney on exercise of voting rights) is a criminal offense.  Documents (company articles, Operating Agreement) must be drafted so that minority shareholder holds veto rights. Operating Agreement/Shareholder Agreement (if possible, also Company Articles): “No shareholder meeting shall be assembled without the shareholders holding 52% of the shares being present.” “No resolution of the shareholder meeting may be made without 52% approval of all shareholders” 49% 22 | Business Law in the Middle East
  24. 24. Commercial Agency Law
  25. 25. Overview of Commercial Agency Law  Most MENA countries have a “Commercial Agency Law” that grants substantial protections to local distributors  Typical characteristics:  Agency and sale of goods restricted to nationals and their companies  Exclusive rights held for agents  Agent registration system  Protection from termination (including non-renewal) and right to claim compensation  Dispute resolution only through local courts  Commercial Agency Laws apply to all relationship structures by which a local party is selling goods and services, whether it is an agency, distributorship, franchise, or other type of relationship. 24 | Business Law in the Middle East
  26. 26. History  Registered “Commercial Agency” introduced as concept in Syria in 1952  Spread to Tunisia, then Saudi Arabia incorporated the concept in 1962 as a protectionist measure to secure local trading families  Spread to Kuwait in 1964, then slowly across the Arab World  Common characteristics—but each country has different rules and different challenges, and therefore different strategies to be adopted 1977 1982 1962 1997 2000 1952 2004 1959 1975 1996 1967 1995 1973 2002 1992 1964  Year that Agency Law (or relevant Commercial Code) implementation ▲ = Very restrictive ▲ = Restrictive ▲ = Less restrictive 25 | Business Law in the Middle East
  27. 27. Strategy for Agency Agreements  All distributor agreements, agency agreements, franchise agreements, and similar agreements must be drafted with extreme caution!  Companies selling their products and services in the Middle East need to know:  local law protections held by local distributors  agent registration system and registration mechanics  plan ahead—what to do if the relationship sours  exercise caution in licensing IP  Consequences:  Inability to smoothly terminate agent or distributor  May have to pay compensation upon termination, or commission even after termination  If a formal dispute arises, agent may be able to block imports of foreign principal goods into the territory 26 | Business Law in the Middle East
  28. 28. Other Legal And Business Considerations
  29. 29. The Middle East Work Week  Ten years ago, most countries had a Saturday through Wednesday work week, and a Thursday- Friday weekend  Today, Jordan, Qatar, Kuwait, UAE, Bahrain, Syria, Egypt, Libya, Iraq and Algeria have adopted the Friday-Saturday weekend. As of 2013, Oman and Saudi Arabia have also adopted the Friday- Saturday weekend  (The Thursday-Friday weekend remains in Yemen, Sudan, Afghanistan and Iran)  Some countries—Lebanon, Tunisia, Morocco and Turkey—have always followed the “international” Saturday-Sunday weekend  This creates (manageable) issues in organizing cross-border schedules and deadlines, and drafting contracts (“Business Day” definition) 28 | Business Law in the Middle East
  30. 30. US Export Controls and Sanctions  Office of Foreign Assets Control (OFAC) – sanctions enforcement  US law can substantially impact what goods are exported abroad  Numerous sanctioned countries and organizations in the Middle East:  Iran  Sudan  Syria  former Iraqi Baathist officials  terrorist organizations  Risks for US companies are compounded because the heavy trade between Dubai, UAE and Iran is well-known  The export or licensing of technology may require export licenses 29 | Business Law in the Middle East
  31. 31. Anti-Corruption  US FCPA Prohibits Bribery of Foreign Public Officials  US law criminalizes bribery of foreign public official (under the definition of US law)  Large number of FCPA investigations involve the Middle East, which makes it a high-risk jurisdiction for many companies  Department of Justice is increasing enforcement  Additionally, bribery is a criminal offense in most Middle Eastern countries  UK Bribery  A newer regime that may have stricter requirements than the US FCPA  Required measures for persons subject to jurisdiction  Implementing a careful compliance system and monitor it on an ongoing basis  Importantly, advising local employees and agents of US law requirements 30 | Business Law in the Middle East
  32. 32. Israel: Arab League Boycott and US Anti-Boycott (1)  Arab League Boycott  Three prongs:  Primary boycott: Products and services that originate in Israel  Secondary boycott: Businesses that do business with Israel  Tertiary Boycott: Businesses that do business with boycott violators  “Primary boycott” still actively enforced in most countries, many countries still maintain “blacklist” of companies and businesses deemed to violate the boycott  US Anti-Boycott Law  US implemented “anti-boycott” law in 1977 to encourage non-compliance with Arab League boycott  Requires reporting of any request, condition, or contractual provision to comply with boycott provisions, and fines for express compliance with boycott 31 | Business Law in the Middle East
  33. 33. Israel: Arab League Boycott and US Anti-Boycott (2)  History of the Boycott  Through the Cold War, many multinational had to choose between doing business with either Israel or the Arab World—but not both  Arab League nation coordination ended in 1994, when Jordan established relations with Israel and the GCC announced it would only follow the primary boycott  Following that, many multinationals do business in Israel and the Arab World (but typically managing Israel business from Europe or the US)  Doing business in Israel from the Middle East  It remains a criminal offense to import Israeli products in most countries  Unpredictable levels of enforcement by authorities  In conclusion: this issue must be handled delicately—risks in seeking express compliance with US law may include:  increased scrutiny from Middle Eastern government agencies  bad relationship with local partners and employees (who may be sensitive to local reputation risk, and criminal and personal liability under local law) 32 | Business Law in the Middle East
  34. 34. Dispute Resolution
  35. 35. New York Convention  Litigation in the Middle East (outside of Saudi Arabia) follows a Civil Court system based on Arabic language written pleadings. The perception is that proceedings are slow, judges lack commercial experience, and courts favor local interests.  Most countries are party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)(except for Iraq, Libya and Yemen), and additionally, two regional conventions (Riyadh Convention, GCC Convention). Shaded countries: NY Convention Signatory States 34 | Business Law in the Middle East
  36. 36. Regional Arbitration Forums Cairo Regional Centre for International Commercial Arbitration (CRCICA) GCC Commercial Arbitration Centre, Bahrain Dubai International Arbitration Centre (DIAC) Dubai International Financial Centre (DIFC-LCIA) International Arbitration and Conciliation Centre, QatarBDCR-AAA – Bahrain Chamber for Dispute Resolution Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) 35 | Business Law in the Middle East
  37. 37. Arbitration Award Enforcement  These three conventions should (in theory) provide a route for enforcing an international arbitration award in every country.  In practicality, there are issues with enforcement in many countries, and a large amount of uncertainty.  Using a regional arbitration center may give you more avenues to enforcement (using not just NY Convention, but depending on the country, also the Riyadh Convention and the GCC Convention).  The current favored forum for international arbitration in the region is the DIFC-LCIA Center in Dubai (previously, forums in Bahrain and Cairo were preferred). 36 | Business Law in the Middle East
  38. 38. Pillsbury Winthrop Shaw Pittman LLP Thank you for your kind attention. Christopher Gunson Counsel Pillsbury Winthrop Shaw Pittman LLP +971.50.554.6205