HOW TO OVERCOME THE RISKS ASSOCIATED USING A 51% UAE NATIONAL PARTNER IN A LIMITED LIABILITY COMPANY

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Corporate vs Individual Sponsorship Company legal Structures: UAE Commercial Companies Law 2015 prohibits foreigners from owning 100% of an LLC, onshore entity and requires a local Emirati individual or corporate to have majority ownership (at least 51%) of the shares...

Under the Companies Law in UAE currently, in order to have a Limited Liability Company registered in the mainland of any Emirate, it is mandatory to have a UAE National (individual or corporate) as the Majority Shareholder in the Memorandum. …

by | Mar 20, 2021 | 0 comments

Under the Companies Law in UAE currently, in order to have a Limited Liability Company registered in the mainland of any Emirate, it is mandatory to have a UAE National (individual or corporate) as the Majority Shareholder in the Memorandum. 

Although there are risk mitigation options, by way of Board of Directors arrangements, none will be notarized legally and will remain vulnerable to challenges during any dispute in front of the court. 

The UAE is a CIVIL LAW jurisdiction and does not recognize the concept of trust or nominee partnership.

Elaborate legal protection can, however, be gained through establishing a holding structure in a jurisdiction, where common law rules and practices apply.  Abu Dhabi Global Market (ADGM), a financial free zone located in Maryah Island. This holding structure can further own an LLC in the mainland of the UAE with the ownership of the company remaining protected at the ADGM level.

Shares in ADGM entities can be held upon common law trusts in favour of any owners with full equitable ownership of the shares vested in the investors/beneficiaries and enforcement through a common law court system modelled on the English High Court.  

A common law trust confers proprietary rights and equitable ownership of shares upon the beneficiary, and these ownership rights can be enforced in the dedicated common law courts operating in the Dubai International Financial Centre. (DIFC court).  This structure is not a low cost one. However, it is a robust one, in our view.  

ADGM is a financial free zone in Abu Dhabi, in accordance with a sophisticated law modeled on Anglo-American laws, which permit the enforcement of nominee arrangements through it’s own courts.  

Unlike the onshore, UAE law, ADGM law recognises the concept of beneficial ownership and the concept of a nominee/trustee.  

It is therefore possible for one party (private trustee company/individual) to hold shares in an ADGM entity on trust for the beneficiary.  In order for the private nominee/trust arrangement not being exposed to local onshore or  other law/courts, the ADGM arrangement should be self-contained in ADGM which can be done by introducing more than one ADGM layer of entities to the structure.

STRUCTURE

  • In the ADGM, a nominee corporate shareholder owned by UAE nationals (otherwise known as CSP) should be used. Hence, the ADGM structure will not be affected if one of the individual UAE nationals passes away. The authorized signatory of the ADGM company can still transfer the shares of the nominee to another nominee company, as and when necessary.         
  • The structure would involve the establishment of a new holding entity in ADGM to be owned 99% by the CSP (corporate entity which can be set up as mainland LLC specifically for this purpose) and 1% by the Foreign national shareholder. (This would be ADGM company 1)
  • ADGM 1 would then further establish another holding entity in ADGM (This would be ADGM company 2). ADGM 2 would become the holding vehicle for the operational LLC’s in the mainland.
  • The foreign partner would then enter into a trust deed agreement with ADGM company 1 and the CSP (trust deed) The foreign partner would become a beneficiary under the trust deed.
  • The CSP would make a declaration of trust and declare the purpose upon which they are holding shares in ADGM company 1 is told hold ADGM company 2 and all its underlying assets for the benefit of the beneficiary under the trust deed.    

Although trust/nominee arrangements are not recognized under the Civil law systems in UAE, the upper layer of the ADGM trust structure would be entirely self-contained in the ADGM jurisdiction. 

The foreign partner will have full control over the management and assets of ADGM company 1 and ADGM company 2 and moreover, can appoint directors entrusted with full powers for both entities including transfer of shares in any subsidiary.

Setting up a non-operation holding entity in ADGM is a relatively inexpensive option as licensing is low cost and a physical office in not required.  However, a legal address provider will need to be appointed.

It is also an option to establish only 1 ADGM entity and use it to hold shares in the mainland company directly.  However, the two-layer structure, ensures that any dispute can be heard before ADGM or DIFC court without any potential argument that the dispute should be heard by Dubai Courts.

See below Diagrams which illustrate the various structures that could be implemented in ADGM.

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