UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Venturing into the UAE through a Joint-Venture

Article 56 of Federal Law No. 8 of 1984 Concerning Commercial Companies (the “Law”) defines a joint participation as being a company concluded between two partners or more, which shares the profits or losses incurred by a single or multiple business operation performed by one of the partners in his or her personal name.  The Law provides that such a company shall be confined to the relationship between the partners and may not be effective vis-à-vis any third party.  The company’s existence may be proven by all familiar means of evidence.   The company’s contract should regulate the rights and obligations of each partner, the terms of profit/loss distribution, and the capital amount.

Article 56

“A joint participation is the company concluded between two or more partners to share the profits or losses of one or more commercial businesses being performed by one of the partners in his or her own name. The company shall be confined to the relationship between the partners and will not be effective towards third parties.  The existence of a joint participation may be proven by all methods of proof.”

The contract of a joint participation is not subject to registration in the commercial register nor to the necessity of being publicized.  A municipality license may not be issued for such  joint participation.  Therefore, the joint participation vehicle may be the optimal choice for those entrepreneurs wishing to do business clandestinely in the UAE and/ or to operate on the license of a local partner with the implication that the licensed partner would be liable for the joint-venture.  In a typical UAE joint-venture, only the licensed local company would be visible to the public while the other company would remain  ‘transparent’ in the background, operating on the visible partner’s license.  Any third party would have recourse only to the visible company.

“The contract of a joint participation should regulate the rights and obligations of the partners and the distribution of profits and losses between them.  This contract will not be subject to registration in the Commercial Register nor is it to be declared.”

According to the law, a partner in a joint participation may not be viewed as a merchant unless he  or she runs business operations by himself.

Article 58

“A partner in a joint participation will not be considered a merchant unless he personally performs commercial transactions.”

However, each partner in such a company should remain owner of his or her share, unless it is otherwise agreed upon.

Article 59

“Each partner in a joint participation shall remain the owner of the share presented by him or her, unless otherwise agreed.”

The law prohibits a joint participation from issuing stocks or negotiable bonds.

Article 60

“A joint participation may not issue shares or negotiable instruments.”

The most important characteristic of the joint participation company is that a third party may not have a right to recourse except towards the partner whom he or she dealt with.  If the partners conduct collectively led to a third party being informed of the company’s existence, than the joint venture may be considered a company in which the partners will be jointly liable towards the third party.

Article 61

“Third parties shall not have the right to recourse except towards the partner with whom they had dealt.  If an action performed by the partners might inform third parties of the existence of the company, it may be considered a real company in which the partners will be jointly liable towards third parties.”

The Law provides that any partner in a joint participation has the right to review the company books and documents either by himself  or herself or through his or her attorney, who may be another partner or a third party, providing that such review should not cause the company any damage or loss.  Any agreement to the contrary shall be considered null and void according to the Law.

Article 62

“Every partner may request to review the company’s books and documents personally or through an attorney, who may be a partner or a third party, provided that inspection by the attorney will not cause any damage to the company.  Any agreement to the contrary shall be void.”

Article 63

“Article 37 of this Law shall apply to a joint participation.”

Decisions have to be made unanimously among the partners unless otherwise agreed.

Article 37

“Decisions in a general partnership have to be made by the unanimous consensus of the partner unless the memorandum provides that a majority will be sufficed.  In this case, the majority will be numerical unless otherwise provided in the memorandum.  Decisions concerning the amendment of the memorandum shall not be valid unless made by a unanimous vote of the partners.”

In the negotiations leading up to the joint-venture agreement, the parties should secure their rights to confidentiality, exclusivity, and non-circumvention in a memorandum of understanding.

In addition, if the parties desire to keep the assets of the joint-venture safe from potential litigants, one might consider creating an offshore ‘purpose-trust’.  This is the concept of placing assets under the control of a trustee for a specified purpose.  A trust created for a purpose can include the acquisition, holding and/or leasing of equipment to a company doing business in Dubai such as a Joint -Venture. Therefore, the purpose trust could be created for the purpose of owning and/or leasing assets to the Joint- Venture for the duration of the life of the Joint- Venture project.  A trustee(s) must be appointed to administer the purpose trust.  In addition, the trust instrument creating the purpose trust must appoint an ‘enforcer’ or a person whose task it is to ensure that the trust’s provisions are carried out by the trustee.  The assets of the trust would be under the direction and control of the Trustee but at all times subject to the trust instrument.  The ‘enforcer’ of the trust ensures that the trustee follows the directions set out in the trust instrument.  The trust instrument must also specify the event that will trigger the termination of the trust and detail the process for the disposition of the trust assets. (Al Tamimi, Joint Ventures Theory and Practice in the UAE)

*This information was taken from Federal Law No. 8 Concerning Commercial Companies, ‘Choose Your Type of Company’ issued by the Dubai Chamber of Commerce, and Al Tamimi, ‘Joint Ventures Theory and Practice in the UAE’ brochure.

1 Comment

  inshasoft wrote @

Excellent Post, Keep it UP


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