Business Law in the Middle East

Pillsbury Winthrop Shaw Pittman LLP

Business Law in the Middle East

A practical guide for multinationals

4 March 2014

Christopher Gunson

Counsel


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

What is the Middle East?

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

EgyptSaudi Arabia UAE

Qatar

IranIraq

BahrainKuwait

Turkey

Oman

Jordan

SyriaLebanon

Libya

Tunisia

Algeria

Morocco


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.


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)


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

8226

8

22

2

7731

14

72

23

6

10

36

324

6


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)


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


Overview of the Legal System

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


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


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.


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).


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


Business Establishment and Foreign Investment


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

OmanUp to 70% (100% permitted for US investors under terms

of US-Oman Free Trade Agreement)

QatarUp 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


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)


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


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.


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

49%

80%

Foreign capital investment in a UAE LLC (outside the free zones)

1. Shares and Voting RightsStrictly limited to 49% maximum—possible

criminal liability for any encumbrance or

restriction on 51% of shares held by local

nationals.

2. Company ManagementFull Control of Manager and/or Board

Permitted—can be placed in company articles.

3. DividendsGenerally, 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


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%


Commercial Agency Law

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.


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

19821962

1997

2000

1952

2004

1959

1975

19961967

1995

1973

2002

1992

1964

Year that Agency Law (or relevant Commercial Code) implementation

▲ = Very restrictive

▲ = Restrictive

▲ = Less restrictive


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


Other Legal And BusinessConsiderations

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)


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


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


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


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)


Dispute Resolution

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


Regional Arbitration Forums

Cairo Regional Centre for

International Commercial

Arbitration (CRCICA)

GCC Commercial Arbitration

Centre, BahrainDubai 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)


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).



Thank you for your kind attention.

Christopher GunsonCounselPillsbury Winthrop Shaw Pittman [email protected]+971.50.554.6205

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