On November 26, 2018 the Dubai Court of Appeal issued the first judgment of its kind in the UAE, that grants shared custody to the divorced parents similar as it is known from European jurisdictions.
M&P would like to shed light on this entirely new Omani piece of legislation from a number of different angles. Besides a short overview over the document and its structure itself, this article intends to outline the new forms of commercial companies established or recognized formally by the new legislation. Furthermore, changes on existing companies as far as apparent from the text of the law itself shall be outlined and finally major changes in the administrative and regulatory structures from state side shall be touched. The main focus of the article shall be on commercial companies as a vehicle for foreign investment in Oman.
B. Overview over the New Companies Law
A first look at the new CL already displays that in comparison to the CL74 it grew considerably in size and number of articles from 219 to 312.
The structure established by the CL74 however remained essentially the same. Users acquainted with the CL74 should thus find their way around the new legislation rather easily. In contrast to most other corporate legislations in the area, the CL tries to treat all matters of general importance centrally in the beginning of the law. Following the trend of all current legislations in the area it has a central part of definitions to start with. These are however limited to those definitions being used everywhere in the law. The region’s legislative trend to stipulate vast parts of the regulatory content of the law in a definitions section and thus depriving those regulations of their context has been balanced. This ability to interpret large parts of the law in its context of contents strengthens the structures of the law when interpreted in coherence with civil law tradition for which Oman opted. The General Provisions Section in the beginning of the CL then generally follows the chronological structure of the “life of a company from cradle to grave”, i.e. foundation, valid types and legal personality of companies, followed by provisions on capital, transformations and mergers of companies and finally the dissolution and winding up of companies. Afterwards the single types of companies are outlined headed by the personal/partnership-oriented types, followed by the capital/corporate types. The law finishes with provisions on investigations and (criminal) offenses under corporate law. A large part of the CL has been dedicated to stock corporation structures, where again the public stock corporation enjoys most legislative attendance. The amount of legislative text on this company type has clearly increased when compared to the CL74. With regards to the large amount of capital and the frequent number and volatility of shareholders, this seems to be very welcome, as the outlined structure is most predisposed for a number of cleavages and thus legal issues. On the other hand, this should not leave the impression, that a public joint stock corporation should be the vehicle of choice for investments in Oman in a broad manner. The prediction might be reasonable that in terms of quantity other types of companies will shape Oman’s corporate landscape more characteristically.
Moreover, it seems to be noteworthy that a large number of particularities and details are left to be enacted by the executive regulations of the CL.
The law is entering into force 60 days after its publication and companies subject to the law are requested to adapt to the new rules set by the law within one year.
With regards to foreign investments the Sultanate stipulates the general Rule of Art. 13 Para. 1 CL that professional companies and companies with foreign capital may be established without prejudice to the obligations of the Sultanate of Oman in its international trade agreements.
C. Reforms Concerning Types of Companies
Over time a number of company types, shapes and vehicles have evolved globally and especially in the GCC states. Oman now took the opportunity to take up these developments and integrate them into its own legal environment.
I. Single Person Companies (SPC)
In Art. 291-297 CL the law for the first time opens the possibility of incorporating a Single Person Company (sharikat al-shakhṣ al-wāḥid) in the Omani mainland.
Therefore, the company definition of Art. 3 CL was changed vis-à-vis Art. 1 CL74. Whereas the old definition primarily evolved around the company as a contract, the new definition focusses more on the company being a legal person. As per Art. 3 Para. 2 CL, a company can now also be founded based on a unilateral decision of one party only. This is the basic form required for the establishment of SPCs.
The Omani SPC is a limited liability company (LLC) and the general rules of the Omani SPC are the ones applicable for Omani LLCs as long as there is no deviant legislation (Art. 291 Para 1, Art. 297 CL). However, as per the CL the Omani SPC already contains a number of features different from LLC rules and partly closer to partnerships or closely bound to the shareholder as a person.
Shareholder of an SPC can be natural as well as legal persons (Art. 291 Para. 1). Although at first sight, appearing very interesting as a form of investment for foreign companies, the SPC is in general not open as a vehicle for foreign investors. This is due to the Omani Foreign Investment Law (FIL) enacted by Sultani Decree 102/94. Based on the FIL and its interpretation in the light of the WTO rules, Oman requires a local shareholder to be involved in an invest vehicle by holding at least 30% of the vehicle.
This leads to a maximum foreign shareholder ship of 70% and by nature of this provision always requires a second shareholder. Exceptions to this rule are possible and foreseen by the FIL to contribute to the national economic development and need a special approval by the development council (majlis al-tanmiya) upon recommendation of the Ministry of Trade and Industry as well as minimum capital invested of RO 500 000/-. Though theoretically possible, this option is of rare practical occurrence. Another possibility for foreign investors to be able to set up an SPC is if the shareholder is subject to one of the international treaties granting equal rights to foreigners in certain areas, e.g. foreign investment. This would mainly be applicable in the framework of GCC relations and thus GCC nationals should be able to set up SPCs in Oman without further restrictions. It also applies in the framework of the U.S.-Oman Free Trade Agreement (FTA). As per Art. 10.3. Para 1 FTA, Oman shall accord to US Investors treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. In basic this gives US-Investors the possibility to incorporate companies in accordance with the same conditions as Omanis. However, the term US-Investors may be interpreted restrictively by Omani authorities in a way, that an US Investor is either a US Citizen as a natural person or a company under ultimate US control/beneficial ownership. Thus, the possibility for non-US investors to set up an Omani SPC through a US subsidiary might be limited. In the past, US citizens working for an investor have been acting as “trustees” for the investor in order to facilitate the privileged access of US-persons to investment in Oman.
Art. 291 Para 2. CL limits the possibility for natural persons to own an SPC to one. It further bars One Shareholder LLCs form owning SPCs themselves. The usage of the term One Shareholder LLCs rather than SPC could indicate that this also applies to foreign One Shareholder LLCs and not Omani SPCs only.
The legislator’s intention of enabling SPCs in Oman seems to be less a perspective to stimulation foreign investment through this vehicle. As outlined by Omani media, the main perspectives of allowing SPCs is to facilitate vehicles of Islamic banking and financial transactions most notable as Special Purpose Vehicles (SPV) for Islamic Bonds (ṣukūk).
The procedures for the incorporation of an SPC are left to executive regulations (Art. 292 CL) and at the moment neither entirely clear nor put to test in practice. It can be expected, however, that they should not deviate too significantly from the incorporation procedures of an LLC, as here established practices exist.
The liability of the owner / shareholder is limited to the capital dedicated to the SPC (Art. 293 CL). This implies that no minimum capital is required for establishing an SPC. In fact, this requirement has been dropped from the CL for most companies (see below). Furthermore, the term of dedicated (mukhaṣṣaṣ) might imply that the capital would not have to be paid up in a separate account as Art. 241 CL stipulates for an ordinary LLC. The SPC could thus be more of a company limited by shares. In this regard details of the executive regulations and the practical handling of the SPC have to be awaited.
By default, the management of the SPC is left to its owner/shareholder, although entrusting it to one or more directors responsible to the shareholder/owner is also possible (Art. 294 CL).
An interesting feature of the SPC is that is connected to the lifespan/existence of its shareholder/owner. It can continue as an SPC if all its shares are held by one heir, otherwise it must continue in another legal form. The law sets a time limit of 180 days (Art. 295 CL).
As per Art. 296 CL the law sets out certain liability standards for the shareholder/owner. This is a personal liability for obligations in cases of the badly intended liquidation of the SPC or to suspend its activities before the end of its term or the achievement of its purpose or in case of no clear separation between corporate and personal affairs.
Hence it might be interesting for foreign investors in Omani Free Zones, where company structures of SPCs will most likely be structured in a parallel fashion and not so much for foreign investments directly in Oman.
II. Offshore Companies
As per Art. 13 Para. 2 CL Oman establishes the possibility for Free Zones to establish companies working outside the Sultanate’s borders (offshore), this is subject to further regulation by the cabinet.
In this context the question imposing itself is; what could be the advantages of such an offshore construction in Oman especially in relation to Free Zone companies? Oman’s Free Zones – though growing in number and specialization – have significant differences to UAE Free Zones. Since Oman permits a majority foreign shareholder ship of up to 70% under its FIL, a Free Zone Company is not the exclusive vehicle for a foreign investor to obtain formal control over a company as usually is the case in the UAE with its relatively rigid 49 – 51 % rule in favor of local shareholders. Omani Free Zones rather can be seen as special economic and investment zones, where certain industries and sectors should be clustered and foreign investment is desired. Hence, only very recently licenses have been granted for general trading in Free Zones. Most Free Zones (especially those ones granting general trading licenses) are fenced and thus physically kept apart from Omani mainland territory. The requirement to restrict Free Zone activities to the geographical area of the Free Zone itself are thus kept seriously especially compared to the UAE, where a similar legal stipulation exists but is barely enforced. Thus, general trading in Free Zones is largely beneficial in foreign transactions not with mainland Oman. What would be the additional benefit of setting up an Offshore? A reasonable answer to this could be that certain requirements for Free Zone Companies might be lowered or dropped as tradeoff for the restriction to only do foreign transactions. These might be the Omanization requirements, the requirement to rent physical properties or a discount in fees and tax exemptions from Omani corporate income Tax.
Omani Offshores could thus be an option for traders to use the neutral and calm international Omani relations for trade without willing to transact in the country itself.
Due to the regulative framework still to be established, no definitive perspectives can be assessed yet, but the options of Omani Offshores are definitely worth monitoring.
III. Branches of Foreign Companies
Art. 13 Para. 3 CL now sets out the requirement for the concerned authority to register branches of foreign companies and commercial representative offices as per the conditions to be defined by the authority. This stipulation might be noteworthy as the setup of branches of foreign companies has been very restricted in Oman so far. Only for Government projects temporary branches were generally permissible. The option to empower the concerned authority with considerable regulatory independence might be interpreted as a perspective for further opening up in this regard.
However, the regulation also imposes some new legal questions to be solved. E.g. the concerned authority (al-jiha al-mukhtaṣṣa) is defined as per Art. 1 No. 4 CL as the Ministry (of Commerce and Industry) or the (General) Authority (of the Financial Markets). Despite details, the first one is responsible for all companies apart from Public Joint Stock Corporations for which the latter one assumes responsibility. Thus, in consequence of the wording of the law the authority would regulate the registration of branches of foreign Public Joint Stock Corporations and the ministry of all other branches of foreign companies. Implied in such a regulation would be the falling apart of registers of branches of foreign companies in accordance with their legal form in their home country. These forms might not always be able to be mirrored in terms of Omani corporate forms and hence, difficult to define. Resulting regulations might split, and a transformation from one company form to another might result in re-registration and different regulatory requirements by Omani authorities, though the activity and legal form in the Sultanate itself might not be affected by the legal form change in the companies’ home country. Based on the aforementioned question it is possible that branches of foreign companies might be handled by one authority only. Regulation of the matter should be carefully monitored to assess possibilities and chances for foreign companies to set up branches in Oman successfully.
With regards to foreign commercial representative offices the law now clearly regulates their registration requirement. With regards to the concerned authority however the above-mentioned legal question becomes important in the same manner.
D. Changes to Existing Company Forms
As already outlined above, the CL has brought about a number of changes and a more detailed regulation for most companies under Omani Law. With regards to the existing company forms we would like to limit ourselves to some exemplary reforms we deem of most importance to our readers.
I. Reforms for LLCs
The most notable reform regarding LLCs is the already mentioned drop of a minimum capital. This is in line with the trend to be observed in the new Companies’ Laws of the region such as those of Saudi Arabia and the UAE enacted in 2015. However, with foreign investment in focus only in the UAE foreign investors were able to profit from the new benefits of the dropped requirement of a minimum capital. In Saudi Arabia foreign investors are bound by the minimum capital imposed by the Foreign Investment Authority SAGIA. In the Omani example the previously required minimum of RO 20 000/- for Omani investors and equally treated investors has been dropped. The FIL required minimum of RO 125 000/- (1.25 mio AED) seems to remain outside Free Zones. LLC capital may generally be contributed in cash or kind. Any kind of services may not be contributable unless the LLC is an SPC used as SPV for the issue of bonds (Art. 239 CL). The capital has to be paid up on an Omani Bank account during the process of incorporation and only be released to the company after incorporation (Art. 241 CL).
The processes of pre-emption rights and procedures for other shareholders and share transfers (Art. 248 -256) and capital increase and reduction for LLCs (Art. 257-262) have been sophisticated.
A number of reforms have been brought about in the area of administration of LLCs. As before, an LLC is managed by one or more directors appointed for a limited or unlimited time either by the Memorandum of Association (MoA) directly or by a resolution of the general assembly. One of the most notable new features of the law is the release of the director by the general assembly. This was possible under CL74 as well, but the new law seems to make this distinctly more complex. Art. 273 CL now requires for such a decision a numeral majority of shareholders holding at least three quarters of the capital of the company.
Art. 151 Para. 2 CL74 did not foresee any kind of specific majority for this decision. A particular problem in this context is, that it is not yet specifically clear from the wording of the CL, if LLCs can agree to a different (particularly lesser) majority or if the law is mandatory in this circumstance. The implications in relation to LLCs as vehicles for foreign investment are significant: As the FIL is usually enforced by requiring a 30% Omani shareholder ship, a mandatory interpretation of Art. 273 CL would now practically furnish an Omani shareholder with a veto right against the release of a manager from his duties. The full control over the administrative personnel has been one of the main advantages for foreign investments in Oman. If this should be cut back by the new legislation, there should be a reaction to this trend. Firstly, it should be checked if the provision will be deemed mandatory by Omani courts or not. If so or in a preventive manner, LLCs should consider not to appoint a manager directly in its MoA and to limit the terms of their managers in Oman, requiring a new appointment by the general assembly from time to time. Since no majority therefore is prescribed, a return to start would re-establish full control of the majority shareholder again. On the downside, it would be less attractive for potential mangers to have their position confirmed in regular (and possibly short) intervals making the position of manager in an Omani LLC less calculable and attractive then today. This trend towards stabilizing management vis-à-vis shareholders seems to find its expression as well in the second component for releasing the manager as per Art. 273 CL. The aforementioned release decision for a manager will only be valid, if the resolution contains the appointment of a new manager. This has clear positive aspects as the LLC cannot be left without management in cases of discontent with a manager and responsibility will be hardly interrupted. On the other hand, if mandatory (what is as well still to be proved) and in case of a binding nature of the ¾ majority mentioned above, an Omani shareholder in a foreign dominated LLC will not only have a veto right but also be able to use this as bargaining chip in the choice of the future manager.
Furthermore, prohibited actions for the managements unless approved by the general assembly have been increased. Apart from the gifting, selling all or major parts of the assets, concluding mortgages pledges or guarantees for obligations not of the LLC, Art. 267 CL now also includes the release of the company’s debtors from their debts. In logical consequence Art. 267 CL mentions also the conclusion of settlement agreements, as these usually release debtors of their obligations at least in part. In logical consequence and as per the dogmatic tradition of most Arabic legal systems Oman also sees arbitration as a way of settlement and adds arbitration to the enlisted topics in Art. 267 CL. This seemingly minor issue has a potentially large effect on foreign held LLCs in Oman. Settlements are a frequent way in Middle Eastern cultural environments in moments of debt collection. With litigation seen as a way to “loose one’s” face, business relations – particularly in a small country like Oman – are usually intended as long-term relations and litigation for the aforementioned reasons to be strongly avoided. Settlement agreements are a common means of maintaining business relations and pragmatically receiving as much outstanding funds as possible. The possibility for the management to make use of these means should be upheld and at hand whenever necessary. Hence, maintaining an open door therefore and allowing the management to settle either by default, under certain conditions or on a case to case basis should be definitively thought through in the light of the new CL. The same applies for the possibility of arbitration. Again, for a number of reasons, arbitration can be a recommended way of dispute settlement. It allows to take awards under a different legal system and resolution body to be made enforceable in Oman. This might be advantageous if dealing with large local or government entities to escape a certain local preponderance of these and potentially create another dimension at one’s disposal. On the other side of the spectrum a number of “international” lawyers in the region tend to recommend it for good fee outcome, their own unfamiliarity with local law (especially in a smaller countries like Oman) and the possibility to move a conflict it into one’s (especially the lawyers’) home jurisdiction and the circumvention of local lawyers, who have a court monopoly. Carefully evaluating pros and cons of arbitration should be done for each transaction. A manager of the company concluding such a transaction should be enabled to conclude it and not be barred by the local law. Hence, the same as for settlements should be considered and a respective policy taken.
With regards to the aforementioned examples and to a number of further reforms each LLC in Oman should carefully check its corporate documents under the CL and make the necessary amendments.
II. Joint Stock Corporations
The major part of the reforms in the CL is a large overhaul of the regulations on joint stock corporations. This limits the following remarks to the most important information on joint stock corporations from the angle of foreign investors. As they hardly ever fit as a vehicle for foreign investment just a very brief overview shall be given.
Oman’s joint stock corporations fall apart into two main categories: SAOG (Société anonyme Omanaise general), the public joint stock corporations and SAOC (Société anonyme Omanaise close) the closed joint stock corporation. Other than with regards to LLCs the minimum capital requirement for joint stock corporations has not been dropped by the Omani legislator. Genuinely a SAOC will require a minimum Capital of RO 500 000/-, whereas a SAOG requires a minimum Capital of RO 2 000 000. Any other company can be transformed into a SAOG when only having a capital of RO 1 000 000/- (Art. 91 CL). Whereas the original capital requirements remain the same as per Art. 58 CL74, the possibility to transform a company into a SAOG having just half of the capital necessary might give way to more companies transforming into SAOGs. However, founders of a SAOG would have to subscribe for 30% of the shares of an SAOG during its original founding process (Art. 100 CL). As per the definition of Art. 89 any Joint stock corporation would need at least three shareholders.
Apart from other ways of financing itself, a joint stock corporation would be able to raise means by bonds (Art. 149 CL – Art. 159 CL).
E. Administration and Regulation of Companies from State Side
As already mentioned, and in accordance with Art. 6 CL now a clear cut is drawn with regards to the concerned state authority for supervision administration and regulation of companies. All companies are basically subjected to the Ministry of Commerce and Industry. The only exception is made for SAOGs as public joint stock companies, which are subjected to the General Authority of the Financial Market.
One of the main changes is that most publication is being switched to online now and electronic means of communication and administration have been highly recognized by the new legislation.
Oman has made an encompassing attempt to legislate a new and contemporary companies’ law. It manages to assess many corporate structures in detail and thus removes the necessity of lengthy corporate documents. Certain aspects remain open such as the imperative nature of certain provisions. Certain expected provisions are not included in the law, e.g. the principle that when the LLCs value drops below 50% of its capital either the company would have to be would up or fresh capital would have to come from the shareholders. Parallel provisions do exist in the UAE and Saudi Arabia, however could not be seen in the new CL.
Another specialty is that documents are not excessively necessary to be ascended by notary publics as in the aforementioned GCC countries.
As MoAs for a number of companies are public documents, it might be expected that more confidential regulations might be moved into Shareholders’ agreements.
A further positive feature is that the CL contains detailed provisions on liability of managers’ shareholders etc. in the regards of factual situations triggering liability as well as standards of care to be observed by potentially liable persons and thus making liability risks for concerned persons more assessable.
All in all Oman presents a modern piece of legislation for its commercial companies. Established companies already existing in Oman must carefully check how to adopt and potential investors should be aware of the details and changes introduced by it.