Out-Law Guide 3 min. read
01 Feb 2023, 3:36 pm
Joint ventures provide foreign investors with an attractive means of entering new markets through leveraging the local knowledge and connections of businesses already established in that market.
As with any partnership, though, businesses need to undertake robust due diligence before entering into a joint venture and setting up in a new market. In the UAE, there are particular considerations to keep in mind.
It is critical that investors looking to enter into a joint venture know who they are partnering with.
In the UAE, there is generally little corporate information in the public domain – information on shareholders and directors is largely limited, for example. Service providers can be engaged to prepare reports on individuals and companies to provide the investor with some better insight. Additionally, there may be information in the local press which may be helpful. It is not uncommon in the UAE and the wider region for politically exposed persons (PEPs) to be involved in various businesses – this in itself is not necessarily a red flag, but investors will want to know what risks are entailed in doing business with those individuals.
Having a well-thought-out joint venture agreement is the backbone of a successful joint venture
Additionally, it is prudent to investigate whether or not the joint venture partner has the expertise in the relevant area. This can be established by reviewing the portfolio of companies in the potential partner’s group and by doing some market reconnaissance – desktop research can be helpful in this regard.
A local partner’s reputation in the market should also be considered. Investors should ask stakeholders they trust about a potential partner to help them establish whether they are well known – and if so, for the right reasons. In the UAE, sometimes there is more than one spelling of the names of people or businesses, and similarly it is not uncommon for more than one person to have the same name. Therefore, it is important to confirm that the information received from stakeholders concerns the right person or group.
Once an investor has decided that it will be entering into a joint venture and has found the right partner, the next step is to think about corporate structuring.
The UAE is made up of a ‘mainland’ and ‘free zone’ areas, with over 50 separate jurisdictions across the seven Emirates. Where and what type of entity to set up will depend on the activities that the joint venture company (JVCo) will be undertaking.
It is usually advisable that the JVCo is established as a pure holding company, which in turn will set up operating subsidiaries. This provides the JV partners with more flexibility in terms of the jurisdiction of JVCo. For example, as a pure holding company, the JVCo can be established in one of the financial free zones – the Abu Dhabi Global Market (ADGM) or Dubai International Financial Centre (DIFC). The ADGM and DIFC are both common law jurisdictions located in the UAE with their own laws and courts. They largely provide investors with the flexibility and certainty available in other offshore jurisdictions, and therefore have established themselves as go-to jurisdictions for foreign investors.
Moreover, incorporating a holding company in the ADGM or DIFC is relatively cost and time efficient, as compared with other jurisdictions in the UAE. The ADGM specifically offers a ‘special purpose vehicle’ (SPV) entity type which only costs a couple of thousand US dollars to set up.
Unlike with other entity types, an SPV is not required to lease office space and instead must appoint a corporate service provider. The incorporation of an SPV typically takes two-to-three weeks from the point all documents are submitted to the free zone, similar to the DIFC. The ADGM and DIFC have very diligent compliance requirements and therefore some additional time should be factored for the document collation process and to respond to the free zone in respect of any additional queries it may have.
It is critical to correctly document the terms of a joint venture. A comprehensive joint venture agreement, with core provisions embedded in the articles of association of the JVCo, will work to ensure that the shareholders’ rights are protected.
The agreement will typically cover matters like board and shareholder reserved matters, further funding obligations, mechanisms for resolution of deadlocks, and general governance.
Both the ADGM and DIFC provide the legal and regulatory framework to allow common joint venture agreement provisions to be enforceable, for example ‘drag’ and ‘tag’ rights.
Choosing a dispute resolution mechanism which would permit meaningful enforcement is also crucial. Both the ADGM and DIFC have their own courts and the registrars within each free zone will generally enforce matters agreed between the authorities, for example in respect of transfer or issuance of shares, appointment and removal of directors, etc.
Having a well-thought-out joint venture agreement is the backbone of a successful joint venture.
01 Feb 2023