United effort

As the UAE tries to increase its influence in the international community, foreign companies and law firms are waiting for promised legislation that could make it easier for them to do business there

In brief

Following the debt crisis and Arab Spring, the UAE has emerged as a haven for investors in the Middle East. Now the country has drafted several acts that could help cement that position. Whether these make into law, however, is anyone’s guess.


Rationalisation, or a similar word, comes up a lot in conversations about the UAE – when people talk about companies and deals such as the proposed $15bn merger between real estate developers Aldar and Sorouh (advised by Allen & Overy and Clifford Chance, respectively), and about law firms.

“The legal market is changing in line with the country,” says Eversheds Dubai managing partner Nasser Ali Khasawneh. “[The UAE] has gone through incredible growth, but at times it was too hectic. Now it is stabilising and reinforcing its position as the hub of choice for companies setting up in the region.

“What’s happening with law firms is very similar. In 2006, law firms came and tried to grow at an unnatural pace and that didn’t really work out. We now have consolidation in the legal market and it’s a healthier landscape. It’s a much more mature market than in 2006 and 2007.”

For some firms, such as Simmons & Simmons and Herbert Smith, this adjustment has meant redundancies. In January, Simmons announced it was letting lawyers and support staff go in Dubai, while Herbert Smith cut five Dubai support jobs in May. Others, including Norton Rose and SNR Denton, claim they are now taking a more regional approach to the Middle East, putting more emphasis on hubs such as Dubai and less on satellite offices in smaller Middle East countries.

During the Arab Spring, Dubai and Abu Dhabi capitalised on their reputations as regional hubs and safe havens for investors fleeing less stable jurisdictions. Planned investment-baiting laws should solidify the UAE’s status as a regional hub, if they are passed.

Switzerland of the Middle East

“The UAE has been considering a raft of investment-related laws,” says Ali Khasawneh. “The key ones have been in the works for quite a while and the Ministry of Economy and Ministry of Justice are spearheading the changes.”

Phil O'Riordan
Phil O’Riordan

Philip O’Riordan, Clyde & Co corporate partner, says: “At one level, the UAE already has a reputation as being quite investor-friendly. It’s the Switzerland of the Middle East and since the Arab Spring, that position has really grown. But it has been apparent for a number of years that both the companies law and the existing laws around insolvency have been out of date.”

The most significant legislative change is the new companies law, which is designed to replace legislation passed in 1984. A draft, approved by the UAE cabinet in December 2011, has been widely circulated among the legal and business communities and contains suggestions for making life easier for foreign investors and businesses in the UAE.

“The UAE’s old [companies] law dates back to the 1980s and there was the desire for a new law that upgrades the legal provisions in this regard,” says Ali Khasawneh. “The draft I’ve seen is very good […] and shows a major step forward. As I see it, the law is dual purposed. It’s about enhancing investment in the UAE and giving greater comfort to investors, but also there’s a strong drive to define and clarify issues for UAE nationals.”

As well as allowing single shareholder companies, providing governance guidance and making it easier for smaller business to establish themselves by removing the $40,838 minimum capital requirement prescribed by the 1984 law, the new law also looks set to ease the restrictions surrounding the foreign ownership of companies.

At present, a company in the UAE mainland (that is, not in one of the designated free economic zones) cannot be more than 49% owned by a foreigner. The new law does not remove this measure, but says the economy minister can recommend the UAE cabinet issues decrees that create exceptions on a sector-by-sector basis. However, what sectors will be exempted and by what percentage is not known. Also, the changes will not apply to joint liability companies or simple commandite companies, where all partners must be UAE nationals.

Most agree the draft law is, at least, a step in the right direction but those who have been in the Emirates for a long time know better than to take it at face value.

“There are drafts of these laws out there at the moment but the final legislation may still change radically,” says one Dubai-based partner at an international law firm. “You have to bear in mind that we don’t have the same transparent legislative process here as in the UK. I’ve been here about 10 years and there have been drafts [of the new companies law] doing the rounds for three quarters of that time. This is the first time that they’ve widely circulated the drafts, though.

“The draft law doesn’t change things radically, and doesn’t go as far as people hoped it would, although it does open the door for ministerial resolutions to allow foreigners to have more than 49 per cent ownership of a company. But locals derive a lot of money from acting as sponsors for these foreign-owned companies, so there’s a strong local lobby not to change the situation overnight.”

Though the draft law was approved by the council of ministers in December 2011, it must still be approved by the Federal National Council, signed by the president, then published before it becomes law. The Arabic press predicts a year-end passage for the law, but only after some amendments have been made.

Bankruptcy update

Lawyers in the UAE are also close to seeing a draft of the updated bankruptcy law, which has been in the works for about three years. It should be in their hands by the end of the year, Justice Minister Hadef bin Juan al-Dhaheri said in May. It would finally give companies that run into trouble in the UAE the legal mechanisms to be rescued, rather than being wound up, though it is not expected to apply to government entities or companies set up within the economic free zones.

Insolvency has been a concern for many people since 2009, when the debt crisis brought a number of companies in the UAE, particularly Dubai, to their knees. One of the world’s largest port operators, Dubai World, had to engage in a $26bn debt restructuring and lawyers found the lack of a coherent restructuring regime a headache.

Indeed, a Hawkamah (the Dubai-based institute of corporate governance) study found that, on average, it took just over five years to wind up a business in the UAE and that creditors can expect to recover only about 10 cents in the dollar.

Emma Giddings
Emma Giddings

“This move is to be welcomed,” says Emma Giddings, Norton Rose Abu Dhabi-based partner. “The current insolvency regime in the UAE is little used and provides for a court-driven approach. As a consequence, there’s often uncertainty as to how the existing regime will work in practice. We understand the new law will contain alternatives to formal insolvency proceedings intended to promote the rehabilitation of companies in financial difficulties and will generally implement a more modern, debtor-friendly approach to insolvency.”

Ali Khasawneh says: “The most important aspect of the new insolvency law is that it will, hopefully, provide a more developed regime to cover more insolvency options for companies in financial difficulties.

“Now, in practice, a company’s options are quite limited. It can either enter voluntary liquidation or court-managed liquidation, which is fine but presents strict options. The new law is designed to allow companies greater protection and provide a system where they can get back on their feet.

Arbitration under review

Arbitration is another area that may get a boost from new legislation. A draft was circulated in February, but when that will become law and how much it will change before it does is anyone’s guess.

Now, the UAE’s arbitration laws are contained within the country’s Civil Procedure Code. The UAE only signed the New York convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which applies to the recognition and enforcement of foreign arbitral awards) in 2006.

One goal of the new law, which like the other legislation will be applied to mainland UAE, is to enshrine that principle of enforcing foreign awards.

“The new law will be a fully fledged arbitration law and will give greater detail and substance on limited companies and where awards can be challenged,” says Ali Khasawneh. “It will also take out some of the vague language [now in the Civil Procedure Code] in line with the overall UAE objective to cement its position as leaders in arbitration in the region.”

The UAE is committed to becoming a force in the international economy. It is well on its way, but the new laws could provide more credibility for the country and make the difference to potential investors, if they are enacted.