A number of international companies and foreign investors (together the “Foreign Investors”) choose to establish mainland UAE limited liability companies (“LLC”) for the purposes of operating their “on-shore” businesses activities in the UAE. Pursuant to UAE Federal Law No. 2 of 2015 Concerning Commercial Companies (the “Companies Law”), at least 51% of a mainland LLC must be owned by a UAE person (either a private individual or UAE corporate).
Choosing a UAE Partner
In haste to establish operations in the UAE and get businesses up and running, many Foreign Investors will partner with a UAE private individual (“UAE Partner”) for the purposes of complying with the Companies Law (supported by a bundle of commercial side agreements with the UAE Partner setting out each partner’s rights, obligations and liabilities and how the control and economics of the LLC are apportioned between them (the “UAE Scheme”)). In this situation, one question which is often frequently overlooked is “what happens to the LLC on the death of the UAE Partner?” It is a very morbid question to ask at the outset of any business relationship, but a very important one, as the death of the UAE Partner will have a material impact on the day to day business operations of the LLC while UAE probate laws (governed by the laws of Sharia) determine how the estate of the deceased will be shared among their heirs.
What happens to the LLC on the death of the UAE Partner?
On the death of the UAE Partner, any shares held will pass to the heirs in accordance with the Companies Law and the laws of Sharia. However, the immediate impact of the death is that the General Powers of Attorney and Special Powers of Attorney which form part of the UAE Scheme and which the UAE Partner has granted to his attorney (usually a nominee of the Foreign Investor such as the General Manager or CEO of the LLC) are revoked. Practically this means that the LLC will be unable to perform the most basic of business operations such as payment of trade creditors, appointing and dismissing employees at the UAE Ministry of Labour, procuring residency visas for staff at The Ministry of Interior, renewing trade licenses at the Department of Economic Development (“DED”) etc. Currently there are no steps which a Foreign Investor can take to mitigate against this business interruption risk as the UAE probate laws must run their course before the heirs succeed the deceased and a revised and amended UAE Scheme is implemented (and often re-negotiated) between the heirs and the Foreign Investor.
One UAE Partner becomes “many”
There is a high risk that at the death of a UAE Partner the heirs may all wish to take an equity stake in the LLC corresponding to their rights determined pursuant to the Court Order (as defined below). This could lead to an impractical situation where the LLC has a number of heir shareholders (with competing interests) and the Foreign Investor is required to negotiate with each and every one of them in order to implement the new UAE Scheme.
Establishment of a HoldCo benefits the Foreign Investor
Foreign investors may wish to avoid this problem by requiring that its existing UAE Partner (or future UAE Partner) establishes a UAE corporate vehicle (“HoldCo”) which will in turn hold the shares of the UAE Partner in the LLC. Upon the death of the UAE Partner his shareholding in HoldCo will be allocated between his heirs (with no direct impact on the shareholding HoldCo has in the LLC – as it remains the same). The Foreign Investor (and the heirs of the UAE Partner) will be saved from amending the LLC’s contract of establishment and the commercial license reflecting changes to the shareholders and it will be saved from needing to prepare any supporting corporate resolutions and POAs to effect the amendments.
Establishment of a HoldCo benefits the UAE Partner
Implementing a HoldCo structure is also very beneficial to any UAE family office and UAE businessmen (together the “Family Office”) who partners regularly with Foreign Investors in the UAE. Instead of the Family Office holding a number of its portfolio companies (“Portfolio Companies”) in the personal name of the head of the Family Office (or through nominees chosen by the head of the family) there are strong corporate efficiencies of holding all of the Portfolio Companies through one consolidated HoldCo. Upon the death of the head of the family only one round of share transfers of the deceased shares in HoldCo will be required. No share transfers will be required at each Portfolio Company level. Although this article focuses on succession planning benefits, the greatest advantage to the Family Office using a HoldCo structure is to diversify the risks and shelter the Family Office from liability with respect to its businesses and assets. Other advantages include: (i) the ability of consolidating accounts of each Portfolio Company under the HoldCo making it easier to raise finance from third party lenders; (ii) the ability to acquire and dispose efficiently of any Portfolio Company and ensure economic gains are passed up through HoldCo (and therefore to family members of the Family Office); (iii) the ability to raise equity capital and potential ease of exit from the Family Office’s ownership of any Portfolio Company through an IPO.
There are a number of structuring options available with respect to establishing a HoldCo. For example, HoldCo may be established as an overseas limited company, UAE Limited Liability Company or Special Purpose Vehicle (“SPV”). For the purposes of this note, we will focus on the advantages of using an Abu Dhabi Global Markets Special Purpose Vehicle (“ADGM SPV”) as HoldCo.
ADGM HoldCo Considerations
The ADGM SPV regime has been in place since October 2015 but has already received a huge amount of interest as a result of its forward thinking and distinctive offering in the UAE.
ADGM SPVs are primarily employed to act as the HoldCo for a company or private Family Office that seeks a legal entity to passively hold assets and equities therein. SPV’s can be established as a new venture, project / joint venture vehicles and wholly owned subsidiaries to ensure that only those assets related to a specific transaction are exposed in reciprocity to the liabilities associated with that transaction. SPVs by nature provide a structure that may isolate both financial and legal risks posed by ring-fencing assets and liabilities held by the SPV. The SPV can act as a passive holding company for shares in an onshore LLC in the UAE or other companies therein.
Restricted Scope SPVs may be formed by Private Family Offices or companies whereby the identity of the ultimate beneficial owner is concealed with approval at the sole discretion of Registration Authority in the ADGM. There is no limit for the number of shareholders that may hold equity in the SPV and no limit to the number of Directors to be appointed to the Board.
The AGDM SPV regime provides a robust yet cost-effective solution for asset protection in the UAE. The ADGM promote the use of a corporate service provider or agent to provide the registered office address, removing the requirement to obtain physical office space. There are no restrictions on the nationality of shareholders/directors and no minimum share capital requirements. Unlike overseas entities the corporate documents of an ADGM SPV do not need to follow the time-consuming and costly legalisation process when acquiring shares in UAE companies.
Summary of UAE Probate Laws
Upon the death of a UAE Partner, the UAE Ministry of Health (Department of Preventative Medicine) will issue a Death Certificate. The heirs of the deceased will thereafter lodge an Inheritance Case with the UAE Court of First Instance (the “Court”) for the purposes of the Court issuing a court order (the “Court Order”). The purpose of the Court Order is to: (i) attest the death of the UAE Partner; (ii) identify the legal heirs of the UAE Partner; and (iii) rule on how the estate of the UAE Partner will be apportioned between the heirs. The period of time between lodging an Inheritance Case and being issued with a Court Order will take a minimum of 30 working days (assuming there is no dispute among the heirs) (the “Interim Period”).
Once the Court Order has been issued, the heirs will be able to present the Death Certificate and the Court Order to the various applicable departments of the UAE for the estate of the deceased to be shared among the heirs. In the case of an LLC with a deceased UAE Partner, the DED will make no amendments to the commercial license of the LLC until it has been presented with the Court Order, the Death Certificate and the Inheritance POA (if applicable).