GCC Quarterly Review - Q4 2017

The GCC Quarterly Review briefly summarises a selection of the major developments in the laws of the Gulf Cooperation Council ("GCC") region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) in the fourth quarter of 2017, with links to further reading, where available.

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Amended Saudi Arabian Merger and Acquisition Regulations: a number of noteworthy changes have been made to the regulation of public M&A transactions in Saudi Arabia as a consequence of the amended rules, including amendments to the requirements for public offers, new provisions for privately negotiated transactions and clarification of the regulation of public merger transactions. Read more in our note produced in collaboration with Zamakhchary & Co.

Restrictions on foreign investment in UAE companies amended: in October, Federal Decree-Law No.18 of 2017 amending certain provisions of Federal Law No.2 of 2015 concerning commercial companies authorised the Cabinet of Ministers, by way of resolution, to permit foreign investors to own a majority or all of the share capital of a UAE joint stock company (“JSC”) or a limited liability company (“LLC”). The reform represents a limited liberalisation of the existing restriction set out in Article 10 of the Commercial Companies Law, which requires a JSC or LLC to have not less than 51 per cent. of its share capital owned by UAE nationals (subject to certain exceptions). 

UAE issues VAT Executive Regulations: in November, the UAE Ministry of Finance issued Executive Regulations, approved by Cabinet Decision No.52 of 2017 (the “VAT Regulations”), in preparation for implementation of the new Value Added Tax (“VAT”) regime in the UAE on 1 January 2018. The VAT Regulations are made under the UAE’s domestic VAT law, Federal Decree Law No. 8 of 2017 (the “VAT Law”). The VAT Regulations provide key detail on a range of areas to allow the UAE to implement and administer the requirements of the VAT Law, including what constitutes a supply of goods and services, the place of supply of various services, tax groups, zero-rated supplies, exempt supplies (including most types of financial services), and the conditions for "Designated Zones" which are outside the VAT regime (free zones in the UAE are not generally expressed to be Designated Zones). In October, the Federal Tax Authority opened its online portal for taxpayers to register for VAT purposes. The UAE is preparing to implement VAT, in common with the other GCC Member States (Saudi Arabia, Bahrain, Kuwait, Qatar and Oman), based on the principles agreed in the Unified GCC Agreement for Value Added Tax. Read more.

English High Court delivers judgment in Dana Gas PJSC v Dana Gas Sukuk Limited and Others and ongoing Sharjah Court proceedings: the judgment of the English High Court in the case of Dana Gas PJSC v Dana Gas Sukuk Limited and Others [2017] EWHC 2928 (Comm) was delivered on 17 November 2017. The case concerned a disputed 2013 Sukuk transaction, which uses a Mudaraba structure no longer prevalent in the market. Dana Gas asserted that the transaction was not Shariah compliant “due to the evolution and continual development of Islamic finance instruments and their interpretation”, the Mudaraba agreement is unlawful and enforceable as a matter of UAE law and consequently, the English law purchase undertaking is also unlawful as a matter of English law on the basis that performance is required in the UAE. The Court concluded that all grounds relied on by Dana Gas were unfounded and declared that the English law governed purchase undertaking was valid and enforceable in accordance with its terms. The main arguments in the case are summarised below:

• Construction: The Court ruled that the purchase undertaking did not provide for an exchange such that Dana Gas was obliged to pay the exercise price only in return for the trustee's rights to the Mudarabah assets: the two performances were not concurrent conditions. As the purchase undertaking was intended to cover the risk that the Mudarabah and transaction documents governed by UAE law may be invalid, it was clear that the purchase undertaking was framed to ensure that in this event any consequences of such invalidity did not affect Dana Gas's obligation to pay the exercise price. 

• Mistake: Dana Gas contended that the purchase undertaking was void for mistake. Justice Leggatt stated that the doctrine of mistake can only apply if there is a gap in the contract. If the risk of the mistake has been allocated by the contract, there is no scope for the doctrine. He ruled that all the versions of the case of mistake advanced by Dana Gas failed.

• Public Policy: Dana Gas contended that the purchase undertaking was unenforceable because, as a matter of public policy, the English courts will not enforce a contract which is entered into for a purpose which is unlawful under UAE law. The Court ruled that there was nothing to indicate that the purchase undertaking had as its object and intention the doing of anything in the UAE which was alleged by Dana Gas to be unlawful under the laws of the UAE, and concluded that this ground relied on by Dana Gas was also unfounded.

The judgment of Justice Leggatt reinforces the sanctity of English law-governed documentation in the context of structures employed in international sukuk transactions, particularly as Justice Leggatt expressly assumed, for his purposes of determining English law matters, that under UAE law all the relevant contractual obligations were, as Dana Gas had asserted, unlawful and unenforceable. 

Dana Gas has stated that it intends to appeal the High Court's ruling. Dana Gas’ appeal against the High Court’s decision allowing BlackRock to participate in English court proceedings was rejected in December. 

The Sharjah Court has now lifted the injunction which prevented Dana Gas participating in the English Court proceedings. The Sharjah Court hearing to determine the validity of the Mudarabah agreement as a matter of UAE law was scheduled for 25 December. However, we note that, in light of the assumption by Justice Leggatt referred to above, the outcome of that hearing should not affect the conclusions reached by High Court.

New bankruptcy Law proposed for Bahrain: a stand-alone draft bankruptcy law is reported to be making legislative progress in Bahrain. It is expected to modernise the bankruptcy and restructuring regime, replacing the Bankruptcy and Composition Law (Law No.11 of 1987). 

Saudi Arabia establishes specialised commercial courts: Saudi Arabia has launched commercial courts, staffed by specialised judges to determine commercial disputes. Currently, commercial disputes are either resolved by arbitration, or by litigation filed with a Board of Grievances or (for disputes relating to the banking and insurance sectors and for the stock market regulator) the Saudi Capital Market Authority. 

Recovery and resolution framework proposed for financial institutions in the DIFC: the Dubai Financial Services Authority (“DFSA”) published a discussion paper on a recovery and resolution framework for financial institutions in the DIFC in September. The DFSA intends to consult on the legislative amendments, after considering the feedback on the proposals set out in Discussion Paper No.3. The paper touches on which entities would be captured by the resolution framework, what powers the regulator will have, resolution triggers and creditor protections, taking into account the Financial Stability Board’s (a body created and mandated by the G-20) “Key Attributes on Effective Resolution Regimes for Financial Institutions” and related guidelines.

MiFID II product governance rules: practical considerations for debt capital markets practitioners: from 3 January 2018, the European Markets in Financial Instruments Directive (“MiFID II”) will introduce new product governance obligations on investment firms established in the European Economic Area (“EEA”) when they manufacture or distribute financial instruments, including shares, bonds and derivative instruments. Although the new product governance rules only apply to MiFID Firms, non-MiFID Firms (which may include local banks and securities houses in the GCC) will be indirectly impacted when doing business with MiFID Firms (e.g. where financial instruments are to be sold within the EEA) or distributing financial instruments (both within and outside the EEA) manufactured by MiFID Firms. We expect that market participants (including those located outside the EEA) will wish to consider the product governance regime and how it will impact them. Linklaters has produced a note that considers aspects of the scope and implications of the product governance obligations for Asia-based debt capital markets practitioners. Read more.