11 January 2021

GCC Quarterly Review - Q4 2020

The final quarter of 2020 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q4 2020 summarises a selection of the major developments in that period, with links to further reading where available.

Download the PDF version (9 pages) or read online below.

ADGM

ADGM amends the Application of English Law Regulations 2015

The Abu Dhabi Global Market has updated the English laws relied upon within the free zone to ensure the regulations remain consistent with the latest developments in English law. The Application of English Law Regulations (Amendment No.1) 2020, which amend the Application of English Law Regulations 2015, were enacted following a consultation which closed in November 2020 (Consultation Paper No.4 of 2020). The changes primarily relate to the Insurance Act 2015, Trustee Act 1925, Bills of Exchange Act 1882 and the Limited Partnership Act 1907.

Payment services regime revised

The ADGM Financial Services Regulatory Authority (FSRA) has revised the Providing Money Services (PMS) regime. The changes are set out in the Financial Services and Markets Regulations (Amendment No.3) 2020 and new rules in the FSRA’s Rulebook, set out in the Conduct of Business Rules (COBS) and the Prudential – Investment, Insurance Intermediation and Banking Rules (PRU). Designed to bring the regime up to date with evolving technologies and the emergence of new business models and methods for the transfer of funds, the new specified activities of “Money Remittance” and “Payment Services” activities broaden the scope of the regulated activity (including the activities of providing payment accounts and the issuance of stored value). The regime also focusses on more appropriately addressing the risks arising from these types of activities (such as the safeguarding of client funds).

ADGM data protection regime to be updated to reflect GDPR

ADGM proposes to enact new, stand-alone Data Protection Regulations to replace the Data Protection Regulations 2015, which were based on European Union and UK laws which have now been superseded by the EU Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data (the GDPR). According to Consultation Paper No.6 of 2020, the new regime is to be aligned with the GDPR and aims to increase the protection of personal data processed and controlled in ADGM in line with international best practice. The changes should also help international businesses with a presence in the ADGM to adopt a consistent, global approach to data privacy. A new independent Office of Data Protection is to be established to monitor compliance with the and take enforcement action in cases of non-compliance. Companies in the ADGM are to have a grace period of 6 to 12 months for compliance.

Electronic transactions regulations proposed

The ADGM is proposing to introduce a new regime to facilitate electronic transactions, records and signatures and authentication technologies. Recognising the increasing prevalence of electronic transactions, the draft Electronic Transactions Regulations aim to ensure equivalent treatment for users of paper-based documentation and users of electronic information. The draft regulations clarify that:

electronic signatures are enforceable;

electronic records and physical copies have equivalent weight; and

references to “writing” in legislation include electronic form.

ICC case management office in ADGM

The International Court of Arbitration of the International Chamber of Commerce (ICC Court) is to open a case management office for the ICC Court Secretariat in the ADGM, which will integrate the operations of the ICC’s existing representative office in ADGM which was established in 2017. The new case management office is expected to be operational by April 2021. Read more about the revised 2021 ICC Rules of Arbitration, which came into force in January 2021, in our Overview of the 2021 ICC Rules of Arbitration.

DIFC

Large exposures regime reform proposed

The Dubai Financial Services Authority may update its prudential regime relating to large exposures of financial institutions regulated by the DFSA during 2021. The proposed revisions to the regime, on which the DFSA consulted in late 2020, are principally to align the Dubai International Financial Centre regime to the standards and recommendations set out by the Basel Committee on Banking Supervision in Basel III.

DIFC Court’s Arbitration Working Group

The DIFC Courts have launched a new Arbitration Working Group, comprising a panel of experts, whose aim is to support the DIFC Courts in assisting arbitration-related disputes. This follows the establishment of a new Arbitration Division within the DIFC Courts in February 2020. The division aims to improve the DIFC Courts’ efficiency in dealing with applications for interim measures and injunctive relief in the context of arbitration-related disputes and help to ensure certainty around the recognition and enforcement of arbitral awards.

UAE

Major changes to the Commercial Companies Law regime Significant amendments have been made to the Commercial Companies Law (Federal Law No.2 of 2015) by Decree Law No.26 of 2020, the majority of which came into force on 2 January 2021. The changes affect the most common types of companies in the UAE; limited liability companies (LLCs) and public joint stock companies (PJSCs).

Under the new regime, the general rule is that foreign ownership of local companies is permitted, unless a restriction applies. Read more… Repealing the Foreign Direct Investment Law (Federal Law No.19 of 2018), Decree Law No.26 of 2020 removes the general requirement for onshore companies to have at least 51 per cent. of their share capital held by UAE nationals. While this is a historic change in approach, it is possible that some restrictions may be introduced by secondary legislation in the coming months, as the amended regime allows the Cabinet to:

impose specific licensing conditions for companies engaged in strategically important activities;

exempt companies that organise their activities pursuant to special legislation from the application of the foreign investment rules (and so they may be subject to stricter requirements); and

restrict the involvement of foreign nationals in the management of local companies engaged in strategically important activities (but the previous general rule that the chairman and the majority of directors of PJSCs shall be UAE nationals is removed).

A UAE national service agent is also no longer required for a branch or a representative office of a foreign company. The new provisions on foreign ownership come into force at the end of September 2021. Selected key changes to note include:

General meetings: the notice period for calling meetings is now 21 days, there are more detailed requirements around calling meetings, quorum requirements are reduced to shareholders representing 50 per cent. of the capital of the company and there is express provision for electronic notices, virtual attendance and online voting.

PJSC share capital: the concept of authorised share capital of a PJSC has been removed. This means any increase in the share capital of a PJSC now requires the approval by special resolution of the shareholders, removing the board’s flexibility to increase the share capital up to the authorised share capital limit without seeking additional shareholder approval.

PJSC boards: the restriction that only a third of the members of the board of directors of PJSCs may be non-shareholders has been removed.

Shareholder rights: minority shareholders holding 10 per cent. or more of the capital in an LLC or PJSC can request a General Meeting. Shareholders have new rights collectively to bring proceedings directly in their own name for damages against the company.  Takeover rules: compliance with Securities and Commodities Authority (SCA) takeover rules is required and there are new fines for breach of takeover rules of between AED 100,000 and AED 10 million.

Financial assistance: The restriction on giving financial assistance now applies to a PJSC and its subsidiaries (rather than its affiliated companies). There is a new exception to the rule against giving financial assistance for banks and financial institutions licensed by the Central Bank which are providing loans to persons to enable them to hold relevant securities (provided that the loans do not contain preferential provisions). The law also now clarifies that the provision of compensation to underwriters in respect of any public offering or subscription of shares in a PJSC does not constitute financial assistance. Using a company's reserves, funds or profits for settling any of the obligations of the holder of the company’s securities is removed from the examples of financial assistance.

Prospectus liability: Liability for the accuracy of information set out in a prospectus is now limited to the Founders' Committee and the board of directors, and advisors are no longer jointly liable.

Pre-emption rights: the law now clarifies that pre-emption rights do not apply where a PJSC is increasing its capital on conversion of bonds or sukuk into shares nor in respect of shares issued in consideration for target company shares in an acquisition scenario.

Auditors: auditors may now be appointed for 6 successive financial years (increased from 3 years), provided that the partner responsible for the auditing is changed after 3 years.

PJSCs in financial difficulty: where a PJSC’s losses amount to half of its issued capital, there are new requirements on directors to recommend either the continuation or the dissolution of the company and provide a plan and supporting documents to the general meeting convened to discuss the company’s position.

Secondary regulations are expected to be issued on corporate governance rules for all companies (other than PJSCs whose governance is already regulated by the SCA, underwriting and strategic partners (as conditions allowing shares to be issued to strategic partners, without first being offered to existing shareholders, are removed from the Commercial Companies Law).

The general rule remains that PJSC provisions will apply to LLCs (unless not compatible with LLCs). A Cabinet Resolution is expected to be issued to clarify more precisely which PJSC provisions will apply to LLCs (and replace the current resolution which references pre-amendment provisions of the Commercial Companies Law), but until such a resolution is issued there is room for uncertainty as to how the rule will be applied to LLCs.

Companies are required to “adjust their positions” by 2 January 2022, one year of the law coming into effect, otherwise the company will be deemed to be dissolved and a daily fine of AED 100 will be imposed. Companies should consider what changes to their Articles of Association may be required or desirable. Those companies which have or are seeking foreign investment, including joint ventures and companies with nominee arrangements, should consider their future arrangements and review the provisions of their existing Articles of Association and shareholders agreements.

Bankruptcy Law reform measures to support businesses

The UAE Government has revised aspects of the Bankruptcy Law (Federal Decree No.9 of 2016). Federal Decree Law No.21 of 2020 amending the Federal Decree Law No.9 of 2016 Concerning Bankruptcy enacts provisions intended to support viable businesses which are experiencing financial difficulty and promote business continuity. The amendments to the Bankruptcy Law came into force on 1 October 2020.

New provisions support businesses experiencing financial difficulty in the context of an “Emergency Financial Crisis”. An Emergency Financial Crisis is described as a situation which affects trade and investment in the UAE, and which expressly includes a pandemic. Ultimately, the right to determine whether an Emergency Financial Crisis exists and its duration rests with the UAE Cabinet. As far as we are aware, there has not yet been a public announcement from the UAE Cabinet determining the Covid-19 pandemic to be an Emergency Financial Crisis. Insolvent debtors are not under a duty to file for bankruptcy where insolvency results from an Emergency Financial Crisis. If a debtor decides to file for bankruptcy, the debtor can request the court to grant a 40 business day grace period to agree a settlement with its creditors. This is intended to give viable companies an opportunity to develop a rescue plan, free from immediate creditor pressure. While there is no express provision for a statutory standstill on creditor claims during the grace period, nor any restriction on enforcement action by secured creditors, the court has wide discretion to take the actions it deems appropriate in relation to the debtor when opening proceedings. Therefore, it is possible that the court may impose a standstill or require secured creditors seek approval to enforce security over the debtor’s assets on a case by case basis.

The approval of the settlement requires (i) the support of a majority in number of creditors engaged in the negotiation representing at least two thirds of the debtor’s debts and (ii) court sanction (which may be rejected if the settlement does not comply with the requirement of good faith in the discharge of the debtor’s obligations). Crucially, the law allows for a cram-down of minority dissenting creditors, but dissenting creditors have a right to apply to the court to object. Any settlement agreement must be concluded within 12 months. Creditors’ rights are temporarily limited during the Emergency Financial Crisis, as the court will suspend any applications to commence proceedings in relation to a debtor.

During an Emergency Financial Crisis, debtors may seek new financing (secured or unsecured), provided that certain conditions are met (including relating to priority rights over other debts and a requirement that the assets to be secured are unsecured or their value exceeds the amount owing under any existing security). The court has discretion to adjust priority rights in the case a second ranking or subsequent security is granted over the debtor’s assets, for example where the financing is required to obtain goods or services necessary for business continuity. Directors may pay their employees (and can dispose of assets to fund such payments), provided that it is necessary for business continuity and in doing so they act prudently and in good faith in the best interests of the debtor. In such circumstances, directors will not face personal liability under the Bankruptcy Law.

For ongoing proceedings commenced before the onset of an Emergency Financial Crisis, the UAE court also has the discretion to extend time periods (by up to double the applicable periods) prescribed for other procedures under the bankruptcy regime, where a debtor’s financial difficulties arise from an Emergency Financial Crisis. The standstill following commencement of preventative composition or bankruptcy proceedings is time-limited and now will cease on the earlier of the approval of the composition plan or ten months (extendable to 14 months) from the date proceedings commenced. As previously, secured creditors can still enforce their security with court approval, however the circumstances in which the court may grant such approval are now restricted to where (i) the secured assets are not necessary for the implementation of the composition plan (in the case of preventative composition) or the bankruptcy composition plan or sale of the business (in the case of bankruptcy), or (ii) the creditor can evidence that the secured assets are likely to suffer damage or depreciation. The debtor has new rights to challenge a secured creditors’ application to enforce its security. The amended law also clarifies that secured creditors will have priority over preferential creditors.

Various jurisdictions around the world are making changes to their insolvency and restructuring regimes, ranging from short term measures aimed at assisting companies struggling with the immediate impact of Covid-19 and significant reforms which are intended promote a rescue culture to support viable businesses. You can read more in our tracker of Covid-19: Restrictions on creditor rights, relaxation of obligations to file and other insolvency-related reforms/proposals.

UAE Government resolution regarding beneficial ownership

The UAE has introduced new regulations requiring certain UAE entities to maintain a register of its beneficial owners (Cabinet Resolution No.58 of 2020 on the Regulation of the Procedures of the Real Beneficiary). The new regulations cover all corporate entities that are licenced or registered in the UAE (including in any commercial free zones) (except for wholly owned government entities and their subsidiaries and those established in the DIFC and ADGM). The regulations provide a more robust and prescriptive regime to record and disclose ultimate beneficial ownership of UAE entities, and follow similar measures in the DIFC (which enacted the Ultimate Beneficial Owner Regulations in 2018 Read more…) and the ADGM (which enacted the Beneficial Ownership and Control Regulations in 2018). Entities that are within the scope of the regulations need to take steps as soon as possible to ensure that they comply with the regulations as key compliance deadlines have already passed. Read more…

Reform of UAE Court and notarisation procedures

Amendments to the Law on Evidence in Civil and Commercial Transactions (Federal Law No.10 of 1992) and the Law regulating the notary public profession (Federal Law No.22 of 1991) have been approved by the UAE Cabinet in order to facilitate the use of electronic technologies in litigation and notarisation procedures. When the amendments come into force, documents signed using digital signatures and e-documents will also be capable of being approved and treated as official documents.

Economic Substance Regulations notifications and reports required for the first reportable year

Businesses in the UAE with a financial year ending 31 December 2019 were required to submit their first annual reports by the deadline of 31 December 2020 under the Economic Substance Regulations (ESR) set out in UAE Cabinet Resolution No.31 of 2019 (amended by Cabinet Resolution No.57 of 2020). Where a business is engaged in certain types of activities in the UAE or a free zone (including the DIFC and the ADGM), it must submit an annual Notification and Economic Substance Report demonstrating an adequate “economic presence” in the UAE relative to the activities it undertakes within 12 months from the end of its financial year. Sectors within the scope of the regime include banking, insurance, fund management and holding companies. The Ministry of Finance released template Notification and Economic Substance Reports in November 2020. Late submission is punishable by fines. Read more…

UAE Central Bank launches Fintech Office

The Central UAE Bank has established a Fintech Office to support financial innovation for banks and financial institutions onshore in the UAE and to strengthen the country’s position as a global financial centre. As part of the UAE’s Fintech strategy, the Central Bank is progressing initiatives relating to digital payment systems (including recently issued regulations relating to stored value facilities), crowdfunding and retail payment activities.

UAE Central Bank to launch new Monetary Bills in partnership with Euroclear and Bloomberg

Banks and financial institutions operating in the UAE will be able to issue new Monetary Bills (M-bills) with effect from 11 January 2021. The Central Bank is introducing M-bills, a new type of tradeable securities offered to eligible investors, as a replacement for conventional certificates of deposit (CD), which are used as a liquidity management tool by banks and the mechanism through which interest rates on UAE Dirham are set. M-Bills are to be auctioned and traded through Bloomberg’s primary and secondary market solutions and settled via a new domestic platform developed with Euroclear Bank. The Central Bank will determine the timing, volumes and maturity periods of M-bills issuances. M-bills should help to manage liquidity within the UAE banking sector, allowing market participants to maintain a pool of Dirham liquidity, potentially reducing volatility in borrowing costs and promoting the development of a secondary market for UAE Dirham-denominated securities. This forms part of the Dirham Monetary Framework adopted by the Central Bank in February 2020. It follows on from the Central Bank’s introduction of a new overnight deposit facility in July 2020 allowing banks in the UAE to deposit surplus liquidity on an overnight basis to manage surplus liquidity, which replaced the issuance of one-week certificate of deposits. Read more…

Project Aber report issued on digital currency and payments initiative by the UAE and Saudi Arabia

The Saudi Central Bank and The UAE Central Bank have issued a final report on the proof-of-concept project for the proposed joint digital currency and cross-border payments initiative announced in January 2019. The Project Aber: Joint Digital Currency and Distributed Ledger Project final report determines that distributed ledger technology could facilitate cross-border payments between the two countries, including using a new, dual-issued digital currency as a unit of settlement. Before this can be achieved in practice, further consideration is needed around policy issues, legal and regulatory frameworks, interest rate calculations and costs. Looking ahead, the Aber network could be used as a means of settlement for other forms of transaction (such as the sale of bonds or other dematerialised assets on a Delivery versus Payment (DvP) basis).

TESS extended to support businesses affected by Covid-19

The Central Bank has extended the Targeted Economic Support Scheme (TESS) to support UAE businesses affected by the Covid-19 pandemic until June 2021. The governments of Abu Dhabi and Dubai also implemented financial stimulus and support packages. The SCA issued circulars to listed public joint-stock companies to facilitate electronic attendance and voting and business continuity planning. You can read more about the TESS stimulus package in our previous briefings.

UAE implements BEPs reporting requirements for multinational companies

Multinational enterprises (MNEs) headquartered in the UAE with a financial year ending 31 December 2019 were required to submit their first their Country-by-Country Reporting by the deadline of 31 December 2020 using the Ministry of Finance’s MNEs Notification and Reporting System, in accordance with Cabinet Resolution No.44 of 2020. The implementation of Country-by-Country Reporting is part of Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative led by the Organisation for Economic Co-operation and Development (OECD) and the G20. The UAE joined the OECD’s Inclusive Framework on BEPs in 2018. BEPS aims to prevent MNEs from exploiting gaps in international tax rules to artificially reduce their taxes. The purpose of the report is to ensure there is no information gap between the taxpayers and tax administrations and ensure alignment between where profits are allocated, and taxes are paid. The report must provide a breakdown of the MNEs global revenue, profit before tax, income tax accrued and other information for each jurisdiction in which the MNE operates.

UAE adopts measures to promote gender equality in the workplace

The UAE has revised the law to promote gender equality in the workplace. Decree Law No.6 of 2020 amends certain provisions of the Labour Law (Federal Law No.8 of 1980) and provides for:

equal pay for female employees for performing the same or equivalent work to a man; and

a new paternity leave benefit for a period of five working days which can be taken within the first six months of a child’s birth.

Saudi Arabia

Foreign investment in listed debt instruments

The Capital Market Authority (CMA) has issued a resolution permitting direct foreign investment in Saudi listed debt instruments without the foreign investor needing to be registered as a Qualified Foreign Investor. This covers investment by both foreign natural persons and entities. Read more…

Listing of depositary receipts

The CMA has issued instructions relating to listing of depositary receipts outside of the Kingdom. Previously, foreign issuers were allowed to be listed on the Saudi Stock Exchange (Tadawul), but the CMA’s regulations did not expressly permit secondary listings of Saudi issuers abroad. The instructions provide, for the first time, a mechanism for companies listed on Tadawul to obtain secondary listings outside of the Kingdom. Read more…

Employment law reforms set to change sponsorship (kafala) system

The Saudi Arabian Government has announced that private sector workers’ rights will be improved by a package of reforms which will come into force in March 2021. The reforms will abolish the sponsorship system (known as “kafala”) for professional workers, provide for new standard contractual arrangements between employers and employees and grant minimum rights and entitlements to employees. Under the new system, foreign employees will be able to change jobs (transferring their sponsorship from one employer to another), leave and re-enter the country and obtain exit visas without the consent of their employer.

Anti-concealment law

A new Anti-Commercial Concealment Law has been approved to address business licensing fraud and penalise the concealment of such offences (Cabinet Decision No.785/1441 On the Approval of the Anti-Cover Law). The law aims to prevent foreign nationals and companies from engaging or investing in any activity which they are prohibited from investing or engaging in under the Kingdom’s foreign investment regime. Violations are subject to penalties, including fines and imprisonment. Whistleblowers benefit from certain protections, including an exemption from penalties. Enforcement is to be a co-ordinated response between licensing authorities in Saudi Arabia and the new anti-commercial concealment committee. Draft implementing regulations have been published for consultation which clarify (among other things) what constitutes concealment.

New mining law

The new Saudi Arabian Mining Law, enacted by Royal Decree No.M/140 dated 19/10/1441 H / June 2020, came into force at the end of December 2020. The law provides for a mineral classification and licensing system similar to the previous regime, together with new features such as a General Purpose Licence and the availability of Exploration Licences for an increased period of 15 years. New licensing procedures (potentially with expedited timelines) are to be set out in implementing regulations, which are yet to be published. Licensees are also permitted to grant security over their rights under certain types of licences to lenders, which is registrable in the Ministry of Industry and Mineral Resources license register. A new mineral zones register will be established, as well as a new online National Geological Database. The new mining law is integral to the Kingdom’s Vision 2030 initiatives; Saudi Arabia is committed to increasing foreign investment in the mining sector, facilitating private sector exploration and increasing the mining sector’s contribution to the Saudi economy.

Commercial leases

The Ministry of Municipal and Rural Affairs announced that it would no longer renew commercial licenses for businesses after 4 October 2020 unless their commercial lease was registered on the EJAR lease registration portal (administered under the Ministry of Housing). Read more…

Special Economic Zones

Saudi Arabia is set to introduce new Special Economic Zones (SEZs). Revisions to the Economic Cities Authority (ECA) Statute enable the establishment and regulation of SEZs, a key feature of Vision 2030, and renames the ECA as the Economic Cities and Special Zones Authority (ECZSA). Read more…

Professional regulation

The Ministry of Commerce is proposing to introduce rules to regulate the licensing of independent consulting professionals, in the fields of hospitality, education, financial, economic and administrative consulting, as well as translation. Read more…

SAMA renamed the Saudi Central Bank

The Saudi Arabian Monetary Authority (SAMA) has been renamed the Saudi Central Bank.

A vision for the future: Linklaters guide to investing in Saudi Arabia 2020

Saudi Arabia’s ambitious Vision 2030 internal reform programme aims to transform every aspect of life in the Kingdom. The paradigm-shifting change envisioned by Vision 2030 is underpinned by three pillars – to foster a vibrant society; develop a thriving economy; and propel an ambitious nation – together with 13 Vision Realisation Programmes and 96 Strategic Objectives. Our updated guide analyses how Saudi Arabia’s economy and laws are evolving to support foreign inbound investment. Read more…

GCC

Kuwait adopts new rescue-focused bankruptcy law

Kuwait’s new Bankruptcy Law (Law No.71 of 2020) was published in October 2020. The new regime will come into force three months following the publication of implementing regulations (which have not yet been issued). The new law is intended to encourage the development of a “rescue culture”, in order to reduce the number of unnecessary liquidations of viable companies. It facilitates the rehabilitation of companies and the avoidance of bankruptcy either by a preventative settlement with creditors or a restructuring plan. A new specialised bankruptcy court is to be established to administer proceedings. The new law is well-timed to address the challenges the Kuwait economy faces as a result of the Covid-19 pandemic. Many aspects of the new law modernise the regime in line with recent changes to other bankruptcy regimes in the Middle East region. As is common in the region, companies experiencing financial difficulty in Kuwait have, to date, tended to pursue out-of-court, consensual debt restructurings and it will be interesting to see the extent to which the new law changes established practices.

Revisions to Bahrain’s Companies Law regime

Bahrain has revised its Commercial Companies Law (Law No.21 of 2001) with effect from October 2020. Decree No.28 of 2020 introduces a number of changes to the regime, many of which affect joint stock companies, including regarding preference shares, pre-emption rights, issuing shares to a strategic partner, issuing convertible bonds and applicable merger provisions.

Oman to implement VAT in 2021

Oman will implement VAT in April 2021, following publication of the VAT Law (Royal Decree No.121 of 2020) in the Official Gazette in October 2020. The standard rate of VAT will be 5 per cent. and there are provisions for zero rating and exemptions. The GCC Member States (Saudi Arabia, Bahrain, Kuwait, Qatar, Oman and the United Arab Emirates) agreed to implement VAT regimes based on the principles agreed in the Unified GCC Agreement for Value Added Tax, with a deadline of 1 January 2019. Saudi Arabia and the UAE were the first to implement VAT on 1 January 2018. Read more…

Global

Year in Review 2020 and Year to Come 2021 Our Year in Review and Year to Come series brings together analysis, thinking and highlights from our lawyers around the world, in the form of topic-specific and jurisdictional guides. The guides summarise the most important legal and regulatory milestones in 2020, and what to look out for in 2021, with links to more information where applicable. Read more…