Wednesday, June 30, 2010

Omani Law Compliance Reminder: Increased Capitalization Requirements and Rights Offerings

In response to the global financial crisis of 2008, the Central Bank of Oman issued a circular in June 2008 requiring Omani financing and leasing companies to comply with the following capitalization requirements:

  • By June 2009, each Omani financing and leasing company must have increased its capital reserves to at least OMR 10 million and maintain such minimum reserve amount at all times going forward; and
  • By June 30, 2012, each Omani financing and leasing company must have increased its capital reserves to at least OMR 20 million, and maintain such minimum reserve amount at all times going forward.
Understanding that many Omani financing and leasing companies initially did not satisfy the OMR 20 million capitalization requirement, the Central Bank of Oman has encouraged Omani financing and leasing companies to conduct incremental capital raises each year, or otherwise periodically, in order to facilitate an orderly and less burdensome capitalization process. The heightened capitalization of Omani financing and leasing companies would then serve to strengthen their financial positions, augment their growth plans, and expand their business operations.

As we approach the two-year anniversary of the issuance of this circular – and two years from the deadline to meet the OMR 20 million reserve requirement – this article highlights one way Omani financing and leasing companies can meet their reserve requirements: rights offerings.
In order to satisfy the Central Bank of Oman’s capitalization requirements, Omani financing and leasing companies should consider, among other options, conducting one or multiple rights offerings in amounts sufficient to satisfy any shortfall.

Pursuant to a typical rights offering, an Omani financing and leasing company, often with the assistance of a bank, distributes to its existing stockholders the right to subscribe to newly issued stock, possibly at a discount from the price at which the stock later may be offered to the public. Stockholders who do not exercise their right to purchase the offered stock then typically would be diluted by the offering. The company conducting the rights offering also may seek to obtain a “Standby Commitment” from the bank conducting the rights offering, under which arrangement the bank would agree to purchase any stock not subscribed to by the stockholders.

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Thursday, June 24, 2010

Focus on Real Estate: The Potential Advantages of a Specialized Real Estate Regulator

Oman’s prudent approach to real estate development has been well rewarded over the few past years, as the Sultanate’s selective focus on sustainable, mainly high-end projects has enabled Oman’s real estate and tourism sectors to thrive while other countries in the region have struggled.

As the Sultanate continues to develop its real estate sector, one possible future addition to consider would be a specialized regulatory authority for the real estate sector. Properly structured, a specialized regulator could further increase coordination, efficiency, and responsive oversight across the sector.

Generally, a real estate authority is a specialized body that is actively involved in all aspects of the real estate sector and has close working relationships with both higher governmental officials on the one hand, and private participants in the real estate sector (e.g., developers, landlords and tenants) on the other hand. Functions that a real estate regulatory authority may perform include:

  • drafting regulations in accordance with the broader laws (e.g., Royal Decrees) that carry out the government’s objectives while also being attuned to issues facing market participants “on the ground”;
  • certifying and licensing property developers to help maintain the integrity of the sector;
  • adopting streamlined, unified processes that make the sector more user-friendly to all market participants and provide comfort to investors;
  • coordinating and providing centralized access to real estate records and data; and
  • helping to promote housing quality standards and carry out other governmental objectives, such as access to affordable housing.
In the UAE, some of the Emirates, such as Dubai and Ras al-Khaimah, recently have established regulatory authorities to revitalize their real estate sectors in the wake of domestic real estate downturns. Over the coming months and years, other jurisdictions may choose, instead, to establish specialized regulators as a preemptive measure, to help make their real estate sector more robust, sustainable, and better able to withstand any future market turbulence.

With its recent successes in privatizing the water and electricity sectors, Oman has gained valuable experience in establishing specialized sector regulators, such as the Telecom Regulatory Authority and the Authority for Electricity Regulation. As Oman’s real estate sector continues to develop in the coming years, one option worth considering to help manage the growth of that sector would be a specialized real estate regulatory authority.

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Tuesday, June 15, 2010

Focus on Labour Law: Mediation Hearings

In Oman, as in other jurisdictions, labour disputes are a common occurrence. A key, but often overlooked, part of any labour dispute is the mediation process.

Under Omani law, labour disputes are first referred to mediation with a mediator from the Ministry of Manpower. The dispute may proceed only to the court system once the mediator takes the view that irreconcilable differences exist between the employer and the employee.

The mediator’s role is to facilitate discussion and negotiation between the employer and the employee. He or she may encourage the parties to try to resolve their differences and may even express views regarding who is in the right and who is in the wrong. The mediator has no power to force a party to change its position or to bind the parties to a resolution of the dispute. However, it is important to bear in mind that the mediator wields influence by means of its reporting role. At the end of the mediation process, the mediator writes a private report to the Primary Court explaining what the dispute is about and what both parties' respective positions are, and may state who the mediator feels is the culpable party.

Accordingly, any company involved in a labour dispute would be well advised to take the mediation process seriously and to come to the mediation sessions well prepared, even if the company is convinced that mediation will not resolve the dispute. Ideally, both an HR staff member and a lawyer should be present to represent the company at the mediation sessions. Before the first session, the company should collate all paperwork relating to the employee and the dispute so that the company’s HR staff member and the lawyer can carefully analyze these materials, discuss the case in depth, and formulate their strategy for the mediation hearings.

Another reason for companies to approach the mediation process seriously and preparedly is that while the mediation will not necessarily be dispositive of the suit, it may raise information and lines of argument and defense that can carry through to and ultimately affect any subsequent court proceedings.

For example, one difficulty a company may have to contend with is when the employee fails to properly articulate his claim during the mediation process. In this event, the company generally should refrain from offering a detailed defense to the employee’s anticipated claim. Such a course of action may commit the company to a fact pattern or line of defense it may wish to avoid during any subsequent court proceedings. In other words, at the mediation stage, the company generally should respond only to the information presented by the employee and the mediator, and not go into further detail than necessary. The general principle to bear in mind is that a court will look unfavorably upon, and will be much more likely to find against, an employer that has set forth inconsistent information and defense arguments during the court proceedings compared with during the mediation process.

In sum, the mediation process in a labour dispute is an important step that a company must handle attentively and skillfully in order to best protect its interests. Companies involved in a labour dispute would be well advised to consult with a lawyer to help them navigate this process.

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Thursday, June 10, 2010

Doing Business in Oman – The Three Business Structures Foreign Companies Can Use

Oman’s combination of a growing, affluent population and a modern, open economy offers an abundance of business opportunities and attracts companies from around the world keen to take advantage of those opportunities.

For any foreign company looking to enter the Omani market, one of the first steps is to consider which business structure to use. Under Omani law, it is mandatory for any company doing business in the Sultanate to have a “legal presence” in Oman. Foreign companies must form and register an Omani legal entity that can do business in the Sultanate. There are three options available for foreign companies to establish a legal presence: (i) form an Omani company with a local partner; (ii) engage a local agent; or (iii) establish a branch in Oman.

Choosing the business structure most appropriate for the foreign company’s needs is often one of the keys to doing business in Oman successfully. This article provides an overview of the three options, including some of the important features of each.

Option One: Form an Omani Company with a Local Partner
There are two kinds of Omani companies that a foreign company may form with its local partner: a limited liability company (LLC) or a joint-stock company. Although joint-stock companies are required by law for some fields of business (e.g., insurance or investment companies), most foreign companies seeking to do business in Oman choose to form an LLC, as there are far fewer procedural, disclosure and corporate governance requirements for LLCs than for joint-stock companies.

The main advantages of an LLC are that it may continue to exist indefinitely, it may service both private and government clients, and it limits the foreign parent company’s liability to the amount of its capital contribution.

Among the requirements for forming an LLC are a capital contribution of 150,000 Omani Rials and a minimum of 30 percent shareholding by the Omani partner, although the allocation of the capital contribution and the distribution of profits may be however the shareholders agree, and need not correspond to shareholding percentages. LLC taxable income over 30,000 Omani Rials is taxed at a rate of 12 percent.

Option Two: Engage a Local Agent
Foreign companies typically enter into an agency agreement with a local Omani agent for purposes of selling and distributing their products in Oman. Under an agency relationship, all business done in Oman must be performed by the local agent; the foreign company principal may not, for example, sell its products directly in Oman. (We note that in special cases, such as defense-related products, foreign companies may sell directly in Oman without an agent, and indeed may be encouraged or required by the buyer not to use an agent.) Income derived from agency arrangements is taxed at a rate of 12 percent.

Engaging a local agent is a quick and simple process: all that is required is a signed agency agreement between the parties, which is almost always registered by the agent with the Omani Ministry of Commerce and Industry. However, it is important to bear in mind that terminating an agency relationship is significantly more difficult than forming one, as Omani courts tend to be highly protective of local agents and may award terminated agents generous compensatory damages. Foreign companies considering entering into an agency agreement therefore should be prudent in selecting a local agent, and should consult with a legal advisor to ensure that the agency agreement adequately protects the company’s interests.

Option Three: Establish a Branch in Oman
Foreign companies performing a contract for the government may establish a legal presence by opening a branch in Oman. The main advantages of a branch are that there are no minimum capital requirements, administrative burdens are minimal, and branches can be 100 percent owned by the foreign company. The drawbacks to branches include their limited lifespan (they exist only as long as the government contracts they were formed to service; although their life can be extended if the foreign company wins a new government contract prior to the expiration of the contract under which the branch was formed), their narrower scope (branches may not service private-sector clients) and the fact that under Omani law branches are considered extensions of the foreign parent company for liability purposes.

Forming a branch is typically the preferred way for foreign companies servicing a government contract to establish a legal presence in Oman, largely because the ability to own the branch 100 percent allows the foreign company to maintain sole control over the entity that receives payments under the contract. The procedural requirements for forming a branch are less than for forming an LLC, but greater than for entering into an agency agreement. Taxable income derived from branches is taxed at a rate of 12 percent.

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Wednesday, June 2, 2010

The Future of Combating Piracy – U.S. Executive Order Provides Ideas

With its rich history as a seafaring nation, Oman has centuries of experience confronting maritime piracy. This heritage may prove useful in coming years, as it becomes increasingly clear that pirate attacks are not merely a past relic, but also a present-day menace – and one that is on the rise.

Oman’s proximity to the main hub of modern pirate activity, the Gulf of Aden, has made piracy a particularly important issue for the Sultanate, as brought to prominence by a dramatic attack last summer in which Somali pirates armed with heavy weapons and night-vision goggles hijacked a German cargo vessel 60 miles off the coast of Sur, Oman. As Oman continues to develop its ports and shipping industries, and pirate gangs seek to expand their territorial reach, anti-piracy initiatives seem poised to be a key economic as well as national defense issue for the Sultanate going forward.

The Sultanate has been proactive in addressing the threat of piracy. Last week, for example, when the Indian defense minister visited Oman to discuss defense matters with his Omani counterparts, discussion of piracy took center stage. According to reports in the Omani press, the two nations have agreed to conduct joint military exercises and to strengthen their cooperation to root out piracy in the region.

As Oman and other nations in the region bolster their anti-piracy efforts, they may consider looking to the United States for ideas about one promising future avenue for fighting piracy: cutting off the pirates’ funding. On April 13, 2010, U.S. President Barack Obama issued an Executive Order declaring maritime piracy to be a threat to the security of the United States, and authorizing the freezing of U.S. funds or property of persons determined to be supporting designated individuals associated with piracy.

This Executive Order represents a very early step for U.S. anti-piracy efforts; it now falls to the U.S. Treasury Department to draft regulations implementing what the Executive Order broadly outlines. The regulations are expected to prohibit banks and insurers that have a U.S. presence from processing ransom payments to pirates affiliated with the individuals named in the order.

This approach from the United States does present an interesting idea: perhaps the future of combating piracy lies not just in warding pirates off with gunboats, but in seizing their treasure chest. The more difficult it becomes for pirates to receive and transfer funds, the more difficult it will be for them to operate. Such measures by themselves may not be enough to root out piracy, but jamming the pirates’ financial machinery may help to slow them down. Anti-piracy financial restrictions will naturally be more effective the more broad-based they are, for example if they are formulated and implemented as part of a multi-lateral international effort.

With the threat of maritime piracy continuing to grow throughout the region, we are likely to see increased international cooperation on anti-piracy initiatives. As these efforts progress, Oman, its neighbors in the region, and the rest of the global community may wish to look to the U.S. example of blocking pirates’ access to financial institutions as one potential weapon in the ongoing fight against piracy.

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