Monday, March 21, 2011

Company Formation FAQ’s

We frequently assist clients in the formation of Omani companies. Clients who are not accustomed to doing business in Oman tend to have quite a few questions regarding the company formation process, on everything from complex subjects like corporate governance to more mundane - but important – things like naming the Omani entity. From time to time we publish such ‘frequently asked questions in the Client Alert for the benefit of all of our readers.

What name should we give to our Omani company?

For many of the clients that we help to form an Omani corporate entity, one of their first questions is what name they should give to the new company. Many wish to include the word “Oman” in the name, as in “Acme Widget Company (Oman) LLC”. However, due to internal regulations of the Ministry of Commerce and Industry, an Omani company must have a minimum capitalization of 500,000 Omani Rials (approximately US$1,300,000) in order to carry “Oman” in its name. This is significantly higher than the 150,000 Omani Rials (approximately US$400,000) capitalization that is normally required for Omani companies with foreign ownership. As a result, many of our clients choose names for their Omani entitiy that reference the region rather than the country, such as “Acme Widget Company (Gulf) LLC” or “Acme Widget Company (Middle East) LLC”.

How long does it take to form an Omani company?

We normally estimate that it takes one to two weeks to set up an Omani company once all of the appropriate corporate paperwork has been arranged, although the formation process can sometimes take as little as a few days depending on the availability of government authorities. Careful planning is the key to maximizing the speed of the process and minimizing headaches, and professional advisors can play a helpful role in determining which documents are necessary and how to prepare and/or obtain them most efficiently.

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Tuesday, March 15, 2011

Focus on Litigation: The Enforceability of Omani Court Judgments

The enforceability of Omani court judgments is an issue which can cause concerns.

A Primary Court judgment is not enforceable, provided an appeal is filed with the Appeal Court no more than 30 days after the oral pronouncement by the Primary Court of its judgment.

However, an Appeal Court judgment is, prima facie, enforceable – even though an Appeal Court judgment can be appealed to Oman’s third and final tier of justice, the Supreme Court. As a result, the loser of an Appeal Court case is best advised to file an appeal to the Supreme Court, and also file an application with the Supreme Court, requesting the suspension of any enforcement of the Appeal Court judgment.

These scenarios are intricate and somewhat complex, so we recommend that detailed legal advice is sought as early as possible in order that rights are best protected.

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Thursday, March 10, 2011

The Basic Law of Oman: Principles for Business

The Basic Law of the Sultanate of Oman, promulgated as Royal Decree 101 of 1996, holds a unique place in Oman’s pantheon of laws.

All other royal decrees are statutes that govern a particular area of law, setting out specific rules and providing guidance for governmental authorities to enact further regulations.

The Basic Law is different. It forms the bedrock of all Omani law. As its name suggests, the Basic Law is a foundational document that is very broad in scope. Although the Basic Law does contain specific directives, such as on succession procedures for the position of Sultan, it mainly addresses the overall structure of Omani government, including the legislative and judicial framework. The Basic Law enshrines the fundamental rights of the citizens and the guiding principles of the State.

Several of these principles, in particular, can be illuminating to companies that seek to do business in Oman:

“The basis of the national economy is justice and the principles of a free economy … constructive, fruitful co-operation between public and private activity … to achieve economic and social development that will lead to increased production and a higher standard of living for citizens ….”

The above-quoted text, from the first of the Economic Principles listed in Article 11 of the Basic Law, is perhaps the most important to companies, because it embodies the Sultanate’s economic approach. The Omani government views foreign investment and cooperation between the public and private sectors as key to increasing the nation’s workforce skills, economic development and living standards. As we have seen in our own work, most Omani businessmen and government officials are very welcoming, professional and helpful because they truly want Oman to be ‘Open for Business’.

“Freedom of economic activity is guaranteed within the limits of the Law and the public interest, in a manner that will ensure the well-being of the national economy.”

This principle sums up another key feature of the Sultanate’s approach to business: Oman has not let its zeal for further economic development cause it to abandon prudent and upstanding business practices. We have often heard Omani businessmen and government officials make clear that they want long-term, responsible development, not the ‘fast buck’ or ‘hit-and-run profits’. Oman is most interested in long-term, conservative and sustainable business.

“The State encourages saving and oversees the regulation of credit.”


This principle, in some ways, may be the best sign of all for companies seeking to do business in Oman. It reflects Oman’s culture of financial conservatism, which has helped the Sultanate avoid the excesses that have put some of its neighbors under severe stress. Omanis plan carefully not just to be open for business today, but for generations to come.

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Monday, March 7, 2011

Legal Developments in Oman

Guarantees and Indemnities
Guarantees and indemnities are both forms of what is known in legal terminology as ‘suretyship’. Suretyship refers to a promise by one person to be liable for the payment of another person’s debts or the performance of another person’s obligations in the event of that person’s failure to pay or perform (or a failure in relation to some other condition).

Guarantees and indemnities are often confused, but there are important distinctions between them.

Guarantees

A guarantee is a promise by the guarantor to a third party that a principal will meet its obligations to the third party – whether by the payment of a debt or by the performance of a duty. In essence, the guarantor says to the third party, “if the principal fails to pay you or perform for you, I will do so.”

Indemnities

An indemnity is a promise to be responsible for another party’s loss and to compensate them for that loss on an agreed basis. For example, the indemnifying party might say, “if it costs more than $100 to repair your car, I will reimburse you for any amounts over $100.”

Guarantees vs. Indemnities

The key distinction between a guarantee and an indemnity is that a guarantee presupposes an original contract, while a contract of indemnity is original and independent.

A guarantor cannot be liable for anything more than what was promised by the principal. The concept is that the obligations of the guarantor stand behind those of the principal and only come to the fore once the principal is in breach of its obligations. The guarantee can therefore be seen to be an accessory contract to the principal’s main contract.

An indemnity, in contrast, provides for concurrent primary liability with the principal to answer for a third party’s loss.

Whether the contracting parties choose to use a guarantee or an indemnity, it is important to record all important contractual promises in writing.

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Thursday, March 3, 2011

Legal Developments in Oman

Audit Committees
The Commercial Companies Law requires the board of directors of an Omani joint-stock company to form various committees from among its members to discharge some of the board’s delegated functions.

One such committee is the audit committee, which a publicly listed joint-stock company (an “SAOG”) is required to have. The composition and functions of an SAOG’s audit committee are prescribed by the ‘Rules on the Constitution of Audit Committee’ published by the Capital Markets Authority.

Composition and Purpose of the Audit Committee

The audit committee must consist of at least three non-executive members of the company’s board of directors – i.e., directors who are not salaried employees of the company. A majority of the audit committee members, including the chairman of the audit committee, must be independent directors – i.e, they and their first-degree relatives must not have occupied a senior post in the company (such as Chief Executive Officer or General Manager) over the past two years. At least one member of the audit committee must have financial and accounting expertise.

The purpose of the audit committee is to assist the board in ensuring the:

• reliability of financial reporting;
• effectiveness of internal controls; and
• legal and regulatory compliance.

The board decision appointing the audit committee should, inter alia, specify the terms of reference for the committee’s functioning, the location and quorum requirements for the committee’s meetings, and the methodology for the committee’s execution of its responsibilities.

The audit committee should specify in its charter for the board’s approval its objectives, membership, powers, responsibilities and liabilities, and the remuneration of its members.

Functions of the Audit Committee

An audit committee’s predominant function is the oversight of financial reporting and internal disclosure mechanisms within the company. This is why the Capital Market Authority requires audit committee members to be non-executive (and majority-independent) directors: an independent audit committee significantly enhances internal controls, the financial reporting process and corporate governance.

Additionally, the audit committee may also carry out related functions such as supervising the company’s regulatory compliance and business ethics, and developing independent reporting mechanisms that help the company detect and combat fraud and financial irregularities.

As described below, the CMA Rules delineate the functions for an audit committee and the specific responsibilities within each function.

External audit functions include:

• Recommending external auditors and overseeing their terms of engagement, independence, qualifications, and performance; and
• Reviewing the external audit plan and ensuring for the external auditors the accuracy and completeness of, and access to, documentation.

Internal audit functions include:

• Oversight of the internal audit plan and the performance of internal audit function and its efficacy; and
• Monitoring the adequacy of internal control mechanisms by analysing periodic reports generated by the auditors.

Financing reporting functions include:

• Developing a financial reporting system to detect financial irregularities and fraud based on best practices in accounting policies and principles;
• Monitoring any change in accounting policies and any significant departure from international accounting standards or non-compliance with the disclosure requirements prescribed by the CMA;
• Ensuring the accuracy of financial reporting generally and the accounting principles adopted; and
• Reviewing quarterly and annual financial reports and, in particular, the qualifications in the draft reports.

Corporate governance functions include:

• Serving as the liaison among the board of directors, external auditors and internal auditors and financial management;
• Reviewing risk management policies and practices;
• Reviewing proposed related party transactions and making appropriate recommendations to the board; and
• Formulating rules for small value-related party transactions without requiring the prior approval of the board or the audit committee.

Finally, many private companies also have audit committees that perform many of the same functions as public company audit committees. Although the Capital Market Authority’s ‘Rules on the Constitution of Audit Committee’ are not mandatory for companies that are not publicly listed, these rules represent the type of robust audit framework that every company should have to ensure strong and effective internal controls and financial integrity.

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