“Who dares wins” could be the motto of some investors when it comes to making investments. In this article we look at structuring investments, and in particular how to reduce the risk when making investments.
When considering investments, a first consideration could be: do I have the team and resources to make this investment? As lawyers, we often regret when clients inform us of investments after the decision is made or the purchase price is paid. In these circumstances it can be difficult for us to give complete advice.
Structuring investments can be important to reduce risk and improve the returns on an investment. Key considerations when structuring investments include:
- The location of the investment;
- The nationality of the co-investors;
- The availability of bank finance (in case leverage is used); and
- Mandatory legal requirements.
When investing directly in Oman, investors must be aware of the relevant laws. An important consideration for foreign investors is the Foreign Capital Investment Law (Royal Decree 102 / 1994) which may require a minimum Omani participation of 30%. As a result of this law, many investments in Oman are structured as joint ventures.
The nationality of co-investors can be important. For example, G.C.C. investors and U.S. investors may rely on the respective Free Trade Agreement which grants them equal treatment with Omanis (i.e., there is no requirement to have a minimum Omani participation of 30%).
Most investments are made with bank finance. Therefore, it is important when contemplating an investment structure to take into consideration the financing bank’s requirements.
An investor must comply with the mandatory legal requirements, especially if a licence or approval is required. It is best practice to have obtained a licence or complied with mandatory legal requirements before paying the purchase price.
Lawyers can also assist investors in deciding whether an investment should be structured as a share purchase or an asset purchase. There is an important distinction between these structures. As a general principle, liability remains with the seller in the case of an asset purchase. In the case of a share purchase, the purchaser tends to take over the liability.
When share purchases are made without proper due diligence and contractual protection, investors can take on liabilities that can detract from the value of the investment.
In next month’s Client Alert, we shall cover non-disclosure agreements.