Monday, June 17, 2019

Access to Company Documents under the Old CCL and the New CCL

Introduction

Shareholders in a company do not always have automatic right of access to the company’s books and accounts.  This article compares the rights of shareholders in a limited liability company to inspect company documents under the old and new Commercial Companies Law.

The Old CCL 

The old law placed restrictions on the rights of minority shareholders’ access to company documents.  Article 160 of the Old CCL states:

“The managers shall send a copy of the company’s balance sheet, profit and loss statement and the reports of the managers and auditors, if any, concerning the expired financial year, together with a notice of a members’ meeting for the approval of these documents and the allocation of net profits, if any, to each member of the company within six months after the end of the company’s financial year.  The originals of these documents shall be available for inspection by the members of the company during business hours at the principal place of business of the company during a period of at least two weeks immediately preceding the date set for the members’ meeting for the approval of these documents.”

In addition, each member of the company had the right to inspect the original balance sheets, profit and loss statement, reports of the managers and auditors, if any, relating to the last five financial years of the company at any time during business hours at the principal place of business of the company.

The New CCL

However, under the New CCL, shareholders have been granted access to a wider range of company documents, and to documents going back twice as long.

Article 277 of the New CCL provides:

“Every partner may request – whenever he wishes – to inspect records and documents relating to business conducted in the previous ten (10) years, and any provision in the Constitutive Documents or any subsequent agreement that is inconsistent with the provisions of this article shall be void.”

Furthermore, article 270 of the New CCL states:

“Any partner who is not a manager may request, at any time, any information about the company and may examine, either by himself or with the help of a specialist expert appointed by him, the company’s books, records, accounts and other documents.” 

Conclusion

Investors in small corporations generally seek access to a company’s books and accounting records as a way of determining the value of their investments or because they suspect mismanagement.
By granting shareholders full access to all the company’s documents and records – and not just to the restricted categories set out in the Old CCL – it is hoped that the transparency of the management and operations of limited liability companies will be improved.

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Monday, June 10, 2019

The Board of Directors of an Omani Joint Stock Company under the New Commercial Companies Law

Sultani Decree 18/2019 issuing the Commercial Companies Law (the “New CCL”) replaced Sultani Decree 4/74 (the “Old CCL”) and became effective on 17 April 2019.  Executive regulations will be issued within one year to provide clarifications, particularly on the provisions introduced by the New CCL (the “Executive Regulations”).

This article focuses on the changes affecting the composition, elections and functions of the board of directors.

Article 3 of the New CCL provides that:

“Commercial companies in existence on the date of enforcement of this Law shall comply with its provisions within one year of the date of its enforcement.”

Most joint stock companies will be required to amend their articles of association and, if applicable, their shareholders’ agreement before 17 April 2020 to comply with the New CCL.

Number of board members 

The New CCL provides that closed joint stock companies must have at least three directors; and listed joint stock companies at least five.  In both cases the number of directors cannot exceed eleven.  The main change is that there must be an odd number of directors.  An existing company with an even number of directors constituting its board will, in order to comply with these provisions, have to decide whether to add a new director or remove an existing one.

Board meetings

The board of directors may hold meetings by audio and video conferencing, provided that the board secretary is able to identify each of the members and record the discussion.  The number of meetings that may be held via video conference during a certain timeframe is not restricted to a certain maximum number.

Quorum and majority

Under the Old CCL, board meetings required a quorum of 50%.  Such quorum has been increased in the New CCL to two thirds.  Resolutions have to be approved by absolute majority unless the articles of association provide for a higher percentage.  This appears to imply that the majority of directors (as opposed to the majority of the directors attending the meeting) must express a positive vote.  The Executive Regulations may provide further clarifications on this.

Removal of directors

The New CCL provides that any director who does not attend three consecutive board meetings without an acceptable reason is deemed to have resigned by law.  It is interesting to note that the New CCL no longer includes provisions whereby directors appointed by the Government cannot be removed in any circumstances.

Conflict of interest

Under the Old CCL, members of the board of directors were not allowed to participate in the management of any business competitive with that of the company, except with the approval of the ordinary general meeting, with such approval to be renewed annually.  Under the New CCL, instead, a director may not participate in the management of another company engaged in similar business.  No approval can be given to authorise such participation.

In the event of violation, the director concerned will be held liable for damages incurred by the company.  Directors are forbidden from entering into related party transactions.  The Executive Regulations will define the meaning of related party and the applicable rules on recording and disclosure of such transactions.

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Thursday, June 6, 2019

In the Pipeline - June 2019

The Capital Market Authority issued a directive on 15 May 2019 suspending the 10% withholding tax that is applicable on dividends and interest, with the aim of boosting foreign investments.  The suspension period is three years and may be extended.

Following the success of compulsory medical insurance policies in other Gulf states, Oman has initiated the rollout of its own national mandate.  The Unified Health Insurance Policy (UHIP), also referred to as Dhamani, is expected to grant approximately two million workers in the private sector and their dependents access to health care.  Implementation will gradually take place in 2019 and throughout 2020.

The establishment of the Oman Credit and Financial Information Centre is promulgated by Sultani Decree 38/2019, and the Centre shall be affiliated with the Central Bank of Oman.  The Oman Credit and Financial Information Centre will enjoy administrative and financial independence in addition to acquiring its own legal identity.  The data, systems and assets shall be transferred from the Banking Credit Information Statistics Department of the Central Bank of Oman to the newly established Centre.  The Board of Governors of the Central Bank of Oman shall issue regulations regarding the enforcement of the provisions. All contravening provisions will be repealed.

The Oman-UK Joint Defence Agreement has been ratified by Sultani Decree 42/2019.  The Agreement was signed in Muscat on 21 February 2019.  It will be published in the Official Gazette and will be enforced from the date it is issued.

Sultani Decree 39/2019 promulgates the regulations enforcing the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and their Destruction.  This shall apply to the Chemical Weapons Convention and it will require the banning of the development, production, stockpiling and use of chemical weapons.  The Minister Responsible for Foreign Affairs shall issue the necessary decisions.  The new law replaces Sultani Decree 21/97 and repeals all contravening provisions.  It will be published in the Official Gazette and will be enforced 90 days from the date of publication.

Please contact us if you would like more detailed advice on the above.


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Monday, May 20, 2019

Set-off Provisions in Loan Agreements

Where two parties owe each other money, it often makes sense for one of the parties to employ the concept of ‘set-off’ to reduce or eliminate its liability to the other party.

For example, assume that Party A owes OMR 100 to Party B under a loan agreement; but that Party B also owes OMR 60 to Party A under a separate (and perhaps unrelated) arrangement.  In this scenario, Party A could in theory ‘set-off’ the OMR 60 that Party B owes to him against the OMR 100 that he owes to Party B – with the result that Party A now owes OMR 40 to Party B (original debt of OMR 100 minus set-off of OMR 60 equals remaining debt of OMR 40) and Party B no longer owes anything to Party A (original debt of OMR 60 minus set-off of OMR 60 equals zero).

Of course, for this to work in practice, Party A also must have the legal right to employ such a set-off mechanism.  Such a right can arise by force of law, or by contract.

In England and Wales, and in certain other jurisdictions, there is detailed legislation and case law specifying various types of set-off available, for example:

  • Legal set-off – a defence to a court action where more than one claim and cross-claim is being contested;
  • Banker’s set-off – where a customer has more than one account with a bank, at least one of which is in debit and one in credit;
  • Equitable set-off – available to a debtor where his cross-claim arises from the same or a closely related transaction;
  • Insolvency set-off – often triggered by a party’s entry into liquidation; and
  • Contractual set-off – where set-off is included as a provision of a contract.

In Oman, while the Law of Commerce (Sultani Decree 55/90) does contemplate the set-off concept, as a practical matter set-off rights frequently arise as contractual rights – e.g., via set-off clauses in loan agreements governed by English law, or by the laws of another foreign jurisdiction.

The contractual set-off rights often found in loan agreements typically will allow the lender to set off a matured obligation due from a borrower against any matured obligation owed by the lender to that borrower, regardless of the place of payment or currency of either obligation. If the obligations are in different currencies, the lender often may negotiate the right to convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.

The result of exercising a contractual right of set-off is similar to enforcing security.  However, set-off is a personal right rather than a proprietary right; unlike a security right, it does not grant an interest in the counterparty’s property.

It should also be noted the Omani courts are unlikely to apply a set-off unless a contractual set-off scenario exists.

Finally, it is important to note that set-off provisions in loan agreements often favour the lender over the borrower.  While set-off clauses in commercial contracts often will apply symmetrically (e.g., permit or prohibit set-off altogether), in many loan agreements the right of set-off is accorded only the lender, with the borrower prohibited from setting off any amounts owed to it by the lender.

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Wednesday, May 15, 2019

Family Businesses in the GCC States

Family businesses in the Gulf Cooperation Council (“GCC”) region are profoundly aware of the dangers they face.  Most do not make it beyond the second generation.  Power battles between successors and the distribution of wealth and control commonly can lead to the fall of a dynasty.

As a family’s third generation of leaders come of age, many want to put in place rules for its interaction with business.  Many of the family businesses within the GCC are discussing options to modernise themselves by partly separating management from ownership.  A common solution is to develop a family constitution outlining the values, principles and procedures that the family agrees to follow.  Family businesses that generally thrive one generation to the next do so because they have in place a sound governance structure in the form of a family constitution or charter which provides a road map for managing wealth, business and legacy transitions over time.

Generally family constitutions are not meant to be legally binding.  Typically, a constitution will set out the family’s values and vision, criteria for selecting leaders and the rights and responsibilities for family members.  They differ in detail but are designed to ensure that the wealth and the portfolio stay together.  Families that do not have a clear mission or set of values to follow face real risks of internal conflicts and potentially damaging private and public disputes over the governance of the family wealth.  At its centre will be the mission statement for the family and a clear statement of its hopes and aspirations for future generations.  It is important, however, that families choose the forum of dispute resolution they want to use in cases of dispute and that such dispute resolution mechanism is respected and implemented in any disputes across the family’s businesses.

A business must be able to deal with sudden and unexpected events which can do damage to it, challenge management and cause uncertainty among family members who are owners of the business.  For example, a key family member may die or become incapacitated.  Similarly, a divorce or a serious dispute between family members may arise or a third party may seek to bring a substantial claim against one or more of the family-owned entities.  In such situations, it is useful to have protocols or a process in place to deal with such events such as the formation of a family committee to deal with such matters or putting restrictions on incurring any further liabilities until the issue is resolved.  Provisions along these lines can be included in the family constitution.  The constitution should govern the inevitable generational change and provide a vision to manage that change.  A provision establishing criteria for the recruitment and remuneration of family members employed in the business should be included.  Rules for the disclosure and exchange of information between family members and the confidentiality of that information are vital.  Confidentiality promotes trust and it is a key element of any family protocol.  Mention should also be made of a periodic summary of the division of assets between family members and how those assets should be shared.

It will be helpful to have provisions within the constitution which deal with issues such as dividends, the role of new generations, remuneration, ownership, succession, conflicts of interest and exit.  Other issues to address include how the owners are to be represented on the board of directors and how they will set objectives and challenge management.  Likewise, the constitution should identify the key issues on which management should consult the business’s board of directors.  Consideration should also be given to the process for share valuation and payout for all family members on exits.  Other important points to cover are the allocation and conditions for ownership and voting rights which allow the family constitution to be implemented.

Overall, a family’s philosophy and core values should be the cornerstone of the constitution.  A family must take the time to articulate its values.  The constitution is not meant to create binding rules, but rather set out a framework and guiding principles for making future decisions.  The constitution usually deals with many areas of the management structure such as an advisory board, management succession, profit distribution and the process of selling shares.  Naturally, a family constitution should be reviewed and adjusted regularly to be fit for purpose.  If it is done right, the constitution should embody the wishes of the founder of the business, the current generations of the family, the family office and the trustees.  It should then become a guide for the parties and, if required, the courts to interpret the conduct of the parties and the decisions that have been taken.


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Tuesday, May 14, 2019

In the Pipeline - May 2019

The appointment of Oman Human Rights Commission members is promulgated by Sultani Decree 29/2019.  Article 1 appoints 14 individuals including Shaikh Abdullah bin Shuwain Al Hosni as the Chairman and Dr. Sulaiman bin Hamad Al Alawi as Deputy Chairman and the remaining 12 persons as members.  The Sultani Decree is to be published in the Official Gazette and implemented from the date it is issued.

Sultani Decree 26/2019 amends provisions of The Law on Classification of State Records and Regularization of Sanctuaries which is promulgated by Sultani Decree 118/2011.  All that contradicts the new law will be repealed.  The Sultani Decree is to be published in the Official Gazette and implemented from the day following publication.

Scholarly zones and other specialised zones are promulgated under Sultani Decree 27/2019.  Scholarly zones that are affiliated to The Research Council or any scientific or specialised zone will be established upon the approval of the Council of Ministers.  The establishments that will operate in this zone shall enjoy exemptions and incentives.  All that contradicts the new law will be repealed. 
The Sultani Decree is to be published in the Official Gazette and implemented from the day following publication.

The Paris Accord has been ratified by Sultani Decree 28/2019.  It was issued in Paris in 2015 and signed by the Sultanate of Oman in 2016 after the Accord was presented to the Omani Council.  The Sultani Decree is to be published in the Official Gazette and implemented from the date it is issued.

Please contact us if you would like more detailed advice on the above.


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Monday, May 6, 2019

New Mining Law Issued - Achievement of Major Milestone in Strategic Sector

Introduction

Oman is enriched by a variety of mineral resources including metallic minerals (such as copper, gold, zinc, chromites, cobalt and iron ores) and non-metallic minerals (such as dolomite, limestone, gypsum, silica and ornamental stones).  Indeed, the National Program for Enhancing Diversification (TANFEEDH) recognises that the diversity of Oman’s natural resources “presents the Sultanate a unique competitive advantage in regional and global markets as well as an opportunity to achieve its diversification objectives.”  In addition to well-established companies, four new companies have recently been granted exploration licences for developing copper mining projects at the Al-Batinah coast.

With this in mind, it is not surprising that the mining sector is one of five economic sectors (the others being manufacturing, transport & logistics, tourism and fisheries) which are the focus and key drivers of the Sultanate’s economic diversification ambitions.  TANFEEDH also recognises the importance of local as well as foreign investment to achieve its overall objectives.

It is only a logical step on the diversification journey to assess existing legislation and pass new legislation that aims to facilitate further investment into identified priority sectors.  Accordingly, the Mineral Wealth Law promulgated by Sultani Decree 19/2019 on 13 February 2019 (“New Mining Law”) represents an achievement of a major milestone in the mining sector.  In this article we take a closer look at the New Mining Law to highlight, and provide commentary on, its key provisions.

New Mining Law – what you need to know

Whilst passed on 13 February 2019, the New Mining Law came into effect on 14 March 2019.  The New Mining Law cancelled the mining law promulgated under Sultani Decree 27/2003.

The New Mining Law recognises the Public Authority for Mining (“PAM” or “Authority”) as the competent authority for mining activities.  Article 2 of the New Mining Law states:

“Subject to the provisions of the Economic Zone of Duqm Law, the Authority shall without exception, conclude concession agreements, issue licences related to the exploration, excavation and utilization of raw materials, or carry out any activity related thereto….The Authority also regulates the process of exploration, excavation and utilization of raw materials and exercises control and supervision over everything related thereto to ensure its preservation and good utilization.…”

To perform its functions, the PAM is granted a wide range of powers under the New Mining Law which include:
  1. expropriation of property;
  2. approving exports of raw materials;
  3. inspection rights and right to access sites and obtain samples; and
  4. revocation of licences under certain circumstances such as:
    • delay in commencement of works by licensee;
    • suspension of works by licensee;
    • delay in payment of fees, etc.;
    • failure by licensee to provide reports;
    • obstruction by licensee of employees of PAM;
    • violation of terms of licence;
    • engaging in unauthorised activities;
    • not maintaining books and records by licensee; and
    • change of status of licensee (legal form, change of shareholders, merger, etc.)
Under the New Mining Law, the licence periods for exploration and excavation shall be one year, renewable but not exceeding three years, whereas the licence period for utilisation/exploitation is five years (renewable).  The period for concession agreements is between 20 and 30 years.

The New Mining Law also sets out some parameters in terms of royalty and rent payments, such as:

  1. financial guarantee of not less than 1% of the value of the cost of the project;
  2. annual rental value of not less than 5% of the total production of the raw material used by the licensee; and
  3. payment of not less than 1% of the total annual production of raw materials for the development of the local community.

Commentary & conclusions

The introduction of the New Mining Law is a very positive step and enhances legal certainty in the mining sector.  Overall the New Mining Law should encourage investments.  It also provides the PAM with significant powers to ensure that progress is being made and that licence holders carry out their obligations under their licences.  It is often difficult to create the balancing act between facilitation of investments and appropriate oversight from the relevant competent authority (in this case the PAM).  The New Mining Law also anticipates the issuance of secondary/implementing regulations and these are expected to be introduced in the coming months.  Given that the New Mining Law was only recently introduced, the effect and impact it has remains to be seen, but in our view it is a very solid step in the right direction.

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Monday, April 22, 2019

New Commercial Companies Law Permits Work and Services as Contributions in Kind to the Share Capital of Joint Stock Companies

On 13 February 2019, His Majesty Sultan Qaboos issued Sultani Decree 18/2019, promulgating a new Commercial Companies Law (the “New CCL”), which is to be published in the Official Gazette and implemented within 60 days from the date of publication.

The New CCL repeals the Commercial Companies Law promulgated by Sultani Decree 4/1974 (the “Old CCL”) and replaces it with new provisions.

The general provisions of the New CCL stipulate, in wording almost identical to that contained in the Old CCL, that capital contributions may take the form of cash, moveable or immoveable property, intangible property rights, services or labour – subject to the specific provisions governing each category of company.

In the Old CCL, the specific provisions relating to both limited liability companies and joint stock companies restricted the nature of capital contributions in such companies to cash or tangible property, explicitly proscribing contributions in the form of services or labour.  However, the New CCL contains no such restrictions in its specific provisions for joint stock companies.

It is hoped that widening the scope of permissible contributions in kind will encourage increased investment in joint stock companies.

Currently, Ministerial Decision 198/94 governs the valuation of contributions in kind, and it will continue to do so until the Minister of Commerce and the Chairman of the Public Capital Market Authority have issued any new decisions required to enforce the provisions of the New CCL.


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Monday, April 15, 2019

Income Tax Law Update

Following the extensive amendments to the Income Tax Law of 2017, the Ministry of Finance recently issued Ministerial Decision 14/2019, published in the Official Gazette of 10 February 2019, which sets out amendments to the Executive Regulations of the Income Tax Law and provides clarifications on a number of tax-related matters.  Most provisions of MD 14/2019 enter into force on the day following publication in the Official Gazette.  Please find below a summary of some of the main provisions:

Remuneration of company members

The allowed deduction for payments made to a company’s partners in a commercial company has been amended to the least of (a) actual payments made, (b) 25% of the taxable income before deduction of such payments or (c) OMR 1500 per month for each partner.  For professional/consultancy companies, items (b) and (c) are fixed at 35% and OMR 3000, respectively. 

Tax exemptions


Tax exemptions are now restricted to companies carrying out manufacturing/industrial activities.  The initial five years’ tax exemption is confirmed but the provisions in relation to further renewals of such tax exemptions have been cancelled, effectively limiting the tax exemption period to five years.  Further requirements the business must satisfy in order to obtain tax exemption are (a) a minimum investment of OMR 1 million in fixed assets and (b) compliance with applicable Omanisation quotas over the tax exemption period.

Withholding tax

The new Ministerial Decision provides for withholding tax to apply to dividends, interest (interest payable to local banks is obviously excluded) and payments made in connection with services provided by foreign companies not having a commercial registration in Oman.

Withholding tax applies only to dividends distributed to foreign investors by joint stock companies and investment funds, whilst dividends distributed by limited liability companies are exempt.  With respect to services, some categories of payments for services are not subject to withholding tax; these include, inter alia and in addition to services acquired in connection with activities carried out or properties located abroad, (a) training expenses, (b) reinsurance costs and (c) board of directors meetings. Withholding tax applies to all other services, subject to tax treaty benefits when applicable.

Bad debts 

The conditions taxpayers must comply with in order to deduct bad debts have become stricter as it is no longer sufficient to start legal proceedings.  The taxpayer must now demonstrate that it took action to recover the amount by enforcing a relevant court judgment.  This applies to bad debts of OMR 1,500 or more.

Small and medium enterprises (SMEs)

A lower tax rate of 3% applies to SMEs.  MD 14/2019 introduces a new option for SMEs to apply to the tax authorities for presumptive taxation.  It further amends some of the rules on the requirements a company must satisfy in order to qualify as a SME:  the Omani owner/partner must be actively and exclusively engaged in the business, and the business most employ at least two Omani nationals and be able to prove their employment for at least six months in the applicable tax year.

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Monday, April 8, 2019

REIFs to Provide new Source of Financing for Property Market

Real estate investment funds (“REIFs”) are one of the primary ways to invest in real estate. A REIF owns income-producing real estate in a range of property sectors and is generally seen to have a number of benefits to investors. Investment in REIFs was made possible in Oman by the Capital Markets Authority (the “CMA”) Organisational Regulation of Real Estate Investment Funds 2 of 2018 (the “REIF Regulations”) and Ministerial Decision 95/2017 issued by the Ministry of Housing (“MD 95/2017”).

The first Omani REIF is set to debut on the Muscat Securities Market (“MSM”) shortly, and it is hoped that the new form of investment vehicle will encourage new inflows of capital into Oman’s promising property sector.

REIF Regulations in the Sultanate permit institutional foreign investors, as well as expatriates resident in the Sultanate, to own units in REIFs.

Interest in real estate is not limited to commercial properties, but extends to the development of infrastructure, warehouses, factories, and projects for small and medium enterprises (“SMEs”) – all of which require some form of financing. As financing has until now been provided principally by bank lending, the CMA was very keen to see funding alternatives becoming available so as to diversify the systemic risk on banks lending into the real estate market.

Oman’s REIF Regulations incorporate best practices gleaned from other jurisdictions around the world. While most of the provisions in the Regulations are principle-based, there is a lot of flexibility – in relation to the fund structure, for example. Some jurisdictions specify the structure for Islamic REIFs. In Oman, the REIF Regulations have left this open. All that is required for an Islamic REIF is that there should be a shariah advisory board in place; the choice of structure is left to the contracting parties provided that the structure complies with the Accounting and Auditing Organisation for Islamic Financial Institutions.

Further, the REIF Regulations allow for the transfer of special purpose vehicles (“SPVs”), typically set up to hold a particular real estate asset, to a REIF. Funds may hold various assets either directly or through an SPV, and can hold any assets in Oman, not only those in integrated tourism complex projects.

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