Thursday, February 21, 2019

Oman's New Commercial Companies Law

Introduction

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 entirely new provisions.

The Minister of Commerce and the Chairman of the Public Capital Market Authority will issue executive regulations within a year of the New CCL’s implementation. They will also issue any decisions required to enforce the provisions of the CCL. Current decisions will remain in force until the issuance of such new decisions.

Companies governed by the Old CCL must comply with the requirements of the New CCL within one year of its implementation.

Below we set out a few of the key changes in the New CCL. Some of these will require positive action to avoid possible regulatory sanctions. For more comprehensive advice on how the New CCL may affect your company, please contact us.

Key Changes 

1. Capital contributions

Subject to the specific provisions governing each category of company, the New CCL provides (in Article 21) that capital contributions may take the form of cash, moveable or immoveable property, intangible rights, services or labour.

Article 239, however, restricts the nature of capital contributions in limited liability companies to cash or tangible property, explicitly proscribing contributions in the form of services or labour.

2. Limited liability companies

The New CCL introduces a new corporate vehicle, the sole shareholder company, which is a limited liability company with only one – either natural or juristic – shareholder. Under the Old CCL, limited liability companies had to have a minimum of two shareholders.

Article 291 provides that natural persons may not incorporate more than one sole shareholder company. A sole shareholder company may not incorporate another sole shareholder company.

For other forms of limited liability company, the maximum number of shareholders has been raised from 40 to 50, which ceiling may be raised if the minister concerned considers it to be in the public interest to do so.

The New CCL removes the minimum share capital requirement of OMR 20,000 for limited liability companies.

3. Joint stock companies

The minimum share capital requirement remains at OMR 2 million for public joint stock companies; and at OMR 500,000 for closed joint stock companies.

However, if a public joint stock company is created by converting another type of company, the limit is only OMR 1 million.

The option, available to both public and closed joint stock companies under the Old CCL, to pay half the nominal value of the issued shares on subscription, provided that the remainder is paid within three years of incorporation, is not provided for in the New CCL.

The founders of a public joint stock company may subscribe to no less than 30% of the shares of the company and no more than 60% of the shares. However, in the event a company is being converted into a public joint stock company, the maximum is 75%.

Closed joint stock companies may now offer securities – other than shares – for public subscription.

4. Holding companies

Holding companies may no longer take the form of limited liability companies. To comply with the New CCL, any holding company currently in the form of a limited liability company must be converted into a joint stock company whose object is to conduct the business of a holding company.
They must have paid up share capital of no less than OMR 2 million.

5. Corporate governance

The New CCL imposes a large number of new restrictions and responsibilities on both shareholders and boards of directors.

For example, board meetings are now only quorate with a minimum of two thirds of the board members in attendance.

Shareholders with more than 5% of the shares in a company may not act as proxies for other shareholders in general meetings.

Board directors may not stand in as proxies for shareholders in general meetings.

Many of the time limits set out in the Old CCL have been reduced significantly: e.g., where the deadline for filing the minutes of an annual general meeting used to be fifteen days, under the New CCL the deadline is now seven days.

6. Sanctions

The list of offences under the Old CCL has been expanded under the New CCL, and the sanctions that may be imposed have been significantly increased.

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Monday, February 18, 2019

Disclosure of Confidential Information by Employees

Following a previous article on the provisions applicable to termination of employees found guilty of misuse of confidential information acquired during their employment, this article will focus on the provisions applicable to the employer’s confidential information under the Omani Labour Law, the Civil Code and the Penal Code.

Article 27 of the Labour Law, which lists the employee’s main obligations, states under item (4) that the employee is obliged to keep the secrets of its work.  Furthermore, Article 40(5) permits the employer to dismiss the worker with immediate effect and without payment of end of service benefits (if applicable) if the employee discloses any confidential information in relation to the employer’s business.

In summary, the Labour Law is clear in stating that, subject to the statutory disciplinary procedures and timelines, actual disclosure by an employee of its employer’s confidential information is a legitimate reason for immediate termination of an employment contract.

The same concept is re-stated in the Oman Civil Code under Article 657 which lists the main obligations of employees, including the obligation to “keep the industrial or trade secrets of the employer, including after the termination of the contract, as required by the agreement or by custom.”  Interestingly, the access to trade secrets and the obligation of confidentiality are linked to the possibility to validly enter into a non-competition agreement.  Article 661 provides that, if the work of the employee is such as to permit him to have access to work secrets or to make acquaintance with the customers of the business, the parties (employer and employee) may agree that, after termination, it would not be permissible for the employee to compete with the employer directly or to enter into an employment relationship with a business which competes with the employer, provided that such agreement is valid unless it is limited in time, place and type of work to the extent as may be necessary to protect the lawful interests of the employer.

Finally, Article 671 specifically provides that no claims arising out of a contract of employment shall be heard after the expiration of one year from the date of the termination of the contract except for the actions pertinent to disclosing trade secrets.

In addition to the serious consequences of any such disclosure under the Labour Law and the applicable provisions of the Civil Code, Oman’s Public Prosecution, in the framework of its awareness building programme, has recently issued a note of precautionary advice addressed to the general public.  Public Prosecution underlines that breach of confidentiality in respect of work secrets and confidential information is a punishable offence under the Omani Penal Code if the person committing it is a public official.

Book 2, Chapter 3 of the Penal Code deals with a number of criminal offences that may be committed by public officials in the context of their duties.  Article 201 provides that “any person who discloses job secrets shall be punished with imprisonment for a period of not less than three months and a fine of RO 1,000.”  The employee’s retirement and the termination of the employment contract do not preclude the application of this Article.

Similar provisions are found in many jurisdictions but the definition of “Public Official” under the Penal Code is rather wide as it includes, in addition to persons holding a government office and “persons assigned to carry out specific work by a competent public authority,” employees of wholly owned government companies or of companies with government participation in excess of 40%.

Considering the large percentage of government employees among the Omani population and the structure of the local economy, where government investment is a rather common feature in a large number of major corporations, this definition applies to an arguably far larger number of employees than in most other jurisdictions.  Further, employees of government-owned or -participated companies are considered private sector employees and, as such, subject to the Labour Law, leaving open the issue of the interaction between the relevant provisions set out in the pieces of legislation considered.


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Monday, February 11, 2019

Indirect Loss under Omani Law

Common law meaning

The concept of indirect loss developed in common law jurisdictions such as England.  The common law approach generally permits recovery of two broad categories of loss caused by a breach of contract:  first, losses that are the natural consequence of the breach (for example, the direct cost of repairing or replacing damaged property); and, secondly, losses which are not a natural consequence of the breach but which were foreseeable by the parties (for example, lost profits, if both parties knew that damaged property would leave the innocent party unable to perform its obligations under other contracts).

Indirect losses are generally viewed in common law jurisdictions as the types of loss that fall into the second of these categories.  In those jurisdictions, clauses excluding indirect losses will not exclude losses arising directly and naturally from a breach of contract.

Treatment under Omani law

Whilst the Civil Transactions Law (Royal Decree 29/13) (the “Civil Code”) does allow for the recovery of indirect losses in certain circumstances, such provisions of the law are yet to be tested before the Omani courts.  In a civil jurisdiction such as Oman, the distinction between losses occurring as a natural, direct consequence of a breach and those that are foreseeable but not arising in the natural course of events does not sit comfortably with the courts, partly because the concept of foreseeability is not a relevant consideration.

Indirect or consequential damages are not, then, excluded as a matter of law but the terms have limited applicability in Oman.  First, there must be a nexus between loss suffered and damages claimed.  Secondly, there must be a degree of foreseeability, i.e., damage must not be too remote.

Common practice

In spite of the attitude of the Omani courts to the concept of indirect loss, clauses excluding indirect losses are commonly seen in Omani law-governed contracts.  Given the lack of a clear concept of indirect loss in Oman, these clauses can be ineffective unless they clearly identify the heads of loss that are meant to be excluded.

For example, there is a risk that the Omani courts would consider loss of profit to be a direct loss that is not excluded by a generally worded indirect loss exclusion clause.  If the parties do not want to be liable for loss of profit, this should be specifically mentioned.

In summary, terms such as direct, indirect and consequential, which are not legally recognised terms in Omani law, are likely to be a source of contention in the event of a dispute.  It is preferable to draft contractual provisions that state explicitly the exact heads of claim that are intended to be excluded.

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Monday, February 4, 2019

Conflicts of Interest in the Public Sector

The recognition and resolution of conflict of interest situations is vital to good corporate governance and maintaining confidence in public and private institutions. In the GCC, there are expectations that governments should deliver higher standards in the civil service, public institutions and in government-owned or -controlled corporations which are prevalent in Oman. Conflicts of interest should be a regular and important consideration of individuals who occupy a positon of trust. If conflicts of interest are not recognised and managed at the outset they have the ability to undermine the integrity of a company and its decisions.

Essentially, a conflict of interest is any situation where there is a risk that a private interest (political, business or commercial, etc.) of a director, manager, officer, agent or other representative interferes with the legitimate interest of the entity for which that individual works. In the public sector, a conflict arises when a public official has private capacity interests which could improperly influence the performance of their official duties and responsibilities. In the private sector, conflicts of interest have been identified as a major cause behind corporate governance shortcomings.

Conflicts of interest often lead to fraud and other corrupt practices which violate existing regulations. The Sultanate of Oman has, pursuant to Sultani Decree 112/2011, implemented the Law for the Protection of Public Funds and Avoidance of Conflicts of Interest (as amended) (the “Anti Corruption Law”) with which government officials must comply. A government official is defined by the Anti Corruption Law as any person holding a government position or working for the government, whether on a permanent or temporary basis and whether they are paid or not. The provisions of the Anti Corruption Law are also applicable to members of the Oman Council, the representatives of the government in companies, and employees of companies in which the government has a 40% shareholding of the company. Pursuant to the Anti Corruption Law, a government official for example:

  • Is prohibited from acting as an intermediary, an agent or a sponsor of any company or establishment whose activities are connected with the entity in which he works; and
  • Must not (and his minor children must not) have a share in any company, establishment or business for profit which is directly connected with the entity in which he works. 

Further, it is not permissible for ministers’ council, ministries, public authorities and institutions and other administrative units that derive power from the state and that are supervised by the government official to deal with any company or establishment in which it has a direct or indirect interest.

The International Chamber of Commerce (“ICC”) Guidelines on Conflicts of Interest in Enterprises identifies three types of conflicts as detailed below:

1. An actual conflict of interest, which is a current situation in which an employee or associate of the company faces a real and existing conflict of interest. Some examples are:

  • Hiring or supervising a relative. 
  • Serving on the board of a company while serving on the board of a competitor company. 
  • Purchasing goods or services from a supplier directly or directly owned by a relative. 
  • Close personal relationships influencing the decisions in a bidding process. 
  • Using assets of the company for private benefit. 
  • Trading in securities for personal benefit using non-public information. 


2. A potential conflict of interest, which does not exist yet but may occur, regarding an employee or officer of a company. Some examples are:

  • X is a board member of companies A and B which are not business related. This may develop into a conflict of interest if the two companies do business together. 
  • X is a former public official of the Capital Markets Authority of Oman (“CMA”). This could create a conflict of interest if the company becomes subject to an investigation by the CMA. 
  • X is the sibling of the CEO of the IT supplier of the company. This could become a conflict of interest if X were to become responsible for the company’s procurement process and was part of the decision-making process. 
  • X is in a position to influence a business decision of a third party where he has direct or indirect influence of a relative to the benefit of the company. 

3. A perceived conflict of interest, which is a situation where a director, officer, manager, employee, agent or representative of a company appears to have a conflict of interest, even if this is not true. For example:

  • X is a senior director at company A and accepts a board membership at company B with which company A does a lot of business. If X is appointed with the full support and approval of the board of company A this merely creates the appearance of a conflict. 
  • Company A hires a new employee who has the same name as the CEO, but they are not relatives. 

The Organisation for Economic Co-Operation and Development (“OECD”) Tool Kit on Managing Conflicts of Interest [1]  has identified a number of commonly repeated ‘at risk’ conflicts of interest areas which directors and managers should make themselves aware of, including:

  • Inside Information – is there a policy and administrative procedure in place for ensuring that inside information obtained in confidence is kept secure and is not misused by directors or staff of the company? Is the policy being enforced? 
  • Ancillary Employment – does the company have a published policy and procedure for approval of additional/ancillary employment? 
  • Contracts – does the company ensure that any employee who is involved in the preparation, negotiation, management and enforcement of a contract involving the company has notified the company of any private interest in relation to the contract? 
  • Gifts or other Benefits – does the company policy deal with conflicts of interest arising from traditional and new forms of gifts or benefits? 
  • Nepotism – it is the practice of giving favours to relatives and close friends, often by hiring them? 
  • Self Dealing – is there a situation in which someone in a position of responsibility in a company has outside conflicting interests and acts in their own interest rather than that of the company? 

To the extent that a company has not already implemented a policy to deal with the conduct of its employees, we recommend that all Omani government-owned companies (LLCs or SAOGs) put in place a specific policy to treat conflicts of interest between individual directors and the company. The policy should identify processes for dealing with actual, potential and perceived conflicts of interest, such as misappropriation of assets, related transactions, insider trading and more. It should be reviewed and signed by each director when appointed as a director and be reviewed and updated regularly.

Although a conflict of interest is not corruption on its own, it does hold the potential for a breach of trust and fraudulent behaviour to follow. Conflicts of interest must therefore be promptly identified and managed. Left unresolved, a conflict of interest can result in unlawful actions and lead to unhealthy mistrust and suspicion of both private and public companies.

Endnotes
[1]Managing Conflicts of Interest in the Public Sector – A Tool Kit, ISBN 92-64-01822, OECD, 2015

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Monday, January 21, 2019

Procedure for Setting up a Holding Company in Oman

Under the Commercial Companies Law of Oman (“CCL”), a holding company may be formed either as a joint stock company or a limited liability company.  The minimum capital requirement of a holding company is RO 2,000,000.  Such capital may either be paid up upon incorporation of the holding company in full or in part to the extent of 50% in the case of a joint stock company.  In case of the issued share capital being partly paid up then the remaining balance will need to be paid up within three years from the date of incorporation of the holding company.

The objectives of the holding company must be as follows:

(a) the management of subsidiary companies or participation in the management of other companies in  which the holding company owns shares;

(b) the investment of its funds in shares, bonds and securities;

(c) the granting of loans, guarantees and finance to its subsidiaries; and

(d) the acquisition of patent rights, trade marks, concessions and the other intangible rights for the exploitation by the company or lease to its subsidiaries or to other companies.

A holding company cannot own interests in a general or limited partnership and it is prohibited from owning shares in any other holding company.

Minimum capital

The minimum capital requirement of a holding company will be RO 2,000,000.  As set out above, 50% of the issued share capital may be paid at the time of incorporation of the holding company with the remaining balance will need to be paid up within three years from the date of incorporation of the holding company.

Duration for setting up a holding company

In the case of limited liability companies, the holding company may be registered within 15 days from the date of receipt of all documents from the intending shareholders.  In the case of joint stock companies, it may take approximately 45 days, for the reasons set out above.  However, please note that the entire capital of RO 2,000,000 must be paid up at the time of incorporation.

Number of directors

In the case of joint stock companies, there must be no fewer than three directors, and the maximum number of directors may not exceed twelve.  Limited liability companies do not have a board of directors.

Article 128 of the CCL provides:

“The board of directors of the holding company may invite the chairman of the board of directors of any of the subsidiary companies to attend the meetings of the board of directors of the holding company when considering any matter relating to the affiliate company, so as to enable him to make any remarks, express his opinion or give explanations or statements requested by the board on certain issues.  He may participate in the discussions without having the right to vote.”

Expatriate director

There are no restrictions on the number of expatriate directors on the board of the holding company.

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Monday, January 14, 2019

Formation of an LLC in Oman

The limited liability company (“LLC”) form is the form most commonly chosen by foreign investors owing to the speed with which it may be established and it being inexpensive in comparison to the establishment and operation of joint stock companies.  LLCs are not required to be listed on the Muscat Securities Market in Oman (“MSM”).  Therefore, all listing and other fees payable to the MSM or the Capital Market Authority of Oman can be avoided in this manner.
An LLC is formed by at least two and no more than 40 natural or juristic persons.  Companies in Oman may be incorporated with different grades.  These being:


Capital (RO)
Grade
250,000 and above
Excellent
100,000 to 249,999
First
50,000 to 99,999
Second
25,000 to 49,999
Third
Up to 24,999
Fourth

A company with an excellent grade would be included with a list of companies given preference over companies with lower grades when bidding for Government contracts pursuant to the tenders floated by the Government.

Minimum capital requirement

The minimum capital of an LLC is RO 20,000 in the case of companies wholly owned by either Omani, GCC or United States nationals.  Please note that an Omani, GCC or US entity that intends to establish a new company (“NewCo”) must itself be wholly owned by GCC or US citizens; otherwise, it will be deemed to be a foreign company. 
An LLC which has foreign participation, i.e., non-Omani/GCC/US citizens, must have a minimum paid-up share capital of RO 150,000.  The foreign investor may own up to 70% of the company’s equity whilst the remaining 30% must be retained by a local shareholder. 

The foreign investor’s equity participation in the LLC may be increased from 70% to 100% provided (i) that the foreign investor who proposes to invest in an LLC can demonstrate that such entity is in need of foreign technical know-how or expertise which is not readily available in Oman; or (ii) that the foreign investor is participating in developing the national economy and is investing substantial capital in the country.  Where a foreign investor intends to retain equity in an LLC in excess of 70% and up to 100%, an application will need to be filed with the Minister of the Ministry of Commerce and Industry (the “MOCI”) on whose recommendation the Council of Ministers will be required to grant their approval.  

Documents and information required from the shareholders

Generally the documentation required to be provided by the shareholders are as follows:
The foreign/non-Omani juristic shareholders will need to provide:

(1) the foreign shareholders’ board resolutions (if corporate entity/entities) resolving to participate in the new company.  The resolution will need to confirm the proposed names of the new company, the capital of the company, the extent of foreign shareholders’ participation in its capital, the names of the person(s) authorised to sign all company formation documents on behalf of the foreign shareholders for registration of the company and its management thereafter;

(2) memorandum and articles of association of the foreign juristic shareholder and other related registration certificates issued by the concerned authorities from the country of such shareholders’ incorporation; 

(3) duly audited accounts to evidence that at least three years have lapsed from the registration of the establishment of the company; and

(4) copies of passports of the authorised individuals to act on behalf of the foreign shareholders for the purposes of (1) above, if the intention is to have individuals nominated by foreign shareholders to act as authorised signatories for the purpose of managing the new limited liability company, with their names listed in the resolutions referred to above.

Items (1) and (2) need to be notarised by the notary public; legalised by the Ministry of Foreign Affairs; and consularised by the Omani Consulate in the foreign shareholder’s country of incorporation (“Duly Authenticated”).

Under the new apostille procedure, the documents need only one single formality if the country of incorporation of the foreign partner is an apostille country under the Hague Convention 1961.  In this case, the documents will only need to be apostilled by the competent authority in the country of incorporation. 

The foreign/non-Omani shareholders (natural persons) will need to provide: 

(i) copy of passport; 
(ii) certificate of good conduct issued by the concerned body in the country of origin evidencing that the partner has never been involved in any crime; and
(iii) six months’ bank statements showing a balance sufficient to fund the foreign partner’s share of NewCo’s capital. 

In respect of the local shareholders, if necessary, they will be required to provide the following:

(1) copies of their constitutive documents (where the investment is being made in the name of a corporate entity) comprising the articles of association and commercial registration certificate;

(2) confirmation of the authorised signatories empowered to act on behalf of the local shareholders;

(3) statement of account from a bank (for a period of three months) evidencing the financial solvency of the local partner or a statement of shares or funds owned by such partner in an Omani establishment or companies; and

(4) if the local shareholder is an individual, the statement as mentioned in item (3) above and copies of his/her ID card or passport will need to be provided.

In respect of the NewCo, the shareholders will need to confirm and/or provide:

(i) the proposed name of the NewCo;

(ii) the proposed activities of the NewCo; and

(iii) list of the authorised signatories to be registered as managers of the NewCo.

Due to a recent amendment in the law, the capital contribution certificate evidencing the minimum capital of the NewCo is no longer necessary.  The shareholders have one financial year from the incorporation of the NewCo to evidence the company’s capital through the audited accounts to be filed with the MOCI. 

Procedures for setting up an LLC

In order to set up NewCo, the foreign investor would need to first identify an Omani national, if Omani shareholding is necessary, to be its second member and then to check the availability of the proposed name of NewCo.  The name of NewCo may include the foreign investor’s name but the MOCI does not permit any LLC to include the word “Oman” in its name.  In the event that the shareholders of the NewCo will be either wholly owned by, or individuals who are, Omani, GCC or United States citizens, an Omani partner will not be required.

The MOCI has prescribed the standard form of constitutive contract (being the contract of incorporation and the articles of association) for LLCs in Arabic which may be used or, alternatively, the shareholders are at liberty to have a constitutive contract of NewCo (preferably bilingual) to be put in place setting out the objectives of NewCo, amount of capital, number of shares, the shareholders’ nationalities, their respective shareholdings, their voting rights, membership meetings, etc.  Such document may provide for any restrictions or limitations on the rights of the members to participate in the management of the company and/or in the distribution of profits and losses between the parties.

All shareholders will be required to sign the company’s constitutive contract for the company and to deposit with the MOCI the LLC formation documents.  Details of the company will then be entered in the Commercial Register at the MOCI at which point the company will be deemed established but not operational.

Generally, for registration of the NewCo, the LLC formation documents to be submitted to the MOCI are as follows:

(i) constitutive contract, in original, signed by all the shareholders;

(ii) copies of all documents (listed above) of the foreign shareholder; and

(iii) copies of all documents (listed above) of the local Omani shareholder.

Once the MOCI has approved the constitutive contract and the documentation granting the authority to set up and to manage the NewCo, the NewCo will be registered in the Commercial Register at the MOCI.  NewCo will be allocated a Commercial Register Number to be used on all its stationery, nameplates, etc. and will receive an official Registration Certificate.

After the formation, a bank certificate issued by the bank in Oman confirming that the shareholders have deposited their full contributions of the share capital into the designated bank account or the duly audited accounts evidencing the capital contribution must be submitted to the MOCI within a period of four months from the close of the first financial year.  Additionally, the Municipality license must be obtained from the relevant Municipality which will only be granted after a lease agreement for office premises is submitted to the Municipality.  The lease can be entered into after the formation of NewCo but before it is operational.  The Municipality license must also be submitted to the MOCI.  After both the bank certificate and the Municipality license are submitted to the MOCI, the NewCo will be fully established and ready to operate and carry out any of its listed activities.

Time frame

Once NewCo’s proposed names have been checked and all the necessary documentation duly attested have been received, the formation of NewCo and the completion of all the registration formalities should not take more than two weeks following submission of the documents to the MOCI.

Official costs

The likely costs for registration of NewCo (with a minimum capital of RO 150,000) would be as follows:


Name of the concerned ministry
Fees
1.
Ministry of Commerce and Industry
RO 100 plus a fee for each registered activity (fees vary)
2.
Oman Chamber of Commerce and Industry
RO 225
3.
Municipality charges
RO 50 (minimum)

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Monday, January 7, 2019

Third-Party Contractual Rights

The Oman Civil Transactions Law, Royal Decree 29/2013 (the “Civil Code”), provides that “a contract shall be made by virtue solely of the confluence of offer and acceptance, subject to the specific provisions laid down for the conclusion of the contract.”

This is consistent with the common law doctrine of privity, or third-party rule - anyone not “privy” or party to a contract could not sue or be sued under it.  In English law, the rule derives from Tweddle v Atkinson [1861] EWHC QB J57, and was applied by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1.  This state of the law was criticised as unfairly preventing non-parties from enforcing contracts made for their benefit.

The Oman Civil Code contains provisions granting rights to third parties allowing them to enforce the terms of a contract to which they are not party.  The provisions in the Civil Code are similar to the provisions of the English law statute on this subject (Contracts (Rights of Third Parties) Act, 1999).

If the terms of a contract require either party to such contract to ensure the performance of certain obligations under said contract by a third party, such third party cannot be held liable for failure to perform those obligations unless the third party itself had previously consented to perform such obligations.

The Civil Code provides that a contract to which a third party is not a signatory cannot impose obligations on such third parties.  However, certain rights may be granted to third parties.  If a right has been granted to a third party in a contract, then the third party has the ability to enforce the terms of the contract against the party/parties who had granted this right.  The Civil Code further clarifies that the rights granted to a third party may be revoked or amended by the party granting those rights at any time prior to the third party informing the parties to the contract of its intention to benefit from the rights granted to it.

However, the parties to a contract can specifically provide in the contract that the third parties mentioned in the contract will not acquire any rights to enforce the terms of the contract against any of the parties.  In the absence of such a specific exclusion to the rights of a third party, all third parties that are mentioned in a contract will have a right to enforce the terms of the contract against one or more of the parties.


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Monday, December 17, 2018

Guarantees and Indemnities in the Sultanate of Oman

Guarantees are instrumental in providing a means of security to the beneficiary of a guarantee by the person giving the guarantee (i.e., the guarantor) for the performance of a physical or monetary obligation by another party.  This concept has been recognised by law of the Sultanate of Oman in Sultani Decree 04/1974 promulgating the Commercial Companies Law (the “CCL”) (as amended), in Sultani Decree 55/1990 promulgating the Law of Commerce (the “CL”) (as amended), and in Sultani Decree 29/2013 promulgating the Omani Civil Transactions Law (the “Code”) (as amended).

Guarantee

A company or government entity may guarantee the obligations of its parent, subsidiary or, as the case may be, a government-owned company.  However, before a guarantee is given, it is essential that the shareholders of the guarantor give the necessary internal approvals to bind the company.  It is also necessary to be aware of the limitations placed on partners, managers and directors of a company.  Article 8 of the CCL stipulates that the aforementioned individuals cannot without the prior consent of the members of the company, or in the case of a joint stock company, its consent at general meeting, use the company’s property for the benefit of third parties.

Additionally, to guarantee third-party debts outside the ordinary course of business, or to mortgage company assets for matters other than securing company debts, requires express authorisation by the articles of association of a joint stock company or by resolution of the company’s members at a general meeting, in accordance with Articles 102(c)–(d) of the CCL.

Receiving a guarantee

It is worth noting that Article 758 of the Code stipulates that if a debt becomes due and the beneficiary under a guarantee does not claim the same from the debtor, the guarantor is entitled to notify the beneficiary that legal proceedings are necessary against the debtor to settle the debt.  If the beneficiary fails to initiate proceedings within six months of the date of such notification, and the debtor does not make the requested payment, the guarantor is discharged from his liability towards the guarantee, save where the debtor provides adequate security in respect of the guaranteed obligation.

From a lender’s perspective it is advisable to add wording to the guarantee agreement explicitly excluding and disapplying Article 758 of the Code.

Claiming on a guarantee

Guarantors are jointly and severally liable together with the debtor under Article 238 of the CL.  As such, the beneficiary of a guarantee can claim against the debtor, the guarantor or both at his option, and does not forfeit his right to claim against the other, until he has received full satisfaction of the debt owed and covered by the guarantee.  Notwithstanding the above legal provision, it is advisable that when drafting a guarantee, the beneficiary requests the inclusion of a clause which will allow him to make a claim directly against the guarantor under the guarantee in the event of default of the debtor, without first having to exhaust all claims against the debtor.

Obligations of the beneficiary

In the case that a beneficiary receives any property (i.e., security) from the guarantor to secure the guarantee, Article 241 of the CL imposes on the beneficiary an obligation to safeguard this property and, in so doing, take account of the interests of the guarantor.  If the beneficiary does not fulfil his obligation and the guarantor suffers a loss to the property as a result, the guarantor is released from his obligation to the extent of the loss suffered.

In case the debtor becomes bankrupt, the beneficiary of a monetary guarantee must make a claim for the debt in bankruptcy.  If he does not, as stipulated by Article 242 of the CL, his right of recourse against the creditor will be barred to the extent that the guarantor suffers a loss as a consequence of the beneficiary being at fault.

The beneficiary is further under an obligation to seek the approval of the guarantor prior to granting the debtor an additional period of time in which to fulfil his obligation.  In the event that the beneficiary does not obtain the consent of the guarantor, the guarantor may be “release[ed] [from] his liability for the guarantee” under Article 246 of the CL.

Obtaining a release of guarantee

The most common way to be released from a guarantee is through performance of the guaranteed obligation, or to receive the consent of the parties to the guarantee.  If a party in the latter case does not consent, and the debtor’s obligation is deferred, the guarantor’s obligation must also be deferred in accordance with Article 235 of the CL.

Indemnities

The courts of the Sultanate of Oman have not drawn as clear a distinction between the two concepts.  Whilst the CL specifically provides for guarantees, it is silent on the issue of indemnities.  However, if an indemnity has been agreed in contract, in principle there is no reason such agreement should not be recognised by the courts of Oman.  The contract would have to make explicitly clear that the beneficiary had the right to claim directly against the guarantor for a fixed amount without having to prove his losses were caused by the default of the debtor, and without any duty to mitigate his losses.

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Monday, December 10, 2018

The Maritime Law of Oman

The Maritime Law pursuant to Oman Sultani Decree 35/1981 (the “Maritime Law”) is the main source of law for matters relating to shipping and maritime in Oman. It is anticipated that a new maritime law shall be issued next year which may, among other matters, include updated provisions relating to vessel registration, vessel management and the arrest of vessels in case of abandonment. Until such time as a new maritime law is effective, some key aspects of the Maritime Law are as follows:

Nationality of a vessel 

A vessel shall acquire the nationality of Oman if it is owned by an Omani national or an Omani company, in accordance with Omani laws.[1] Vessels adrift at sea that are picked up by Omani vessels, as well as vessels which are confiscated for violating Omani laws, shall also be deemed to have Omani nationality.[2] Vessels with Omani nationality are required to be registered in Oman, fly the Omani flag and adopt a name pre‐approved by the competent maritime authority. Particulars such as the name of the vessel, the number and port of registration and the net tonnage must also be written in Arabic together with Latin characters in specified places on the vessel.

Port authorities 

The Omani port authorities carry out all of the inspections of a vessel, for example, ports regulate the arrival and departure of vessels as well as pilotage and towage together with berthing and the shifting of vessels.

Ports are also concerned as to safety and conduct of berthing and will ensure that adequate fire and safety precautions are taken. The port authorities also regulate port operations including licensing and permitting, communications and the handling, storage and delivery of cargo. The port authorities aim to ensure the prevention of accidents and ensure general safety within its ports.

The Maritime Inspection Department of the Ministry of Transport and Communication may carry out inspections in relation to Omani national vessels wherever they are located, and on foreign vessels at the ports or passing through Omani territorial waters.[3] In respect of national vessels, inspections will include verification that the ship is registered, that it has the documents required under the Maritime Law on board, and that compulsory conditions under the Maritime Law are complied with.

Inspectors of foreign vessels must be able to verify that the conditions laid down in international agreements relating to safety at sea and shipping lanes are being complied with.

The head of the competent maritime authority or his deputy may prevent a vessel from sailing if it has not passed its applicable inspections conducted pursuant to Article 28 of the Maritime Law.

Removal of a wreck 

In jurisdictions with a developed maritime legal system, a central authority is usually responsible for arranging the removal of wrecks in territorial waters. A central authority either has the power to order the removal of a wreck by a vessel owner or to remove the wreck itself and recover the cost of doing so from the vessel owner.

The applicable port authority shall have the right to seise the wreck of a ship by way of security for the costs of removing the wreck.[4] It may sell the wreck administratively by public auction and recover the debt due from the proceeds and in that regard it shall have priority over other creditors. The balance of the proceeds shall be retained in its treasury department for distribution to such creditors, if any.

Vessel operator’s responsibilities 

The Maritime Law contains detailed provisions relating to the crew and the regulation of marine employment. The operator of a vessel is obliged to pay wages in full, despite injury or sickness on the voyage, though certain exceptions apply. The operator, during the period of the voyage, is obliged to feed and accommodate the crew of a vessel without requiring payment from them and in addition the operator is bound to provide medical treatment free of charge to a crew member if he is injured in the service of the vessel or falls ill during a voyage.

The Maritime Law sets out detailed provisions relating to the powers and responsibilities of the master (otherwise referred as commander of the vessel). Among these, the master has the following powers:

  • Command of the vessel;
  • Maintain order;
  • Right to impose disciplinary penalties; and
  • Act on behalf of and represent the operator. 

  • The master’s responsibilities include the following:

  • To observe the technical principles of maritime navigation, agreements, maritime custom and provisions in effect at the Omani ports where the vessel is located;
  • To arrange the manning of the vessel, conclude the necessary contracts and take beneficial measures for the voyage;
  • To carry out the investigation of crimes committed on board the vessel and, if necessary, to order the arrest of the accused, conduct searches and take the necessary measures to prove the crime;
  • To carry out the instructions of the operator and keep him notified on matters relating to the vessel or the cargo;
  • To maintain on board the vessel documents required by law; and
  • To take necessary steps to protect the interests of the owner, operator, crew and passengers. Further to the provisions above, our June 2018 article “Arresting a Vessel in Oman” sets out the key steps to arresting a vessel in Oman.
[1] Article 10 of the Maritime Law
[2] Article 11 of the Maritime Law
[3] Article 28 of the Maritime Law
[4] Article 170 of the Maritime Law

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Monday, December 3, 2018

Key Considerations for Analysing Management Fee Provisions

The sponsor of a closed-ended fund, such as a private equity fund, typically receives a management fee to cover the basic overhead expenses of operating the fund and managing its investment activities, including salaries of the investment professionals and administrative staff, rent, utilities and travel. In the course of conducting due diligence on a prospective investment in a fund, investors should pay attention to the fund documentation and reporting by sponsors, and carefully review the provisions relating to the calculation of the management fee and allocation of expenses to the fund and its investors. Regulatory agencies, such as the U.S. Securities and Exchange Commission (“SEC”), have reviewed the business practices of many private equity firms and found that they pass on fees and expenses that should be covered by the management fee to clients without their knowledge. For example, Andrew Bowden, the former director of the SEC’s Office of Compliance Inspections and Examinations, said at a private equity conference in 2014 that “[b]y far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.”[1] Prospective investors may wish to consider the following questions when evaluating an investment in a closed-ended fund and the determination of the management fee:

  • What is the applicable rate of the management fee? Generally, the rate of the management fee is in the range of 1% to 2% per annum, though we have seen instances where the applicable rate has been higher or lower than this range.
  • Are there any discounts available on the rate? With increased competition to attract capital commitments and an escalating pressure to raise larger funds, it is becoming more commonplace for sponsors to offer discounts on the stated rate. Discounts may be offered in circumstances where (i) an investor’s commitment exceeds a stated minimum threshold (a size-based discount), (ii) an investor has invested in prior funds raised by the sponsor (a loyalty discount), or (iii) an investor participates at the first closing (an early closing discount).
  • What is the base on which the management fee is calculated? During a fund’s investment period, the management fee should be expressed as a percentage of capital committed to the fund by investors unaffiliated with the sponsor. It would be unusual for the sponsor to charge a management fee for managing its own committed capital (or the committed capital of its affiliates). To the extent it does, however, the investor should ensure that the management fee is also being charged to the sponsor and its affiliates such that they bear their proportionate share of the management fee.
  • Is the management fee subject to any offsets? Generally, sponsors agree to offset or reduce the management fee by amounts of any placement fees or organisational expenses incurred by the fund as well as certain transaction fees that may be received by the sponsor, its affiliates and their respective members and employees in respect of any portfolio investment. These transaction fees may include monitoring fees, director fees, commitment fees, break-up fees, investment banking or similar services and topping fees. The management fee will typically be offset and reduced by a specified percentage of these transaction fees. Normally, the percentage is in the range of 50% to 100%, and it is now viewed as market for the management fee to be offset by 100% of these transaction fees.
  • When does the management fee start to accrue? Historically, the management fee started to accrue from the fund’s first closing date as the sponsor effectively begins to manage the committed capital from that date. As sponsors tend to focus the first 12 to 18 months on raising additional capital and having subsequent closings, it is becoming more commonplace to see the management fee start to accrue from a later date, such as the fund’s final closing date, a “commencement date” or “effective date” which is a date determined by the sponsor, or the date on which the fund makes its first investment.
  • Who is responsible for paying the management fee? It is important to determine whether the management fee is paid by the fund rather than by the investors directly. In other words, is the management fee included within an investor’s capital commitment or is it expected to be paid on top of the investor’s capital commitment? An investor typically expects that its capital commitment represents its entire obligation to contribute capital to the fund and that it will not be expected to make further contributions in addition to its capital commitments to fund the management fee.
  • When does the management fee “step down”? Generally, the management fee should “step down” when the sponsor is no longer actively managing committed capital and/or devoting all of its time to the fund. This “step down” usually occurs at the end of the investment period where investors are, subject to certain limited exceptions, released from their obligations to make further contributions to the fund or once a successor fund starts to accrue fees.
  • When the management fee steps down, what adjustments are made to the base on which the management fee is calculated? Following the expiration of a fund’s investment period (or other event that gives rise to the stepping down of the management fee), the management fee should be expressed as a percentage of invested capital. Sponsors may, however, seek to have other amounts included in this calculation, such as amounts reserved and committed for investments or follow-in investments and outstanding indebtedness and borrowings. Further, to the extent that the fund makes acquisitions or dispositions of investments, or otherwise undertakes a write-down or write-up of an investment, such events may affect the base on which the management fee is calculated.
  • When does the sponsor stop earning the management fee? Generally, the management fee will continue to accrue during the fund’s term for so long as their remains invested capital. Where the sponsor seeks to extend the fund’s term or the investors elect for an early termination of the fund’s term, the investors (or the limited partner advisory committee) may be faced with negotiating an appropriate management fee for the sponsor to continue to manage the fund for the duration of the extended term and/or through its winding up and dissolution.

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