Focus On: Corporate Governance

There is widespread confusion in Oman about the applicable standards for companies with respect to transparency and conflicts of interest. A conflict of interest arises when a person has an interest that may compromise his reliability. For example, if company A is negotiating a contract with company B, and a director of Company A has a close relative working at Company B, this would be a conflict of interest. The director has a duty to act in the interests of his company, but he has a personal interest that may conflict with that duty. Even if there is no improper result, conflicts of interest can sometimes give the appearance of impropriety. For this reason, the government of Oman has issued several regulations related to conflicts of interest, or related party transactions, as they are also known.

In Oman, there are different laws and regulations applicable to different company structures. Specifically, there are different requirements for publicly traded companies (SAOGs), closely held companies (SAOCs), and limited liability companies (LLCs).

For SAOGs, Article 108 of the Commercial Companies Law states that members of the board or related parties shall not have any direct or indirect interest in the transactions or contracts concluded in respect of the company except when such transactions or contracts are in accordance with the regulations issued by the Capital Market Authority.
The Capital Market Authority has issued the Code of Corporate Governance (Circular 11/02) which defines related party transactions and the disclosure rules that apply to such transactions and contracts.

For SAOCs, the applicable rule is provided in Ministerial Decision 92 of 2003 titled “Rules regulating the Election of Board of Directors and the liabilities of Board Members”. These rules state that the Ministry of Commerce & Industry shall investigate violations that undermine the rights of shareholders in a closed joint stock company that are committed by members of the board of directors.

Sometimes, corporations operating in Oman are concerned about which standard applies, and particularly whether they need to comply with the Code of Corporate Governance. In some instances, there have been attempts to force SAOCs to comply with the Code. The Code of Corporate Governance only applies to SAOGs in Oman. SAOCs do not fall under the requirements of the Code of Corporate Governance because they are not publicly listed. Similarly, LLCs are not subject to the requirements of the Code of Corporate Governance.

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Hot Topic: Red Tide Legal Issues

In recent weeks, the Omani coastline has been significantly affected by red tide, a biological phenomenon that occurs when the rapid growth of algae overtakes a water column.

Red tides, also known as algal blooms, are common along the coastlines of the Arabian Gulf between the months of March and September. Red tides are generally considered to be a natural phenomenon, though many scientists contend that human activity such as pollution or global warming can increase their likelihood or exacerbate their severity.

The red tides result in red or green colored seawater, unpleasant odors, and low underwater visibility, making the water an unpleasant place for beach goers. Severe red tides, however, are more than just a nuisance. The proliferation of algae blocks out sunlight and results in a lack of dissolved oxygen in the water, causing the death of marine organisms and the destruction of ecosystems.

As has been seen in Oman, the environmental disruption caused by red tides can have a serious impact on businesses relying on the waters for economic activities.

Perhaps the most direct consequence felt by businesses has been the killing of massive amounts of fish. In 2001 and 2002, 27 tons of dead marine life came ashore along Sur, Batinah and the south of Oman. The recent red tides have also resulted in large amounts of dead fish washing ashore in Muscat. Such destruction has a detrimental impact on fisherman and fisheries in Oman.

Additionally, the red tides significantly affect tourism. The red tides are toxic and cause skin irritation rendering the water un-swimmable. Resorts in the area routinely warn their guests to stay out of the water during red tides. Further, the blooms have resulted in the destruction of coral reefs and the killing of whales and dolphins.

Algal blooms also have a serious impact on industries relying on the use of sea water, and are known to have caused temporary industrial shutdown. In Oman, the red tide has caused a temporary halt at the Qalhat LNG plant as well as the Sohar Aluminum plant. Similarly, other Omani plants in Sohar must remove foam from the sea water before it comes into contact with their systems and equipment. Removing the foam, which is caused by algal blooms, increases costs materially.

Red tides also raise complex legal issues, most of which hinge on the question of causation. Of particular concern to businesses is whether legal rights exist for those parties facing adverse economic effects. The answer to this question relies on whether red tides are caused by the activities of any particular person or legal entity. If so, it must be determined whether such entity has breached a duty to refrain from such activity or applicable environmental laws.

While red tides are widely considered to be natural phenomenon, many scientists believe the frequency and severity of red tides are influenced by human activities, including pollution and the dumping of raw sewage, that raise nutrient levels in the waters. If direct causation, for example by the unlawful dumping of raw sewage, can be determined, liability for damage caused by red tides could possibly be found against the violator.

Assuming the red tide is caused by pollution, Oman has environmental laws in place that would hold the polluter liable. Specifically, the Environmental Law, provided in Royal Decree 114 of 2001, provides criminal penalties for introducing harmful pollutants into the natural environment of Oman. If the pollution involves the discharge of a pollutant into wadis, sewage systems, catchments feeding the underground water or rain water disposal networks, or falajs and their channels, the penalties are more severe.

In addition to fines and imprisonment, polluters are also required, at their own expense, to repair the damage to the environment by restoring it to the previous state. If the red tide in Oman is caused by a polluter, the clean up and compensatory costs could be enormous.

Currently, however, it is not clear what causes the red tide and there is no hard evidence that it is caused by polluters in Oman. Therefore, perhaps more important than liability is the matter of mitigation and prevention. In Oman, this responsibility is imposed on the Ministry of Environment and Climate Affairs (MECA). MECA has set up a warning system involving the placement of buoys outfitted with sensors for continuous measuring of over 13 determinants of water quality.

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Doing Business in Oman FAQ: Local Partners

Can a company, as opposed to an individual, satisfy the minimum 30% local shareholding requirement for an Omani limited liability companies (LLC)? This question arises when a foreign company wishes to establish an LLC in Oman, but must find a local partner in order to fulfill legal and procedural requirements.

Under the Foreign Capital Investment Law (Royal Decree 102/94) (the “FCIL”), there is a mandatory requirement that at least 51% of the shares of a limited liability or joint stock company be held by an Omani natural or juridical person. Although this provision of the FCIL has never been amended, pursuant to Oman’s WTO obligations, companies with only 30% Omani shareholdings are allowed to incorporate without the need for any special approval.

Typically, the 30% requirement is satisfied by an individual Omani owner, often one who offers local expertise to the new LLC.

The answer to whether a corporate entity could satisfy the requirement depends on whether the Omani company is 100% Omani owned or whether it has some non-Omani owners If the Omani company is 100% Omani owned, then it can satisfy the minimum 30% Omani shareholding requirement for the LLC. If it has a single non-Omani owner,
however, it cannot.

This answer may be different if the foreign shareholder is from a country that has a free trade agreement with Oman (such as the U.S. and Singapore). In that case, the result depends on the industry in which the company operates and other factors.

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Hot Topic: States of Emergency in Oman

The recent outbreak of the H1N1 virus commonly known as “swine flu” has caused massive disruption to many countries, including widespread school, business and government closings. Globally, many travelers have faced restrictions, heightened screening procedures and even quarantine. In Oman, passengers at Muscat International Airport are now being screened for increased body temperature which can be a sign of the virus. All of this leads to the question of what laws would apply if Oman were to experience a pandemic of H1N1 or another public health emergency.

Last year, the government issued the Law on State of Emergency, Royal Decree 75 of 2008, which would come into effect if a public health or other disaster happens in Oman. In particular, the law sets out the circumstances under which the government may declare a state of emergency, who makes the declaration and what additional authority the government may exercise in order to respond to the emergency.

First, the law provides that the state of emergency may be declared when the security and public order is subject to a dangerous situation. This may include any situation posing a threat to society or state security. Examples of such situations include:

• • War or threat of war;
  
• • Internal criminal disturbances;
  
• • Public calamity; or
• • The spread of an epidemic or plague.

The state of emergency declaration is made through a Royal Order specifying the emergency situation, the area covered and the date of effect.

Second, the law requires the National Security Council to issue orders to protect safety and public order. It also provides additional authority to the government to respond to the emergency. For example, during the state of emergency the National Security Council may issue orders to the Royal Oman Police to take the following emergency response measures:

• • Restrict individual liberties and rights to move, reside, and pass through specific locations at certain times;
• • Take into custody anyone threatening public order;
• • Specify timings and require closure of public places;
• • Monitor all kinds of correspondence and information, and seize, confiscate, or destroy the correspondence and information;
• • Evacuate or isolate certain regions, including by closing roads;
• • Temporarily acquire any property;
• • Utilize services of any person, depending on the functions that are required in the situation; and
• • Prohibit employees from leaving work.

The law provides that the government will give reasonable remuneration if it temporarily acquires property or utilizes the services of any person to respond to the emergency.

Lastly, the law states that the Royal Oman Police shall have the authority to implement the orders issued by the National Security Council. If circumstances warrant, the National Security Council may present recommendations to His Majesty Sultan Qaboos Bin Said to use the services of the Sultan Armed Forces to execute the orders.

Oman has not been subject to any widespread outbreak of H1N1 virus, nor has a Royal Order declared a state of emergency since the law was issued in 2008.

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Focus on: the Salalah Free Zone

On June 20, 2006, the Sultan of Oman, Qaboos bin Said, promulgated Royal Decree No. 62/2006 creating the Salalah Free Zone (SFZ), furthering progress toward the Sultanate’s goal of being a desirable and advantageous place to do business. A ‘Free Zone’ is a territorial carve-out in which business-friendly laws may be instituted to promote foreign direct investment, trade, entrepreneurship and business development.

The 19 million square metre SFZ is endowed by the government with world-class infrastructure and support services providing start-to-end-function facilities for both multinationals and start-ups. Other advantages include close proximity to the ‘Super Hub’ port at Salalah, one of the world’s largest container terminals. Strategically positioned on the Indian Ocean, the port at Salalah accommodates the world’s largest container ships, is equipped with the world’s largest container-handling cranes, and can handle up to 4.4 million TEU/year.

Apart from its strategic location and well-developed infrastructure, a whole host of other investment-friendly incentives are available to businesses operating at SFZ, including a competitively low initial cost of setting up, and a one-stop-shop arrangement for licenses, permits, visas, customs clearances, etc. Businesses at SFZ will even be able to participate in existing export guarantee arrangements provided to Omani companies by Omani financial institutions.

The specific activities permitted in the free zone are:

• • Trading
• • Distribution and Warehousing
• • Manufacturing and Assembling
• • Processing and Packaging
• • Logistics
  

The array of special incentives offered includes:

• • A lease for 50 years (renewable for another 50 years)
• • 100% foreign ownership
• • Zero customs duties on imports and exports
• • No minimum capital investment requirement
• • No taxes on profits or dividends for 30 years and no taxes on personal income
• • No restrictions on repatriation of capital, profits and investments
• • Citizen employment requirement level of only 10%
• • Flexible customs procedures
  

Businesses may apply for the following kinds of licenses from the SFZ:

• • General Trading License. Allows the holder to import, export, distribute, and store all items as per the Free Zone rules and regulations;
  
  
• • Trading License. Allows the holder to import, export, distribute, and store items specified on the license;
  
  
• • Industrial License. Allows the holder to import raw materials, carry out the manufacture of specified products, and export the finished product to any country;
  
  
• • National Industrial License. Allows the holder the same status as an Arabian Gulf Cooperation Council (AGCC) company inside Oman. This license is designed for manufacturing companies with at least 51% AGCC ownership or shareholding. The value added to the product in the Free Zone must amount to a minimum of 40%; and
  
  
• • Service License. Allows the holder to carry out the services specified in the License, within the Free Zone. The type of service must conform to the parent company’s License, issued by the economic department or municipality of the relevant region.
  

It should be noted that for all types of businesses located in SFZ, sales in Oman must be carried out through a distributor or any company based in Oman that holds a valid trade license with the same business activity.

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