Friday, December 11, 2009

Omani Courts: Case Summary

Oman's Law of Commercial Agencies states that the Oman Courts will not hear any case as regards an agency agreement which has not been registered with Oman's Ministry of Commerce and Industry. An Omani agent relied on this provision in 2005 when its foreign principal sought payment for goods shipped to the agent. The Primary Court found in favour of the agent, but the Supreme Court ultimately ruled in the principal's favour, saying it would be unjust enrichment if the agent could avoid paying for the goods it had received from the principal. In other words, the Supreme Court was not willing to allow the agent to get goods free of charge on the pretext that the agency agreement was unregistered. The agent was ordered to pay the principal for the goods in question.


Wednesday, December 9, 2009

Funding the Capital Requirements for Companies in Oman

Payment in Kind

It is legally permissible to make a contribution in-kind to the share capital of a locally organized company. The contribution can be a non-cash input, such as goods, commodities, services, machinery and property rights, whose value can be determined. A debt owed to a shareholder that is represented by a negotiable instrument also can be used for capitalising a company. A contribution of property rights will be deemed to include a guarantee of a marketable title to the property. The value of a contribution in-kind must be confirmed by one or more Government appraisers who are legally obliged to submit their reports within thirty days of an application being made by the shareholders. If the appraiser finds the value to be less than the valuation initially made by the shareholders of the company, then the contributing shareholder must pay the difference. If the General Meeting rejects a proposed contribution in-kind, then the corresponding shares may be subscribed for in cash, or the company may reduce its capital to the extent of the rejected contribution provided that the capital does not fall below the minimum stipulated by the law. The resolutions relating to contribution in-kind must be passed by shareholders representing at least two-thirds of the capital with the abstention of the subscriber seeking to pay capital in-kind. The subscriber must transfer the ownership of the evaluated contribution in-kind to the company soon after the approval of the shareholders. Given the high borrowing rates prevailing in the market, entrepreneurs may feel encouraged to offer non-cash contributions to the capital of start-up businesses over borrowed monies. However, as the evaluation of an in-kind contribution must precede the incorporation of a company, there are potential pitfalls of which shareholders should be aware. Valuation formalities can be time-consuming, and an appraiser’s disagreement with a value estimation could lead to delay in getting the business up and running. Another potential issue relates to obstacles to successfully importing the in-kind contribution. Foreign shareholders wishing to contribute in-kind will have to rely on the local partner or a third party to assist with the importation of equipment or machinery until the company is registered. This extra layer of complexity can result in customs clearance and security issues. Any third party who is not the owner or registered agent or user will have to establish his interest in the equipment for customs clearance. Lastly, issues may arise if the business plan is shelved before the company is registered but after the contribution has been imported. Consequently, a business-specific cost benefit analysis should be undertaken in order to ensure the advisability of making a contribution in-kind.


Friday, December 4, 2009

Oman Petrochemical Producers Targeted by Protectionism

In early December 2009, members of the Gulf Petroleum & Chemicals Association (GPCA) will convene in Dubai for the organization’s Fourth Annual GPCA Forum. Recent dumping accusations made by Asian and European petrochemical producers against GCC companies likely will rank highly among topics for discussion.

China, India and the E.U. each have complained of dumping by GCC producers in recent months, in some cases leveling tariffs on GCC products. “Dumping” is the term used when a producer sells its product on the international market at a price lower than either the cost of production or the price on the local market.

In June, China launched an anti-dumping investigation into Saudi methanol exports, placing a provisional tariff on Saudi methanol. In August, India levied tariffs on exports of poly-propylene from Oman and Saudi Arabia ranging between one and eight times production costs. In September, the EU launched an anti-dumping investigation against the UAE and Iran relating to exports of poly-propylene tripthalate, the substance used to make plastic bottles.

With the exception of Iran, all of the countries involved in these claims are members of the World Trade Organization (WTO). The WTO allows member states to take action against dumping when it causes material injury to the competing domestic industry. Prior to taking such action, members are required to show that dumping is taking place, calculate how much lower the export price is compared to the exporter’s home market price, and show that the dumping causes or threatens to cause harm.

The complaints raised by China, India, and the E.U. accuse GCC countries of subsidizing natural gas, a crucial input in the production of plastics and other petrochemicals. The low price of feedstock is said to reduce the prices of goods produced in the region to unfairly low levels compared with the international market.

In an interview with Abu Dhabi’s The National, the GPCA rebutted the subsidy allegation, emphasizing that the natural gas used in the production of petrochemicals is a by-product of crude oil production. In the words of the organization’s secretary general Dr. Abdulwahab Al Saadoun, “It is not a subsidy, because there is no cost incurred.

According to the GPCA, Asian and European claims of dumping mask growing protectionism. In an October 2009 statement, the organization stated “the GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules.

A surge of protectionism would come as no surprise to the GPCA. The global financial crisis has affected the petrochemical industry worldwide, restricting credit, causing economic contraction and substantial declines in demand for petrochemical products. According to the GPCA, GCC producers have been the least affected by the crisis, making them ripe targets for protectionist policies. “During downturns,” Dr. Al Saadoun remarked in an interview with Arabian Oil & Gas, “there are moves toward protectionism and this is a key challenge we want to address through the collective efforts of all the members.

Unless settled by the governments of the involved countries, the WTO Dispute Settlement Body may hear disputes between WTO members. History provides some indication as to how the WTO may rule on any cases brought before it. At the time of Saudi Arabia’s accession to the organization in 2006, Saudi negotiators successfully persuaded WTO member states that the country’s low domestic costs of feedstock were justified when compared against the additional costs associated with export. Experts believe that the WTO’s acceptance of this position will undercut European or Asian anti-dumping measures in any hearing before the WTO.

While the anti-dumping duties can exact a cost on regional producers during the time it takes to resolve these disputes, there may be an unexpected benefit for the members of the GPCA. As a result of these challenges, Dr. Al Saadoun has pledged that the “GPCA will strengthen coordination with GCC governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by antidumping regulations and other trade restrictions.” To that end, the young organization has established an advocacy committee that will create a mechanism to alert its members about anti-dumping cases.

As a result of the anti-dumping challenges, GCC producers seem to have gained a new advocate eager to meet its aims of speaking on behalf of the industry and developing a range of tools and resources available to all of the region’s producers.


Tuesday, December 1, 2009

What Fund Offering Terms Should Omani Institutional Investors Negotiate? (Hedge Funds)

Institutional investors’ appetite for hedge fund investments has grown substantially in the last decade, propelled by the promise of reduced volatility and risk coupled with capital preservation and the delivery of positive returns under all market conditions. As a result of mushrooming investor appetite, the number of hedge funds increased to more than 8,000, with approximately US$1.9 trillion in assets under management, by the end of 2007. However, since then the industry has undergone a massive contraction, with assets under management shrinking to an estimated US$1.4 trillion by the end of 2008, and below US$1 trillion by the current date. This contraction was caused by weaknesses in risk management and due diligence processes amplified by the adverse effects of substantial leverage, liquidity and counterparty risks in the global recession. In this article we briefly examine certain key terms that Omani institutional investors (e.g., pension and other government funds, private financial institutions and banks) should consider negotiating for in relation to their investments in hedge funds.

  • MFN Clause: The most-favoured-nation clause generally guarantees the institutional investor treatment no less favourable than that accorded, in the past or future, to any other investor in the fund. Any such preferential treatment must be disclosed to the institutional investor, together with the option to elect to receive such treatment itself.
  • Fees: Management fees should be calculated as a per annum percentage of the fund’s net asset value, and performance fees should be subject to a high water mark. In addition, any early redemption fees should be payable only during the applicable lock-up period, and no placement, organizational or other fees should be chargeable to the institutional investor’s account unless otherwise agreed and disclosed on an item-by-item basis. The calculation of all fees should be confirmed by an independent audit to provide transparency to the institutional investor, and all fees should be commercially reasonable.
  • Change of Control, Key Person and Strategy Disclosure: Notice of any change in control of the fund manager, any variations in its key persons’ involvement in the investment activities of the fund and any material change to the fund’s overall investment objective should be promptly given to the institutional investor and trigger a right of withdrawal from the fund, without application of any early redemption fees.
  • Redemption Intervals and Notices; Gating: Hedge funds generally allow periodic redemptions of fund interests (e.g., monthly, quarterly, semi-annually), subject to substantial prior notice from the redeeming investor and the potential imposition of a gate (i.e., a limitation on the total amount of redemptions permitted on a given redemption date, usually set at 10% of fund net asset value). Institutional investors should negotiate preferential redemption terms (e.g., in the form of shorter notice periods and diminished gating thresholds) to guarantee sufficient liquidity of their investments.
  • Compulsory Redemptions: The right of the fund to compulsorily redeem an institutional investor’s fund interest should be limited to cases in which an independent counsel’s opinion confirms potentially adverse legal or regulatory consequences to the fund should the institutional investor continue to hold its fund interest.
  • In-kind Distributions: An institutional investor should ensure its right to receive all redemption amounts and other distributions from the fund in cash, unless it specifically agrees to receive in-kind distributions, in which case it should request the right to establish a liquidating trust to receive the in-kind distributions.
  • Transparency: An institutional investor should ensure the right to receive monthly capital account statements and regular risk profile reports, together with quarterly (unaudited) and annual (audited) capital account statements.
  • Transferability of Fund Interest: An institutional investor should seek a carve-out to any transfer restrictions imposed on its fund interest to permit transfers to its affiliates (e.g., when the institutional investor is undergoing a reorganization) without requiring the fund’s consent.
  • Valuation: The fund’s asset valuation procedures should be fully disclosed, including any methods used to value hard-to-value assets. As a general matter, illiquid or special situation assets should be valued by an independent valuator and not at the fund manager’s discretion.
  • Alternative Investment Vehicle: Where the fund elects to establish an alternative investment vehicle to pursue a particular investment opportunity, the institutional investor should have the right to “opt out” of the vehicle upon prior notice.
  • Soft Dollars: The fund manager should confirm to an institutional investor that any “soft dollar” credits derived from brokerage transactions effected for its capital account will only be used to obtain investment research and brokerage services for the benefit of its account.
  • Liability: An institutional investor should ensure that its liability for the fund’s debts and obligations is limited to the investor’s contributed capital and that, following its withdrawal from the fund, it will have no further liability.
  • Privileges and Immunities: Certain institutional investors may, under Omani laws, benefit from immunity from certain domestic and international laws which would otherwise be applicable to them. No provision of any fund document should prejudice such immunity unless deliberately waived by the institutional investor.
  • Forum Selection: Omani courts should have exclusive jurisdiction in respect of any legal action brought against an institutional investor relating to its investment in the fund.
  • Fund and Manager Representations: Each of the fund and its manager should represent to the investor that no action is being threatened against them and that any information provided to the investor is true and complete and no material fact has been omitted.
  • Controlling Nature of Side Letter: An institutional investor entering into a side letter arrangement with the fund should ensure that, as a contractual matter, where any inconsistency or contradiction between the fund’s agreements and the provisions of the side letter arises, the side letter will control in all respects.
Investing in hedge funds continues to present an attractive option for institutional investors which offers a broad range of investment strategies and considerable portfolio diversification opportunities within a flexible and sophisticated structure. Nonetheless, the liquidity and operating failures experienced by many hedge funds during the financial crisis have highlighted inherent weaknesses within industry practice which investors must guard against going forward. It is crucial therefore, for Omani institutional investors to seek preferential side letter terms such as those described above before investing to minimize investment risk, ensure high levels of transparency and better align the fund’s investment strategy with the investor’s investment objectives and portfolio diversification and regulatory requirements.