Post-Incorporation Requirements

For new companies that are incorporated in Oman, it is often unclear what procedural formalities they must follow in order to get fully up and running. This article highlights a sampling of the key steps that new Omani companies must take:

• A company which has its share capital deposited in a pre-incorporation bank account should first seek to get the account reactivated by the designated manager of the company. The banks typically require evidence of commercial registration and of the authority of the manager, both of which can be established via the commercial registration documents issued by the Ministry of Commerce and Industry.
• It is mandatory for a new company to register with the Secretariat General of Taxation at the Ministry of Finance generally within three months of the date of incorporation.
• The company must obtain an approval from the relevant municipality for commercial operation, office signage, etc. The municipality assigns a distinct registration to each company.
• A new company must also enter into a lease agreement for its principal office, which lease must be registered with the relevant municipality. A related commercial requirement is obtaining a P.O. Box address for the company from the postal authority.
• In accordance with Oman’s labour laws, the employment contract of an Omani national employed by a company must be registered with the Ministry of Manpower, and within 15 days of the registration the employee must be enrolled with Public Authority for Social Insurance to allow for monthly social insurance contributions from the employer and the employee.
• If employing one or more expatriates, the company must obtain labour clearance from the Ministry of Manpower and employment visas from the Directorate General of Passport and Residence of the Royal Oman Police.

The above list is not exhaustive, as there might be other government-approval requirements depending on the company's business. Many of these administrative requirements can be performed by the company’s Omani public relations officer, and as lawyers we are able to assist with the more complex matters.

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Experts in Litigation

An issue that often arises in Omani litigation is the importance of experts.

Unlike in many other countries, the courts in Oman only recognise one expert - the expert appointed by the court. Therefore, the crux of many Omani cases is proving one's viewpoint to the satisfaction of the court-appointed expert.

That is not to say that the Omani courts always agree with their appointed expert. There are occasions where the courts totally override what the expert has concluded. Such a situation normally only happens where the courts decide that a provision of law is the reason why they wish to negate the expert's findings.

The court-appointed expert often will base his report on his oral discussions in meeting separately with each of the litigants. The litigants are each free to bring along to these meetings their legal advisors and any other technical third-party personnel.

In other words, if a litigant has a supportive report from a third-party expert, it is not enough to merely exhibit that document. The litigant should ensure that the writer of that report – i.e., the litigant’s own third-party expert – comes to the meetings with the court-appointed expert.

As a practical matter, the Omani courts place very little weight on the reports prepared by the litigants’ third-party experts. The courts want to hear what their own appointed expert has decided having read the relevant papers and having met with the litigants and with any individuals which the litigants bring to such meetings.

A final but important consideration: often the court-appointed experts wish to converse only in Arabic. This is a factor which should always be borne in mind, especially in choosing a litigant’s expert.

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The Uproar Surrounding Petroleum Contract Renegotiations

The prestigious Oxford Institute for Energy Studies, in its most recent newsletter, Oxford Energy Forum, published an article by Curtis Chairman George Kahale, entitled "The Uproar Surrounding Petroleum Contract Renegotiations." The article is posted here.

Introduction by the editors of the newsletter:
There are a number of fundamental issues that characterise the international petroleum industry. Their relative importance varies according to the interests of the different parties that constitute the industry. A private oil company will hold different views than a national oil corporation on what really matters; producers and consumers, or exporters and importers stand in different places on issues of interest. In this Forum a number of international authorities address some of these topics, sometimes shedding light on an obscure aspect but always assessing their import.

Two important oil problems – (a) the relationship between host countries and the foreign oil companies seeking investment access to upstream oil (or gas) reserves in their territories and (b) the peculiarities of the international oil price regime – have retained our attention.

The relationship between host and foreign oil (gas) investor is governed by contracts sometimes drafted within the framework of a petroleum law. There are instances when these agreements were entered upon at a time when the host country was politically or economically weak, or was badly advised, the consequence being a contract that put the host country at a clear disadvantage. Later the country, usually under a new political regime, realises the problem and seeks renegotiations. But some companies (if not all) reject the idea of renegotiation, or complain loudly about its unfairness. They refer to the principle of pacta sent servanda.

George Kahale, an eminent American lawyer, argues in this Forum that reference to the pacta principle does not provide complete justification for rejecting renegotiations. There are features of the oil industry that make contract renegotiations either inevitable or desirable. In brief, these are the long-term nature of oil upstream licences or agreements, the sharp volatility of oil prices, and the vital importance of oil revenues for the exporting countries. And circumstances can change radically at least once if not several times over contractual periods that usually extend over 20 or 25 years, if not longer. The sharp volatility of prices is an important change of economic circumstances for the simple reason that conditions agreed upon when oil prices were at a certain level become unacceptable when prices move to a significantly different level.

Interestingly, the attitudes of many oil countries seeking an improvement in the financial terms of their contracts are reflected in a statement of Mr Salazar, the US Secretary of the Interior, addressing an oil industry corporate audience: ‘Just as your shareholders expect you to get a fair return on your investments...the American people are asking the same of us as we manage their resources.’ What is good for the USA must also be good for other countries, a point concealed by the preferential treatment given to the superpower in many discourses.

The Kahale article, importantly, includes three case studies…

The Uproar Surrounding Petroleum Contract Renegotiations
George Kahale, III

In recent years, complaints of unfairness on the part of host states in the renegotiation of international petroleum contracts have become commonplace at conferences and seminars in both the United States and Europe. Not so often discussed are the legal issues underlying the particular cases – simply repeating the mantra of pacta sunt servanda is not a discussion. Even less attention is paid to the facts, a point which is the focus of this article. Without an understanding of the facts underlying a renegotiation, one can easily julep to the wrong conclusions, and that is precisely what seems to have been happening with alarming frequency on the conference/ seminar circuit, where conclusions are too often drawn from incomplete information derived from press releases or press reports.

Background 

This recent period is not the first time that the petroleum industry has provided the setting for political, economic and legal struggle.  The same was true in the 1970s, when the principle of Permanent Sovereignty Over Natural Resources[1] was trumpeted as loudly as pacta sunt servanda.  A wave of nationalisations gave rise to a series of arbitral decisions that would be cited throughout the coming decades, even to this day.[2]  When circumstances changed radically, the industry again became the incubator for what has been dubbed a new wave of ‘resource nationalism’.

What is it about the petroleum industry that seems to always place it in the eye of the storm? Here are some contributing factors.

First, upstream licences or agreements tend to be long-term in nature.  It was not uncommon for concessions granted in the 1950s to have a term of 50 years or longer.[3]  Production sharing agreements, the next generation of upstream contracts that became popular in many oil-producing countries when concessions fell into disrepute, were anywhere from 25 to 40 years in

length.[4]  Agreements of such duration tend to undergo fundamental changes at least once in the course of their life.

Second is the volatility of the price of the resource.  In the 1970s, the oil shock sparked by the Arab oil embargo was followed by another extraordinary price rise at the end of the decade.  The 1980s saw the market flooded with oil as Saudi Arabia increased production and market share with netback pricing.  The price of oil plummeted to less than $10 a barrel, and stayed relatively low throughout the 1990s, averaging around $18 per barrel for the entire decade.  In March 1999, the cover story of The Economist argued that the price could hover around $5 for some time.

Starting in 2004, the price environment again changed dramatically, averaging around $40 per barrel that year.   The seemingly endless upward spiral continued in the succeeding four years, with the price shooting right through the $100 per barrel barrier and reaching a peak of almost $150 per barrel in July 2008.  Given this kind of structural change in the petroleum markets, it is not unusual to see adjustments in contractual terms or fiscal regimes to take account of the changed circumstances.

Third, the economic importance of the petroleum industry to host countries cannot be overstated.  With the stakes that high, a mistake in petroleum policy can have devastating consequences for the host state concerned.  That is why matters relating to the petroleum industry tend to be considered matters of public policy in those countries.

Fourth, the best-known renegotiations and industry restructurings of the last five years have involved upstream contracts entered into in the 1990s, when the price of oil was a fraction of what it was to become and when privatisation was in vogue.  The Soviet Union had just collapsed and the prevailing attitude was that everyone would flourish from private ownership and exploitation of natural resources.  In that environment, many long-term agreements that were very unfavourable from the host country’s standpoint were concluded, agreements that invariably led to trouble as circumstances changed and the anticipated benefits of privatisation did not materialise.

“In recent years, complaints of unfairness on the part of host states in the renegotiation of international petroleum contracts have become commonplace.”

Finally, many of those contracts were not only economically indefensible, but they also purported to cede control over petroleum operations to private parties, often in a manner that raised serious legal issues going to the heart of the contracts.  Ownership of petroleum in the subsurface typically is conferred upon the state by constitutional mandate in host countries, and in some cases the political sensitivity of control over the hydrocarbon sector is at least as important as the legal issues raised by such constitutional provisions.  This explains the propensity to create new forms of contracts that pass constitutional muster and can withstand the political heat that often accompanies long-term contracts involving foreign, or any private, participation in the oil industry.  The proliferation of service’ contracts, in which the service contractor never acquires title to the oil produced, is attributable mainly to the perceived need to reconcile the desire to attract private investment with the legal and political constraints standing in the way of achieving that objective.

All this has led to contract renegotiations, and in some cases complete national industry restructurings, in the last few years.  In many countries, this has involved fundamental issues of structure and governance; all cases involved adjustments in government take.

Host countries that have taken measures in this direction include Algeria, Bolivia, Canada, China, Ecuador, Kazakhstan and Venezuela, all of which imposed new taxes and royalties on production, exports or windfall profits.  Bolivia and Venezuela also mandated structural changes for all contracts in their hydrocarbons industries.  In Alberta, Canada, the provincial government announced a 20 percent increase in oil and gas royalties.  The US Government provided Congress with a report in May 2007 on the question of increasing oil and gas royalties, including a comparison of royalty rates under fiscal regimes around the world, in response to concerns that government take was not keeping pace with record oil company profits.  Oil executives were called before Congress to defend windfall profits, and Sarah Palin’s Alaska collected billions in additional revenue from a new windfall profits tax.  The attitude of many governments is reflected in the following statement of US Secretary of the Interior Salazar to an oil industry audience last year:

Just as your shareholders expect you to get a fair rate of return on your investments and to be wise stewards of your balance sheets, the American people are asking the same of us as we manage their resources. . . .

That means we are going to take another look at royalty rates.  It means that tax breaks that are no longer needed, and which the American people can’t afford, will disappear.[5]

Three Case Studies

Three of the best-known renegotiations or industry restructurings of the last few years involved the operating service agreements (convenios operativos) in Venezuela, the gas production contracts in Bolivia, and the renegotiation of the world’s largest production sharing agreement, the one covering the Kashagan field in Kazakhstan.

In Venezuela, approximately 500,000 barrels per day were being produced under the operating service agreements, which were supposed to be pure service contracts.  The 1975 Law Regulating the Industry and Trade of Hydrocarbons did not allow, except in certain cases approved by Congress, any private participation in production.  Service contracts were allowed for basic services, such as drilling and seismic survey, but these were supposed to be pure service contracts, not contracts mimicking production sharing agreements that effectively granted the contractors a participation in the business.

The Venezuelan operating service agreements, although structured as service contracts, were in substance anything but pure service contracts.  They ceded control over petroleum operations in huge areas for 20 years, and compensation was based on the volume and value of production.  Many of the service providers were in effect senior partners in the business, on average taking more than half the value of production.  In some cases, the state company actually lost money for each barrel of oil produced, after accounting for the royalty owed to the State.  Making matters worse, the contractors, claiming to be only service providers, argued that they were subject to the non-oil income tax rate of 34 percent rather than the rate applicable to oil producers, 50 percent.

In April 2005, the Venezuelan Government intervened to require migration of the operating service agreements to the new structure of mixed company (empresa mixta) under the 2001 Organic Hydrocarbons Law, and 30 out of 32 contracts were successfully migrated over a one-year period.  The other two resulted in negotiated settlements.  The new mixed companies emerging from the migration of the operating service agreements are all subject to combined royalties and special advantages (ventajas especiales) of 33 1/3 percent, as well as the 50 percent oil income tax rate.  A special assessment for extraordinary prices also applies when the price of crude oil exceeds $70 per barrel.  Apart from the fiscal regime, a state company is by law the owner of at least 60 percent of the shares of each of the new mixed companies.  Basic minority protections are included in the by-laws, but the legal issue of control has been resolved.

Turning to Bolivia, we again hear a lot of talk about resource nationalism, but little about the facts of the old agreements.  Prior to 2005, contractors were taking 82 percent of production from Bolivia’s giant gas fields, paying only an 18 percent royalty.  This was after all investment that had long ago been recovered.  The contracts had never been approved by Congress, as appeared to have been required by the Constitution.

By 2005, the situation had become untenable.  A new Hydrocarbons Law was enacted in May of that year, imposing a 32 percent tax on the gross value of hydrocarbons (Impuesto Directo a los Hidrocarburos) in addition to the 18 percent royalty, thereby reducing the private party’s share to 50 percent.  The Hydrocarbons Law also provided a six-month period for migration of all existing contracts to one of the new legally sanctioned forms of contract.  That six-month period expired with no progress on the migration.

On May 1, 2006, the new administration again nationalised the industry, granting another six-month period for the conversion of the old contracts.  While the new operating contracts were being negotiated, the state company was given a provisional 32 percent share, reversing the old 18/82 split to 82/18.  Six months later, all of the contractors executed the operating contracts, which are structured as service contracts with the service providers receiving remuneration in cash, not oil.

The third case study is the renegotiation of the PSA covering the world’s largest discovery in three decades:  Kashagan in Kazakhstan.  There the heart of the problem was the concept of cost recovery, under which a large percentage of production, known as ‘Cost Oil,’ is allocated off the top to the contractors to recover their costs.  In the case of Kashagan, that percentage was 80 percent.  After allocation of that 80 percent to the contractor, the remaining production, known as Profit Oil,’ was allocated initially 90 percent to the contractor and 10 percent to the State, a ratio that was eventually supposed to change in favour of the State based on a set of complicated triggers set forth in the agreement.  Until then, the contractor would continue to receive 80 percent of the Cost Oil and 90 percent of the Profit Oil, or 98 percent of total production.

Despite what many feel is a textbook alignment of interests in a contract including such cost recovery provisions, experience shows that this structure is often a recipe for disaster, and that is exactly what happened in Kashagan.  Overall costs of the project increased by more than 100 billion dollars, and production, originally scheduled to start in 2005 or 2006, now is scheduled for 2012.  The net result was that in the world’s largest discovery in recent times, which is expected eventually to produce 1.5 million barrels per day, the state would have received a grand total of only 2 percent of the oil produced for at least the first decade of production, not including the relatively small participation of a subsidiary of the national oil company in the contractor consortium.  That was obviously an unacceptable situation, which most people with knowledge of the facts fully recognised.  In the renegotiation, the national oil company’s subsidiary doubled its stake in the project, a new priority share’ was allotted to the Government off the top, and new cost and schedule control mechanisms were introduced to help guard against future cost increases and delays.

What lessons can be drawn from these experiences?

First, bad deals spell trouble.  The worse the deal, or the more imbalanced the deal, the more likely it is to be renegotiated.  That goes for both sides.  One might say that the best form of stabilisation is an equitable deal.

Second, don’t believe everything you read in the papers.  Most of the renegotiations or industry transformations have ended in success, which says something about the reasonableness of the processes.  The objective has not been to exclude private participation from the petroleum industry or to make it economically non-viable, but rather to put it on a sound legal and economic footing.

Third, most renegotiations take place without adversarial proceedings, another indication that reason tends to prevail on both sides.  There is a school of thought that favours adversarial proceedings, mainly arbitration, as a negotiating tactic, but the wisdom of using that tactic would not appear to be borne out by experience.

Finally, terms such as resource nationalism’ are an oversimplification of what has been happening on the ground and are no substitute for informed analysis of both the facts and the legal issues underlying the major renegotiations of the last five years.

---

[1] Declaration on the Establishment of a New International Economic Order, G.A. Res. 3201(S-VI) U.N.Doc. A/ RE’S/S-6/3201 (1974); Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), U.N. Doc. A/RES/29/3281.

[2] Libyan American Oil Company (LIAMCO) v. The Government of the Libyan Arab Republic, Award dated April 12, 1977, 20 INTERNATIONAL LEGAL MATERIALS 1 (1981); BP Exploration Company (Libya) Limited v. Government of the Libyan Arab Republic, Award (Merits) dated August 1, 1974, 53 International Law Reports 331 (1979); Texaco Overseas Petroleum Co. and California Asiatic Oil Co. v. Government of the Libyan Arab Republic, Award on the Merits dated January 19, 1977, 17 International Legal Materials 1 (1978); In the Matter of an Arbitration between the Government of the State of Kuwait and The American Independent Oil Company (Aminoil), Award dated March 24, 1982, 21 International Legal Materials 976 (1982).

[3] See, e.g., Libyan Petroleum Law of 1955, Article 9(4) (“Concessions shall be granted for the period of time requested by the applicant permitted provided that such period shall not exceed fifty (50) years.  A concession may be renewed for any period such that the total of the two periods does not exceed sixty (60) years.”).  Thomas W. Waldo, Revision of Transnational Investment Agreements:  Contractual Flexibility in Natural Resources Development, 10 Lawyer Of The Americas 265 (1978), pp. 265, 279 (“Traditional petroleum concessions in the Middle East often had a duration of up to 99 years.”).

[4] Concessions fell into disfavour not merely for economic reasons, but because they appeared fundamentally inconsistent with notions of sovereignty.  They granted international oil companies control over petroleum operations, title to production, and control of the marketing of crude oil.  Production sharing agreements did not have the stigma associated with concessions because the national oil company was usually a party, receiving a share of production and exercising at least nominal control over operations through approval processes for work programs and budgets.  The reality did not always conform to the theory, as became evident from some well-publicized cases.

[5] Department of the Interior News Release, March 19, 2009, “Salazar Addresses the American Petroleum Institute’s Board of Directors” (http://www.doi.gov/archive/news/09_News_Releases/031909.html).

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Term Sheets in Loan Transactions

Term sheets are an important part of the loan transaction process. The initial draft of the term sheet is usually drawn up by the lender and outlines the terms of the proposed loan to the borrower. The term sheet is usually then negotiated between the lender and the borrower.

It is generally in the lender’s interests to keep the term sheet as broad and vague as possible. For example, it may set out details of a number of events of default but also state that the list is not exhaustive. This will give the lender maximum flexibility when it comes time to finalise the definitive loan agreement. The longer and more detailed a term sheet, the harder it is in practice for the lender to deviate from or add to its terms. The detailed terms will have been negotiated between the parties and the borrower will resist any further changes.

Typically, term sheets are not legally binding and simply set out the intentions of the parties. However, in some cases, certain clauses are deliberately made legally binding, such as the confidentiality clause where a customer is concerned that it has provided confidential information to a lender with which it does not have a current relationship or where the lender does not want its terms shopped to other lenders. To ensure there is no confusion over whether the term sheet is legally binding, it is always recommended that the term sheet contain a clear statement on this point.

Terms sheets generally expire by a specified date. The term sheet also usually states that provision of the loan facility is subject to (i) the lender’s satisfactory completion of due diligence on the borrower, (ii) approval by the lender’s credit committee (if this has not yet been obtained), and (iii) completion of a loan agreement and related documents satisfactory to the lender. The requirement that documents are satisfactory to the lender also gives the lender scope to depart from the term sheet during negotiations of the loan agreement.

Next month we will look briefly at the structure of a typical loan agreement.

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An Introduction to Equity Capital Markets Transactions

In recent years, the Sultanate has experienced tremendous growth not only of its national economy and physical infrastructure, but also of its financial system. Oman’s capital markets, in particular, have undergone significant development and modernisation since the legislation passed in 1998 to restructure the Muscat Securities Market.

Equity capital markets transactions, such as IPOs and rights offerings, are key events for the companies that undertake them, and such transactions often take on a larger importance to a nation’s economy and financial system. Yet these transactions tend to be shrouded in so much jargon and mystery that they sometimes can be difficult for laymen, and even experienced businessmen, to understand. Our mission in this article, and in the further articles on capital markets transactions in coming issues of the Client Alert, is to explain how these transactions work and why they are important to companies.

This article describes, at a fundamental level, what equity capital markets transactions are and why companies undertake them. Future Oman Blog posts will explore these transactions in further detail.

What is an Equity Capital Markets Transaction?

An equity capital markets transaction is essentially a sale of stock – ownership shares – in a company to investors. Investors buy stock in a company in order to receive a share of the dividends that the company pays out to its shareholders periodically, or in order to make a profit by later selling the stock to another investor for a higher price.

Large investors may also buy stock in a company with the goal of influencing – or even gaining control over – the management of the company. An investor, or group of investors, that acquires a large percentage of the company’s (voting) stock can vote its representatives onto the company’s board of directors and influence the selection of the company’s management. (Note that some companies have multiple classes of stock, with some classes carrying voting rights, and other classes carrying only economic rights such as the right to receive dividends or the right to be bought out at a specified time and price.)

There are different varieties of equity capital markets transactions, categorised according to who is selling the shares (e.g., the company itself, or its existing shareholders) and to whom the shares are sold (e.g., to existing shareholders, to private institutional investors, or to the investing public).

However, the most well-known type of equity capital markets transaction is an initial public offering, or IPO. In an IPO, the company “lists” its shares – that is, makes them tradable on a stock exchange – and creates and sells additional shares of the company to the investing public.

Another common type of equity capital markets transaction is a rights offering. In a rights offering, a company offers each of its existing shareholders the right to buy additional shares in the company at a specified price within a specified time period. (See the May 2010 blog post on rights offerings and their use in meeting Oman’s increased capitalisation requirements.)

Why do Companies Engage in Equity Capital Markets Transactions?

One of the most fundamental needs of any company is capital. A company needs capital in order to function – to fund the costs of starting up the business; to provide a cushion for the company’s finances during temporary gaps in cash flows; and to fund expansion plans such as hiring more workers, building new facilities or making acquisitions.

Companies can raise capital either by selling stock in the company (i.e., issuing equity) or by borrowing money, typically from a bank (i.e., taking on debt). The advantage to taking on debt is that doing so does not dilute the ownership stakes of the company’s existing shareholders. However, the disadvantage to debt is that the company must typically make regular interest and principal payments on the debt, which can be problematic, for example, to young and growing companies that are investing heavily in their business but are not yet generating significant cash flows.

Issuing equity, while having the disadvantage of diluting the existing shareholders, has the advantage of giving the company financial flexibility – the company can wait to pay shareholders dividends until it has achieved its growth objectives and has begun to generate profits.

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Anticipated Rule Change Could Spur IPOs of Family Owned Businesses

Family owned businesses play a central role in the economies of both developed and developing regions around the globe. Economic studies estimate that 40 percent of large companies in the United States and Europe are family owned. In the Middle East this percentage is even greater: more than 80 percent of Middle Eastern companies are owned or operated by a single family. However, the ownership dynamics within controlling families is quite fluid. Experts believe that over the next 10 years companies worth approximately US$1 trillion will be passed from one generation to the next within business-owning families.

In Oman, the central role of family owned businesses is even more pronounced. The local press has cited HE Yahya Bin Said Al Jabri, Executive President of the MSM, in reporting that 95 percent of Omani companies are family owned.

For this reason, safeguarding the future of Oman’s family businesses has been a key priority in the Sultanate’s economic development model. Recent plans announced by the Ministry of Commerce and Industry to lower capital dilution requirements suggest that the most promising future path for some family owned businesses may lie in tapping Oman’s public capital markets. This path leads directly to augmented share capital and strengthened corporate governance mechanisms.

According to a report in the Times of Oman, the government is preparing a new set of amendments to the Commercial Law which will lower the minimum capital dilution from 40 percent to just over 20 percent for family owned businesses undertaking initial public offerings (IPOs) on the Muscat Securities Market (MSM). By lowering the percentage of equity in the company that the law requires a family to relinquish, family owned companies should be more likely to float of portion of their shareholdings on the MSM.

The goal of these amendments and the policy behind them is that promoting public flotation will (i) strengthen family owned businesses by allowing them access to public investment capital; (ii) refine their corporate governance practices through adherence to listing standards; and (iii) streamline access to professional strategic and management advice that could fill potential succession gaps.

While Oman’s family owned businesses are currently among the strongest and most respected enterprises in the Sultanate, some family businesses may face vulnerabilities over the longer term. A leading professional services firm recently released a survey indicating that relatively few family businesses in the region survive beyond the third generation. That report also highlighted that only 16 percent of family owned businesses have instituted a clearly defined succession plan.

Another potential area of vulnerability for family owned businesses is the need for larger amounts of capital to compete in an increasingly international, big-player dominated environment. Concurrently, the more restrictive credit environment in recent years and some high-profile defaults by family owned businesses has made borrowing necessary capital much more difficult. Loosening the requirements for tapping the equity markets should afford family owned businesses another source of much-needed funds.

Similarly, as companies in many sectors grow larger, they often need a more formalised corporate governance structure in order to function properly. Becoming a publicly listed company and adhering to the MSM’s corporate governance standards should help provide structure and discipline to family owned companies.

Nevertheless, many family businesses have balked at the prospect of raising funds through IPOs. The current 40 percent capital dilution requirement has meant that any firm listing shares has had to give up a substantial ownership stake to public investors. Given that family control has been a central driver of success for many companies, few family businesses have been willing to relinquish that much ownership and such a degree of control. Further, bringing in outside investors and managers has been thought to risk disrupting the company’s culture and shifting focus from long-term development to short-term profits. Consequently, only eight percent of family businesses in the Middle East are publicly traded.

By lowering the minimum capital dilution percentage, the authorities’ objective is to enable family owned companies to bring in outside investors without giving up as much control. This change should enable more family owned businesses in Oman to partake of the advantages of public flotation, while mitigating its risks.

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Importance of Specifying Counter-Party Physical Address

Focus on Litigation

Much of the disputes process is centered on the usual elements of litigation: cogent legal arguments, meticulous gathering of evidence, and navigation of complex procedural requirements. Yet even after many years of practicing law in Oman, we are often reminded of how the actual day-to-day progress of a matter can turn on the most mundane of details – for example, ascertaining the physical addresses of the parties.

With the great urgency often surrounding the litigation process, such as filing a case or an injunction application with the Omani Courts, one small detail that sometimes gets lost in the shuffle – namely, omission of the actual physical addresses of the parties to the dispute – can inject considerable delay into the overall process.

The Omani Courts now require very exact information about the physical address of each party to a case. (If the party is a company with multiple physical addresses, the physical address of the company’s head office must be specified; if the party is an individual with multiple residences, the physical address of the individual’s primary residence must be specified.) A high level of detail is often required. It is, perhaps strangely, not enough to state that company X’s head office is in building Y. The Courts require us to state the exact floor of the building, the building number, and the way/street number, together with any nearby landmarks. If these details are not provided, the court will not allow the case to move forward.

Accordingly, it is very important for parties to know the exact physical address details of the entities in Oman with whom they do business. When doing transactions, one often knows only the other party’s postal address (typically a P.O. box). In Omani litigation, however, it is the physical address information which is of paramount importance. Whilst we can often help in finding out a physical address, it is prudent for companies to ascertain such information right at the beginning of their commercial relationship with a counter-party.

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Corporate Law Focus - Personal Debts of Members of Commercial Companies

Many companies have a joint ownership structure. Indeed, many types of commercial companies – for example, limited liability companies or joint stock companies – are required by law to have multiple shareholders. However, joint ownership can make matters complicated when an individual shareholder of the company, whose assets include his interest in the company, is pursued by a creditor for personal debts (let us call this creditor the “personal creditor”).

The personal creditor will wish to access any of the shareholder’s assets that it can in order to claim payment of the member’s debts. However, if the personal creditor were able to withdraw the shareholder’s share of a company’s capital, this reduction in the company’s capital could adversely affect the company and its remaining shareholders. Likewise, if the creditor were able to accede to the shareholder’s interest in the company and become a shareholder in the company without the consent of the company’s remaining shareholders, this could adversely affect those other shareholders. Particularly in a privately held company (as opposed to a publicly traded joint-stock company), many shareholders are active in the company’s affairs – voting on key decisions; serving on the board and committees; even participating in day-to-day management – and are very selective about who they want to work with as fellow shareholders.

Fortunately, the Commercial Companies Law does prescribe rules for dealing with these types of issues. The statute provides that:

• A personal creditor may not claim the shareholder’s share in the company’s capital as payment of the shareholder’s debt; however, upon dissolution of the company, the personal creditor may claim as payment the shareholder’s share of the company’s assets remaining after settlement of the company’s liabilities.
• When the shareholder’s interest is in a company other than a joint stock company, a personal creditor may claim payment of the shareholder’s debt out of the shareholder’s share in the company’s profits.
• When the shareholder’s interest is in a joint stock company, a personal creditor may claim payment only out of the shareholder’s share of the declared dividends; however, the personal creditor may also – subject to the company’s articles of association and applicable law – require the public sale of the shareholder’s shares and claim payment of the debt from the proceeds of this share sale.

In addition to these statutory requirements, companies can impose additional requirements – e.g., via the company’s commercial contract or a shareholders’ agreement – to govern such matters as shareholder composition and capital withdraw.

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Commercial Companies Law & Super-Majority Voting Requirements

Under the Commercial Companies Law, a number of corporate actions require approval by a “super-majority” vote – for example, 75% – of the company’s shareholders. (Similarly, some corporate actions require a unanimous vote of the company’s shareholders.)

Super-majority voting requirements can play an important role in protecting the rights of the company’s minority shareholders. Moreover, super-majority requirements can also help to promote the long-term stability of the company and harmony among its shareholders, by ensuring that the key corporate decisions are undertaken only with a larger consensus.

Our article on minority shareholder rights (September 3, 2010) discussed a number of corporate actions for which the Commercial Companies Law mandates super-majority or unanimous shareholder votes. However, there are a number of other important matters which, unless specified in a company’s charter or in a shareholders’ agreement, would be subject to a simple majority vote. Such key areas and actions, for which a company may wish to enshrine super-majority (or unanimous) voting requirements in its charter or in a shareholders’ agreement, include the following:

• approval of the business plan and annual budget;
• merger or acquisition transactions;
• sale or purchase of assets that are material to the business;
• investments in other companies;
• commencement or settlement of legal actions;
• related-party transactions; and
• appropriate distribution of the company’s profits and bonus payments.

We note that while super-majority voting requirements, when prudently used, can promote minority shareholder rights and the stable and harmonious operation of the company, the injudicious or excessive use of super-majority voting requirements can potentially stymie the company’s ability to act nimbly and cause gridlock. We therefore recommend that you consult with legal advisors to help carefully craft the voting requirements in your company’s charter or shareholders’ agreement.

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Focus on Labor Law: Fixed-Term Employment Contracts

For most companies, entering into contracts that are well drafted and carefully negotiated is key to carrying out their business smoothly and successfully. Often, some of a company’s most important contracts are those with its own employees.

Employment contracts can be of indefinite duration or for a fixed term. As this article discusses, while employment contracts are typically of indefinite duration, fixed-term contracts can offer companies distinct advantages in some cases.

Employment Contracts of Indefinite Duration

In the Sultanate of Oman, as in other countries, employment contracts are typically entered into for an indefinite duration. This embodies the company’s and the employee’s shared good-faith intention to form a lasting relationship in which the employee is committed to the company, and the company is committed to the employee for the long term.

The difficulty for the company can be that, if the employment relationship sours or the economic viability of the business turns down, terminating an employee may often require more than simply providing the required notice. (The Omani Labor Law specifies that the notice period shall be a minimum of 30 days for workers employed on a monthly basis, or a minimum of 15 days for all other workers. The Labor Law further provides that if an employment contract specifies a longer notice period than the statutory minimum, the longer notice period specified in the contract shall apply). Beyond giving the required notice, companies may often find themselves facing unfair dismissal suits by the terminated employee.

There are a number of ways that the company can successfully defend against an unfair dismissal suit. If the employee has committed acts considered by the Omani Labor Law to be gross misconduct acts – including using a false identity, intoxication or assault at the workplace, or heavy absenteeism – the company may terminate the employee without having to pay damages (indeed, the Omani Labor Law provides that in the specified cases the company need not provide notice or pay end-of-service gratuity either). Furthermore, companies often succeed in defending against unfair dismissal claims by arguing that lay-offs in a money-losing division were economically necessary.

However, notwithstanding the foregoing, Omani courts are generally inclined to be highly protective of employees. And whether they would ultimately win or lose, most companies try to minimize the risk of unfair dismissal suits being brought against them in the first place. One way to mitigate this risk is by using fixed-term contracts.

Fixed-Term Employment Contracts

The Omani Labor Law allows for employment contracts to be for a fixed rather than unlimited duration, and explicitly provides that fixed-term contracts shall be effective, stating “The contract of work shall terminate [upon] … the expiry of its period or completion of the work agreed upon.” The Omani courts, in turn, are generally very respectful of fixed-term employment contracts. While the courts often hear unfair dismissal cases brought by employees whose contract of indefinite duration was terminated, the courts are unlikely to countenance unfair dismissal claims by employees who were asked to leave the company upon the expiration of their fixed-term contracts. Although the Omani Labor Law in general favors employees, its respect for fixed-term arrangements is one of the areas where the law is protective of employers.

Although they can be used in a variety of circumstances, fixed-term contracts are naturally most useful for hiring employees that will be working on a single, discrete project with a well-defined timeframe. Fixed-term contracts may also be especially useful to foreign companies that only plan to operate in Oman for a limited period of time. By lowering the risk of unfair dismissal claims, fixed-term contracts could help to protect against overhanging liabilities that could interfere with the company’s plans to smoothly conclude its affairs in the Sultanate.

There are subtle but important nuances to the Omani Labor Law, such as the requirement that a fixed-term employment relationship must be severed at the expiration of its term, lest a continuing relationship be deemed by the Labor Law to constitute a renewal of the employment contract for an indefinite period. In light of these complexities, we recommend that you consult with legal advisors in drafting your employment contracts, particularly for senior-level employees; employment contracts are truly a field where “an ounce of prevention is worth a pound of cure.”

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Jeremy Miocevic Joins Curtis as Corporate Partner in Dubai

Curtis, Mallet-Prevost, Colt & Mosle LLP has announced that Jeremy Miocevic has joined the international law firm as a partner in its Dubai office.

Mr. Miocevic's practice focuses on mergers and acquisitions, private equity, international funds, and general corporate advisory and structuring.

“The addition of Jeremy Miocevic as a partner strengthens Curtis’ position in Dubai and the Middle East,” said Peter F. Stewart, Managing Partner of Curtis in Dubai. “Jeremy’s strong client relationships, both in the region and in specific sectors, will bolster Curtis' ability to help clients in the UAE and throughout the GCC region.”

Mr. Miocevic is moving to Curtis from a prominent UAE law firm, where he was involved in a wide range of local and regional M&A and private equity transactions and advised a number of clients on structuring, establishing and marketing private equity, real estate or other targeted investment funds.

Mr. Miocevic has counseled some of the largest investment banks and private equity firms in the United Arab Emirates, as well as multinational and regional companies. His work covers deals both inside the UAE as well as cross-border transactions within the GCC, Middle East and Africa.

Mr. Miocevic advises the full range of industry sectors, with particular experience in logistics and supply chain management, water treatment, food and beverage, media and publishing, financial services, and retail. He brings to Curtis more than four years of experience practicing in the UAE where he has a strong knowledge of local laws and regulations relating to his areas of practice.

He also previously served as group legal counsel for Ricardo Plc, a global automotive engineering consultancy. Prior to that, Jeremy was Sole Counsel at Kinsford Development Ltd., a UK-owned boutique venture capital company. He also has been a corporate and commercial solicitor at Allens Arthur Robinson, one of Australia’s largest law firms, where he was a member of the M&A team.

Mr. Miocevic received his B.A. in philosophy and his LL.B. with honors from the University of Auckland, New Zealand. He was admitted to the Bar as a barrister and solicitor of the High Court of New Zealand in 1999 and subsequently admitted as a barrister and solicitor of the Supreme Court of Victoria, Australia in 2001.

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UK Bribery Act Signals Rise in Anti-Corruption Clauses

International Law Update

Anti-corruption clauses in commercial contracts and other agreements have become commonplace in international transactions involving a US entity, due to the US Foreign Corrupt Practices Act (FCPA). Recently, the UK passed the Bribery Act, which is even broader in scope than the FCPA in a number of respects. With the Bribery Act expected to come into force in April 2011, we expect anti-corruption clauses to become even more widespread in international commercial contracts and other agreements.

Omani companies that carry out international business are already accustomed to seeing anti-corruption clauses in their contracts with US entities. With the passage of the Bribery Act, Omani companies can expect to also see anti-corruption clauses – and perhaps fuller-bodied ones – in their contracts with UK entities.

An anti-corruption clause could include the following wording:

The Contractor shall not:

(a) offer or agree to give any person working for or engaged by the Company any gift or other consideration, which could act as an inducement or a reward for any act or failure to act connected to this Agreement, or any other agreement between the Contractor and the Company, including its award to the Contractor and any of the rights and obligations contained within it; nor

(b) enter into this Agreement if it has knowledge that, in connection with it, any money has been, or will be, paid to any person working for or engaged by the Company by or for the Contractor, or that an agreement has been reached to that effect, unless details of any such arrangement have been disclosed in writing to the Company before execution of this Agreement.

The Bribery Act sets out four offences, namely:

1. offering, promising or giving a bribe to another person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity (an active offence);
2. requesting, agreeing to receive or accepting a bribe to perform a function or activity improperly (a passive offence);
3. bribing a foreign public official; and
4. failure of a commercial organisation to prevent bribery.

The Bribery Act applies to all commercial organisations that are registered in the UK or that have any operations in the UK. The Bribery Act also has extensive extra-territorial application – there are no territorial limits imposed in relation to the prosecution of UK companies, partnerships, citizens or residents, and non-UK persons can be prosecuted for offences of bribery where any part of the offence takes place in the UK.

The standards for determining bribery in relation to the first two offences listed above are based on what a reasonable person in the UK would expect in relation to the performance of the relevant function or activity. If such functions or activities are not subject to UK laws, local customs and practices will be disregarded when deciding what a reasonable person in the UK would expect unless such customs or practices are specifically permitted or required by the relevant local law. Unlike in the FCPA, there is no exception for small facilitation payments paid to officials to smooth official actions.

In relation to the offence of failing to prevent bribery, a commercial organisation will be guilty of this offence if it fails to prevent an “associated” person from bribing another person with the intention of obtaining business, or an advantage in the conduct of business, for that commercial organisation. This is a strict liability offence and applies to any UK-incorporated entity as well as to any company which carries on business in the UK.

A person is considered to be “associated” with a commercial organisation if that person performs services for or on behalf of that organization (e.g., employees, agents or subsidiaries). The associated person does not need to have any connection to the UK for its actions to be covered by the Bribery Act.

Under the Bribery Act, a commercial organisation would have a defence to prosecution if it can show that it has in place “adequate procedures” designed to prevent bribery. The practical effect of this new offence is that all businesses will be well advised to have (i) a clear and comprehensive anti-bribery policy; (ii) clear policies on corporate gifts and hospitality; (iii) regular training and updates for employees at all levels on anti-corruption measures; and (iv) anti-corruption clauses in all of their commercial contracts. These measures are likely to be critical for a commercial organisation seeking to use the “adequate procedures” defence, however, the actual measures will need to be tailored to each commercial organisation, taking into consideration the nature of the business, the size of the organisation and the degree to which it operates in high-risk markets.

The UK Ministry of Justice has recently published its consultation on the meaning of “adequate procedures,” which highlights six high-level general principles: risk assessment; top level commitment; due diligence; clear, practical and accessible policies and procedures; effective implementation; and monitoring and review. The Ministry of Justice has highlighted in the consultation that the guidance is not prescriptive or exhaustive and it envisages a risk-based compliance regime.

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Mary Allan Joins Curtis as Infrastructure Partner in Muscat

International law firm Curtis, Mallet-Prevost, Colt & Mosle LLP has enhanced its Infrastructure practice by adding Mary Allan as a partner based in Muscat, Oman.

Ms. Allan comes to Curtis from the Oman office of Denton Wilde Sapte, where she was head of infrastructure/projects. She has focused her work on projects in utilities and general mandate work for energy clients in utilities and the energy sectors. She has done much of her work on behalf of governments, particularly regarding regulatory issues for new power and water projects.

Ms. Allan has spent almost her entire career within the Middle East. She has been based most of the time in Muscat. She was in the Oman capital first from 1996 until 2002 and then, after a four-year stint in Denton’s Dubai office, she returned to Muscat in 2006 where she has been ever since.

“Mary Allan is well-connected within the Middle East and has represented a number of major clients in the energy and infrastructure sectors,” said Bruce Palmer, managing partner of Curtis’ Muscat office. “Her experience in Oman and across the GCC region will enable Curtis to establish itself further as one of the area’s leading international law firms.”

Ms. Allan has been recognized as one of the top practitioners in Projects and Energy by Chambers & Partners Global Directories which quoted sources praising her "excellent experience in the projects area" and by Legal 500 which called her “an excellent lawyer, extremely good in relation to project work and knowledge of the Oman legal system.”

The Curtis Infrastructure Development practice handles a broad range of domestic and international transactions, including some of the world's largest and best known project finance transactions and projects in the international petroleum and power industries. Our lawyers counsel infrastructure clients on the full range of corporate, financial and regulatory issues they face, representing project sponsors, investors, lenders, developers and state entities operating in a wide array of industries. The firm has particular expertise within the Energy sector, covering every segment of the industry – power plants, oil and gas exploration and development, refineries, substations, greenfield facilities, terminals, tankers, pipelines, transmission lines and mining – and spanning the generation, transmission and distribution aspects of electric energy development, regulation and financing.

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Judges' Verdict

The following article by Curtis partner James Harbridge appeared in the October 3, 2010 Muscat Daily newspaper.

Judges' Verdict

The issue of interest on late payments often causes problems in Oman.

An interesting judgment on this topic was made by the Omani Supreme Court on 29 March 2006.

The facts of the dispute related to a 2002 rock blasting contract. The Claimant performed the services and the Defendant failed to pay. The contract between the parties was absolutely silent on the subject of interest on late payments.

The Claimant filed a court case in March 2003, and requested the principal sum owing - plus interest at 10% per annum.

The Primary Court ordered the Defendant to pay the principal sum, but rejected the claim for interest.

The Claimant appealed to the Appeal Court, as he wanted to obtain the interest he had claimed.

But the Appeal Court ruled against him, and upheld the validity of the Primary Court's ruling.

The matter moved to the Supreme Court. The Claimant argued that, as a matter of public policy, interest should always be applied to late payments. However, the Defendant said no interest should be payable, as the parties' contract did not grant any right to claim interest.

The Claimant also relied on:

Ministerial Decision 151/2002 which stated that the interest on commercial loans - other than for loans granted by CBO-licensed entities - would be 10% per annum, unless a lower rate had been agreed; and

Article 80 of Oman's Commercial Code, which states that a creditor is entitled to levy interest on a commercial debt.

The Supreme Court ruled that the Claimant was entitled to interest at 10% per annum, and that interest was definitely applicable even in the absence of an agreement on the point.

This judgment is an important one, as it shows that a claim for interest cannot be denied on the grounds that a contract is silent on the subject.

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Focus on Litigation: Settlement Agreements

When a dispute seems to have been resolved by a verbal agreement, many could be forgiven for thinking that a lawyer’s role is no longer necessary. After all, the only thing still required at that point is a written record, signed by both parties, as regards the terms on which the dispute has been settled. It sounds easy.

However, properly putting a verbal agreement into writing is not always easy. A fully protective settlement agreement requires a great deal of legal precision. Some immediate questions arise, for example:

• Are all of the relevant entities correctly named as parties to the settlement agreement?
• Are the individuals who plan to sign the agreement actually authorised signatories with the power to bind the entity which they represent?
• Does the agreement adequately resolve all issues in dispute?
• What rights will be triggered if the agreement is breached?
• In which country, pursuant to which law, and in which forum will any litigation/arbitration take place as regards any breaches of, or disputes arising out of, the agreement?

Many settlement agreements do not spell out with requisite precision who will do what, and when. Equally, they may contain terms that are not defined, or which are defined too loosely, thereby leaving these terms – such as “handover date”, “payment issues” or “additional resources” – open to interpretation.

An imprecise settlement agreement may turn out not to be a true settlement at all. The only way a settlement agreement genuinely can signal the conclusion of a dispute is when it is drafted with the exactitude required. This can prevent the perceived ending of one dispute from becoming the start of another dispute.

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Royal Decree Relaxes Foreign Shareholding Restrictions

Real Estate Law Update

A recent amendment to Omani land use laws could well prove to be a tipping point in the liberalization of the real estate sector in Oman. The Land Law of 1980 and its subsequent amendments originally paved the way for corporate ownership of land, by permitting wholly Omani (or GCC) owned companies and public joint stock companies with at least 51% Omani shareholding to own land in the Sultanate.

Yet even after the enactment of the Land Law, corporate ownership of land remained highly restricted, as Omani companies with foreign ownership – even joint stock companies with greater than 51% Omani shareholding – could not own and utilize real property except for limited purposes complementary to their business objects. For example, these companies could use land only for installing a showroom, warehouse or business office, for providing staff accommodation, or for other administrative purposes. Only wholly Omani owned companies were permitted to engage in real estate development as a business object.

Trading and investing in real estate development, as well as the reselling of real estate property, remained the exclusive preserve of wholly Omani owned companies with related real estate objects until 2004, when these business fields were opened up to wholly GCC owned companies. However, ownership of land in the Sultanate by companies with non-Omani GCC shareholding is subject to conditions which include a well-defined timeline for development of the land along with restrictions on reselling the land without first completing the planned developments to the property. Real estate companies with non-Omani shareholding had to content themselves with usufruct rights over land granted by the Government or by private parties. Usufruct as a beneficial interest in land is time-bound and has limited assignability, which can be a deterrent to undertaking long-term real estate development projects.

These restrictions are now changing. The recent amendments to Omani land use laws issued by Royal Decree 76/10 seek to relax the foreign shareholding restrictions as well as the limitations on the usage of land. The amendments enable public and closed joint stock companies with a minimum of 30% Omani shareholding to own land in the Sultanate. More significantly, the amendments allow these companies to engage in real estate development as a business object, a key permission that previously had been restricted to wholly Omani (and later, GCC) owned companies. Although the amendments do not purport to grant ownership rights to companies that are not in the real estate development sector, they represent a watershed event for real estate development companies that are executing various ITC and non-ITC projects in Oman. (Integrated tourism complexes, or ITCs, are large-scale planned developments that usually include residential properties, hotels, shopping and entertainment facilities.)

Pursuant to the amendments, real estate companies must do the following in order to own land:

• obtain prior approvals from the relevant government authorities for a specified real estate project;
• not dispose of the land within four years of the registration of ownership;
• obtain a building permit for the land;
• register the sale of units only after the completion of construction of the units and the basic infrastructure related to them; and
• have real estate development as a business object stated in its commercial registration.

It is unclear whether real estate companies with existing holdings satisfying the above conditions would be entitled to “upgrade” their existing rights on the back of the amendments.

The amendments also increase the permitted foreign shareholding in companies for entitlement to usufruct. Omani companies with up to 70% foreign shareholding and a minimum of 30% Omani (or GCC) shareholding are now entitled to usufruct over land for national development projects.

Furthermore, the amendments amend the Law on Ownership of Real Estate in Integrated Tourism Complexes, authorizing the Ministry of Tourism (with the prior approval of the Ministry of Finance) to exempt investors in tourism projects – including ITC projects – from the payment of usufruct fees for five years in relation to the undeveloped project area. The amendments make it obligatory to commence an ITC project within two years of securing the land. Lastly, another significant development is that the amendments allow the developer to subdivide the project land in coordination with the Ministry of Tourism, with the proviso that the subdivision will be in accordance with the designated purpose for which it was earmarked.

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Anti-Corruption Laws & Compliance by Infra Co's

Curtis partner David Seide and associate Adil Qureshi recently authored an article for Infrastructure Journal entitled "Anti-Corruption Laws & Compliance by Infra Co's."

The article discusses the tremendous increase in anti-corruption prosecutions and penalties directed at the energy and infrastructure sectors in recent years.

Download the article.

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Solar Energy – Legal Structure Issues

As discussed in a previous post (Hot Topic: Solar Energy), solar power is poised to play a key role in meeting the Sultanate’s future energy needs. With the Omani Authority for Electricity Regulation having published a comprehensive report on renewable energy in 2008, and the Omani Public Authority for Electricity and Water anticipated to soon release a feasibility study for the Sultanate’s first large-scale solar plant, there are clear indications of growing support at the policy level for solar energy projects in Oman. Once policymakers decide to undertake specific solar energy projects, the implementation framework for these projects will come to fore.

As the Sultanate crafts its implementation framework for solar energy projects, it is likely that economic and strategic issues will lead, and the legal issues will follow their cue. However, it is important to choose the legal structure that will best express and accomplish the chosen policy goals. This article explores the economic and strategic context for solar energy in Oman, and outlines some possible legal structures that may meet the Sultanate’s needs.

Economic and Strategic Context

Solar energy has clear advantages over other energy sources, namely that it is renewable, plentiful and non-polluting. Over the long term, investing in solar energy makes solid economic and strategic sense. Solar power provides a secure, stable and sustainable energy source. Solar production costs will likely fall as technology improves, whereas fossil fuel costs have shown a propensity to rise with global supply constraints and demand increases. Further, replacing fossil fuel-based power with solar power also reduces pollution, which lowers health and environmental costs to society as a whole.

However, solar projects do face a short-term disadvantage: at current technology and market prices, the per-unit cost of producing electricity using solar energy is significantly higher than using natural gas or other fossil fuels.

In order to overcome the obstacle of short-term cost and launch solar projects that will yield long-term benefits, governments usually will absorb, over the short and medium term, the production cost difference between solar-based energy and fossil fuel-based energy. In other words, the key step to getting solar energy projects off the ground is for the government to subsidize the project to make it economically viable. Although such a subsidy can be politically difficult to carry out in some countries, it likely could be done in the ordinary course in Oman, where government subsidies to provide affordable electricity to the population have long been a top priority of government policy.

There are a number of possible ways that the Sultanate could structure such subsidies, and these various legal structures contain subtle but important differences.

Possible Legal Structures for Solar Subsidies

The first, most obvious way that Oman could subsidize solar energy production would be for the government to absorb the higher per-unit cost by directly financing and carrying ownership of the solar plant. In this case, the government would typically recruit a third-party operator with the requisite technical expertise, and would build and operate the solar power facility as a public-private partnership (see the June 2010 Client Alert for an overview of the public-private partnership model).

Alternatively, the government could subsidize the purchase of output from a privately owned and operated plant. Under this approach, the government would solicit a private party to build and operate a solar energy plant and cause the Oman Power & Water Procurement Company (“OPWP”), the government-owned, sole wholesaler buyer of electricity in Oman, to enter into a subsidized long-term purchase agreement that would allow the operator to earn a reasonable profit above its cost of producing the solar energy. This power purchase agreement would typically have a term of between 15 and 25 years. It is important to note that private operators seek a long-term power purchase agreement not only for assurances that they will earn a reasonable operating profit, but also to help secure financing to build the plant in the first place, as banks are more likely to lend money for projects that have revenue streams which are guaranteed (and are backstopped by the government).

Finally, as Oman’s solar power sector evolves in future years, OPWP eventually may decide that it would like to tap private-sector capacity even further. One way to do this would be by adopting a “feed-in-tariff” model along the lines of what is used today in Germany and other European countries. Under this model, private businesses and households install solar panels on their property and sell the excess energy that they produce to the relevant electricity authority (in Oman’s case, this would be OPWP). Rather than negotiate power purchase agreements with each business and household that contributes to the electricity grid, the electricity authority establishes a standard rate, commonly called a “feed-in-tariff”, that it pays to all contributors. The government purchases excess solar-produced electricity from businesses and households at feed-in-tariff rates that are high enough to allow the businesses and households to recoup the cost of purchasing and installing their solar panel systems. The feed-in-tariff model both encourages more widespread adoption of solar energy and helps to instill eco-friendly values across society.

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Consolidation of Pension Fund Management in Oman

Possible Approaches

Pension funds are a key pillar of the financial sector in Oman. As the Sultanate continues its drive to increase the efficiency of government services, it is possible that we shall see initiatives to consolidate the management and operation of Oman’s various pension funds. In this article, we discuss two possible approaches for consolidation of pension fund management: (i) merging existing funds into a single consolidated fund, and (ii) bringing existing funds under a single management body.

The Consolidated Fund Approach

One approach would be to integrate the various existing funds into a single consolidated pension fund, either by way of a corporate restructuring (including through a series of mergers, asset purchases or transfers) or via a wholesale transfer of all the assets held by the existing funds to a master investment holding company or consolidated fund. The consolidated fund would benefit from unified management, administration and support services and could leverage its size to achieve better economies of scale than the smaller existing funds.

However, a corporate restructuring into a single consolidated fund would involve some challenges. Caution and careful planning would be required to capture the benefits of consolidation while avoiding potential legal and administrative issues, including, among others:

• costs and restrictions relating to the transfer of the existing funds’ assets;
• valuation issues associated with the broad range of the existing funds’ assets;
• personnel and service provider decisions, including, most importantly, the selection of the consolidated fund’s managers;
• tax implications; and
• variations in beneficiary entitlements under the existing funds.

A consolidation team comprising internal and external stakeholders and independent advisers would be required to address these issues.

The Single Management Body Approach

An alternative approach would involve retaining the existing funds’ respective corporate structures, but delegating management authority over the existing funds to a single management body. This approach could be carried out by way of a series of investment management agreements between the existing funds and the management body, with each such agreement being tailored to satisfy the unique requirements of each fund.

The key advantage to this approach is its ability to centralize the management of the existing funds in a single entity while leaving the existing funds intact, thereby largely avoiding many of the issues associated with asset transfers, valuations, beneficiary entitlements and tax implications. As the single management body would manage multiple portfolios with divergent investment strategies and restrictions, certain measures to avoid conflicts of interest and/or market abuse would need to be taken. We nonetheless would anticipate that this approach would enable the Sultanate to optimise the existing funds’ management and achieve significant economies of scale in a relatively straightforward and cost-efficient manner.

We continue to monitor ongoing developments in the Omani pension fund sector, and look forward to discussing them in the blog going forward.

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Focus on Corporate Law: Minority Shareholder Rights

It is common for Omani companies to have at least one minority shareholder – i.e., a shareholder that owns less than 50% of the company’s shares. Some companies are formed with minority shareholders as part of the original ownership structure, such as a joint venture company in which the majority partner owns 70% of the shares and the minority partner owns 30% of the shares. Other companies add minority shareholders at a later stage, for example by granting a minority interest to a new investor in exchange for an infusion of capital.

For any such company, minority shareholder rights represent a key corporate governance issue. The minority shareholder will desire legal protections to ensure that the majority shareholder cannot use its voting control over the company to abuse the minority shareholder’s interests. Protections for minority shareholders not only promote fair and responsible governance, but also encourage investment by giving parties comfort to invest in companies in which they will not be able to exert voting control.

Minority shareholder rights mainly come in two forms: (i) rights conferred by statute, and (ii) contractual rights between the minority shareholder and the company’s other shareholders, enshrined either in the company’s charter or in a shareholders’ agreement.

Statutory Rights – the Commercial Companies Law

In Oman, statutory protection for minority shareholders generally is limited to requirements under the Commercial Companies Law that certain key corporate decisions be made by a unanimous vote of the company’s shareholders. The requirement of shareholder unanimity effectively grants the minority shareholder a “blocking right” over the covered actions.

For LLCs

The Commercial Companies Law provides particularly robust blocking rights with respect to limited liability companies, or LLCs. For an LLC, a unanimous shareholder vote is required to:

• increase or reduce the share capital of the company; or
• transform the company into a general or limited partnership.

In addition, the Commercial Companies law states that, unless the company’s constitutive contract provides otherwise, a unanimous shareholder vote is required before the company’s managers:

• sell all or a substantial part of the company’s assets;
• mortgage the company’s assets to secure debts of the company (except in the ordinary course of the company’s business);
• guarantee the debts of any third party (except in the ordinary course of the company’s business); or
• make donations on the company’s behalf above small or customary amounts.

Finally, approval by a majority of the company’s shareholders representing at least 75% of the shares is required for certain other key actions by an LLC, such as amending the constitutive contract, transforming the LLC into a joint stock company, or dissolving the company. Although this “super-majority” voting requirement does not necessarily grant minority shareholders blocking rights, it often will do so in practice – e.g., for minority shareholders that hold a greater than 25% shareholding (in Oman, many minority shareholders have a 30% interest in the LLC), and for smaller minority shareholders that act together and have a combined shareholding in excess of 25%.

For SAOCs

The Commercial Companies Law does not provide such extensive blocking rights for minority shareholders of closed joint-stock companies (“SAOCs”), likely because SAOCs are already subject to more rigorous corporate governance standards. However, the Commercial Companies Law does require that certain key actions by an SAOC be taken at an extraordinary general meeting (“EGM”). This serves to protect minority shareholders, as EGM resolutions must receive 75% of the votes cast in order to be adopted. Capital increases by issuance of preferred shares, or amendments to the company’s articles of association, for example, require approval by an EGM resolution.

Contractual Rights – Company Charter and Shareholders’ Agreement

Beyond the safeguards provided by the Commercial Companies Law, minority shareholders may obtain additional protection from contractual terms agreed to by the company’s other shareholders. Those rights typically would be enshrined either in (i) the company’s charter or (ii) a shareholders’ agreement.

From the perspective of enforceability, it is preferable to include minority shareholder rights in the company’s charter, as in Omani courts it is normally quicker and easier to pursue claims based on violation of the company’s charter than claims based on breach of a shareholders’ agreement. However, as a practical matter, it may be difficult for the minority shareholder to include the provisions it desires in the company’s charter, as the Omani Ministry of Commerce and Industry is often reluctant to permit a company to deviate significantly from the terms of the model charter that is used for registration purposes.

Thus, it is common for minority shareholders to insist on entering into a separate contract with the company’s other shareholders to set out protections for the minority shareholder. This contract, called a shareholders’ agreement, typically will include provisions on such matters as:

• the right of the minority shareholder to appoint a given number of the members of the company’s board of directors;
• the allocation of profits, liabilities, roles and responsibilities among the various shareholders;
• heightened shareholder approval requirements (e.g., unanimity or super-majority) for the company to take particular actions; or
• dispute resolution procedures to be followed in the event of disagreements between the shareholders.

Company charters and shareholders’ agreements are key legal documents that should be meticulously crafted and reviewed to protect shareholders’ rights. We strongly recommend that companies and investors seek professional legal advice in preparing such documents.

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Oman Joins Arab Research and Training Agreement

Nuclear Energy Update

Readers of this blog know that we have been keen to highlight the opportunities presented by Oman’s plans to develop a peaceful nuclear energy program. As we discussed in our “Nuclear Energy in Oman” series, two of the key legal steps in the nuclear development process include joining international agreements and building a nuclear safety framework.

The Sultanate’s recent enactment of Royal Decree 68/2010 suggests that Oman is continuing to make further progress in both of these areas. Pursuant to Royal Decree 68/2010, Oman is acceding to the Cooperative Agreement for Arab States in Asia for Research, Development and Training Related to Nuclear Science and Technology, also known as “ARASIA.” Established in 2002 under the auspices of the International Atomic Energy Agency, ARASIA provides a forum for Arab nations to cooperate in formulating nuclear research, development and training initiatives – not only for nuclear energy production, but also for other applications of nuclear technology such as medical testing. ARASIA hosts training courses on nuclear technology and safety issues, and participates in a range of research projects. In joining ARASIA, Oman takes it place alongside fellow members Iraq, Jordan, Lebanon, Saudi Arabia, Syria, the United Arab Emirates and Yemen.

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Oman and India to Launch Joint Investment Fund

Oman has a long tradition of fostering mutual cooperation and trade with its neighbors, and in recent years has taken major steps to further integrate the Omani economy into the global economy, such as joining the World Trade Organization and entering into bilateral free trade agreements with the United States and with Singapore.

This month the Sultanate unveiled a new initiative to further its policy of economic integration, signing an agreement to set up a US$100 million joint investment fund with India.  The State General Reserve of Oman and the State Bank of India each shall contribute half of the investment fund’s capital.  The fund will be used to finance projects in a variety of sectors, including tourism, healthcare, telecommunications and general infrastructure projects in both countries.

The signing of this agreement marks an important milestone for the Sultanate, and even could offer a glimpse into the future, showing that not only trade but also direct investment increasingly may be conducted through international arrangements.

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M&A in Oman

Economic climates characterized by rapid change, whether expansionary or contractionary, tend to be accompanied by a surge in merger and acquisition (“M&A”) activity.  M&A transactions offer companies a way to expand their businesses much more quickly than they would be able to solely through organic growth.  Some companies seek this rapid growth to ride the momentum of a business that is prospering, or to bulk up in order to compete at a regional or global level; other companies, such as those that were hit hard by the global recession, have looked to M&A transactions as a way to stay afloat by consolidating operations.

Although M&A transactions, as strategic investment decisions, are driven mainly by financial and operational considerations, there are also a wide range of legal issues that come into play when companies evaluate and execute M&A deals.  For this reason, it is crucial for companies considering mergers or acquisitions to work closely with legal advisors.  This article provides an overview of two of the most critical legal aspects of M&A transactions in Oman: regulatory compliance and transaction structure.

Regulatory Compliance

The key starting point for an M&A transaction is to make sure the transaction is permitted by law.  In Oman, M&A deals can occur only with the prior approval of the relevant Government authorities.  Depending on the characteristics of the companies participating in the M&A transaction (e.g., whether they are listed) and the line of business in which they operate (e.g., banks, investment companies, or insurance companies), the relevant Government authorities may include the Ministry of Commerce and Industry, the Capital Market Authority or the Central Bank of Oman.

The process of evaluating whether an M&A transaction is permitted also involves an examination of the types of participating companies involved, as well as those companies’ constitutive documents.  For example, certain types of companies may have   shareholding restrictions mandated by law or by their respective articles of association triggering the need for additional approvals.  In the preliminary stages of the transaction, the companies’ legal advisors would examine these issues as part of the “due diligence” review process.

Transaction Structure

Under Omani law, a merger can be effected either by incorporation or through consolidation. A merger by incorporation would entail the dissolution of the merging (i.e., target) company and its incorporation into the incorporating (i.e., acquiring) company. This structure would follow the two-step procedure of (i) evaluating the merging company’s assets and (ii) increasing the incorporating company’s share capital by the net value of the merging company’s assets. The increased capital would be issued as shares to the shareholders of the merging company in proportion to their shareholdings.

A merger through consolidation is effected by the dissolution of both of the merging companies and the formation of a new company which will be capitalized by the net value of the assets owned by the two merging companies.  Each merging company will be allotted shares in the new company in accordance with its contribution to the capital, which will cascade down to its shareholders in proportion to their shareholdings.

Omani law sets out the methodology for the evaluation of the assets of the merging companies and other legal requirements governing mergers. The merger must be entered provisionally in the Commercial Register, subject to a three-month waiting period, and the merger must be announced in two daily newspapers over two consecutive days. During the three-month waiting period, any of the merging company’s creditors may file an objection to the proposed merger. A creditor’s objection will cause the merger to be suspended until one of the following occurs:

• the creditor waives his rights;
• the debt is discharged or sufficiently guaranteed; or
• the Commercial Court dismisses the creditor’s objections.

If there is no objection by a creditor during the three-month waiting period, the entry of the merger in the Commercial Register becomes effective.  Following the merger, the incorporating company will assume the liabilities of the merging company, in the case of a merger by incorporation, and the newly formed corporation will assume the liabilities of both merging companies, in the case of a merger through consolidation.

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