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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Raising Counter-Claims in Construction Disputes

With the high level of construction activity taking place in Oman, it is unsurprising that construction disputes sometimes arise.  Because of the size, complexity, and large amounts of money often at stake, many construction disputes require the meticulous attention of legal advisors.

One key aspect of construction disputes that is often overlooked is the potential for a party to raise counter-claims against the initiating party.  For instance, if a general contractor terminates a subcontractor, the subcontractor may bring certain legal claims against the general contractor, such as for costs incurred or work forgone.  However, if the subcontractor brings such a claim, the general contractor itself may have a wide range of counter-claims that it can raise against the subcontractor in a judicial forum, such as for costs incurred as a result of shoddy work or regulatory violations.

Counterclaims may be raised in many types of disputes, but when it comes to construction disputes they often must be raised in accordance with a unique set of procedures.

As readers familiar with the construction sector may know, many construction contracts – for example, the oft-used Oman Standard Conditions of July 1981 (Third Edition) - contain a clause which states that any dispute will be settled by arbitration.  This arbitration clause usually states that, before any arbitration can take place, it is a mandatory requirement that “any dispute or difference of any kind whatsoever” must be referred to the project’s engineer for a decision.  In many Omani construction contracts, the arbitration clause further states that the engineer must give his written decision “within a period of ninety days after being requested by either party to do so….”  It is only after compliance with this step involving the engineer that a party can commence an actual arbitration proceeding.

The type of arbitration clause described above is simple and non-controversial from a claimant's perspective.  Clearly, the claimant should request a decision from the engineer as regards all the claims which the claimant wants to make against the counter-party.

However, the counter-party may not realize that it too should request a decision from the engineer as regards all the counter-claims it would wish to make against the claimant.  Failing to do this could give rise to difficulties for the counter-party when it responds to the claimant's statement of claim during the arbitration proceedings.  In its reply, the counter-party may wish to raise counter-claims.  However, when the counter-party does so, the claimant then may retaliate by arguing that the counter-party has fallen foul of the procedural requirement in the contract’s arbitration clause for obtaining a written decision from the project engineer in relation to any dispute or difference.  The claimant may assert that the arbitral panel has no capacity to hear the counter-claims because the engineer first must make a written decision on those counter-claims before they can form part of the subject matter of the arbitration proceedings.

Accordingly, we strongly advise our clients, who may wish to assert counter-claims in the arbitration, to  seek first an engineer's decision as regards all of those counter-claims.  In this way, we can negate the claimant's ability to argue in the arbitration that the arbitral panel cannot hear, or adjudicate upon, such counter-claims.

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Hot Topic: Solar Energy

Oman, like its GCC neighbors, is well known for its abundant oil and natural gas resources.  What is perhaps less well known is that the Sultanate is also poised to become a leading player in the next great natural resource boom: solar energy. 
  
This article provides background on Oman’s plans and potential for harnessing solar energy.  In a future post, we will discuss some of the important legal issues that may come to the fore as Oman moves ahead in its solar development initiatives.

History
Solar energy has been on the agenda in Oman for quite some time.  The use of solar systems for special industrial purposes – such as powering telecommunications and monitoring equipment in  the Sultanate’s remote desert and mountain areas – dates back to the early 1990s.  More recently, the Government has begun to focus on the potential for large, commercial-scale solar projects, both to help diversify the national economy and to meet growing domestic energy needs.  A comprehensive report on renewable energy issued by Oman’s Authority for Electricity Regulation in 2008 (the “AER Report”) identified solar power as one of the Sultanate’s top prospective energy sources for the coming decades.

Over the past few weeks, we have witnessed the clearest signs yet that Oman’s potential as a solar energy producer soon will be realized.  Oman’s Public Authority for Electricity and Water (the “PAEW”), which is overseeing the formulation of a national strategy for solar energy development, has been working with a consortium of international consultants to determine the size, location, and type of solar technology to be used in Oman’s first large-scale solar power plant.  According to recent press reports, the feasibility study is near completion, and the PAEW soon will announce the details of the project and launch a competitive process for bidders to design, develop, finance, and operate the plant. 

Looking toward the Future
As we await further details of Oman’s solar plans, it is easy to be optimistic about the Sultanate’s potential to be a major producer – and perhaps someday an exporter – of solar energy.  As noted in the AER Report, which analyzed solar radiation data collected over a five-year period, Oman’s solar energy density ranks among the highest in the world.  The AER Report estimated that, theoretically, it would be possible to produce sufficient electricity to satisfy all of Oman’s electricity consumption at present levels by utilizing 280 square kilometers of desert (0.1% of the Sultanate’s total land area) for solar collectors.

Building solar power generation capabilities could yield a variety of benefits for the Sultanate.  First, the bolstering of Oman’s overall energy resources clearly would help to meet growing domestic electricity needs.  Second, the partial fulfillment of domestic energy needs through solar power may allow Oman to export more of its oil and natural gas, which would generate additional revenue.  Third, advancing the development of renewable, environmentally friendly energy sources would allow the Sultanate to take a leadership role in the global community.  And  finally, acquiring expertise in “green” technology may be something that the Omani tourism industry could tap into – hotels featuring eco-friendly technology would nicely complement the stunning natural beauty of their surroundings, and could enhance Oman’s appeal as an upscale, eco-friendly travel destination.

Potential Technologies
According to the recent news reports, it is likely that Oman’s initial large-scale solar projects will utilize some form of concentrated solar power (“CSP”) technology.  CSP systems use a group of mirrors to focus a large area of sunlight onto a smaller collecting surface.  The collecting surface is usually mounted on a tower surrounded by an array of mirrors, or inside a parabolic trough composed of mirrors.  The collected heat is used to turn a heating medium (such as water or molten salt) into steam, which powers a turbine to produce electricity.  An alternative technology is to use photovoltaic cells, which absorb solar radiation and directly turn it into electricity via the excitement of electron particles.

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In the News: Al Mazunah Free Zone

The development of free trade zones across Oman has been a centerpiece of the Sultanate’s plans to diversify the national economy beyond the oil sector by spurring the growth of value-added, export-focused industries such as refining, manufacturing, shipping and logistics. Free zones serve as catalysts for this growth by providing infrastructure (e.g., roads and ports), a streamlined regulatory framework (e.g., fewer visa and entry/exit restrictions) and financial incentives (e.g., income tax and customs duty waivers) that encourage high-end foreign and domestic companies to set up operations. By attracting these companies to Oman and locating them together in a concentrated, business-focused environment, the free zones aim to build an industrial and trade base that will help bring the Sultanate new technology, jobs and sustainable economic growth in higher value-added fields.

The large free zones in Salalah and Sohar are now well-known features of the Omani economic landscape. However, it is a smaller, lesser known free zone that has recently been capturing headlines: the Al Mazunah Free Zone, located in the Dhofar region near the Oman-Yemen border.

The Omani government recently signed an agreement with a Kuwaiti-based company, Golden Hala Trading, to develop the infrastructure for the Al Mazunah Free Zone. Golden Hala, a part of Kuwaiti development conglomerate Jawaharat al Fanar Group, has pledged to invest an estimated 680 million Omani Rials in the project over the next five years, and has already launched an intensive marketing campaign to lure companies to the free zone. Among the generous incentives that the free zone offers companies are a 30-year exemption from income tax, the right to import commodities duty-free, and the allowance of 100 percent foreign ownership. Golden Hala has cited the processing, storage and shipment of produce from the Dhofari agricultural heartland, along with the automobile and industrial vehicle trade, as potential focus areas for the free zone’s growth plans.

With Al Mazunah thus gearing up to take its place alongside Salalah and Sohar as a major industrial hub, Oman’s free zones appear poised to play an increasingly important role in the Sultanate’s economic future and are a sector to watch closely for companies that already do business in Oman and those that seek to do so in the future.

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