Monday, September 27, 2010

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.


Monday, September 20, 2010

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.


Monday, September 13, 2010

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.


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.


Wednesday, September 8, 2010

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.


Friday, September 3, 2010

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%.


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.