A legal opinion is an opinion expressing legal conclusions about and/or legal analysis of a transaction or matter.
The main purposes of a legal opinion are:
However, a legal opinion is not a substitute for legal advice which, in a transactional context, is likely to be more extensive.
Legal opinions can be given in a variety of circumstances. In a banking transaction, delivery of a legal opinion will often be a condition precedent to, for example, the advance of a loan.
Typical scope
Although legal opinions will vary in scope they are, in many respects, fairly standard. Typically, they will address issues such as:
Typical focus
Legal opinions are generally required by banks, to reassure them that the legal effect of a lending transaction is as they suppose. Consequently, they will focus on whether the transaction documents:
Legal opinions will not focus on whether the transaction documents bind and are enforceable against the non-obligor finance parties, such as the banks, any facility agent or any security trustee. This applies regardless of the jurisdiction of incorporation of a finance party.
In transactions or matters involving only one jurisdiction, the bank may require only one legal opinion, typically an opinion from the lender's lawyers. In some cases, an opinion may be obtained from in-house counsel of the borrower. The advantage of an opinion from in-house counsel is that they may be prepared to cover issues not usually opined on by external lawyers (for example, litigation or non-conflict with obligor's contracts).
If the transaction involves several jurisdictions, there will usually be a legal opinion from each jurisdiction, for example, the jurisdiction of incorporation of each of the obligors from the obligors’ lawyers and the jurisdiction of the governing law of the transaction documents from the lender’s lawyers.
Wednesday, December 26, 2012
Legal Opinions in Banking Transactions
Tuesday, December 18, 2012
Settlement Talks and Negotiations
A little-known fact of Omani law is that the jurisdiction has no concept of “without prejudice” negotiations. Interestingly, despite this fact, lawyers and/or litigants in the Sultanate do sometimes have “off the record” discussions with a view to a possible settlement. This normally happens when there is a high level of trust between the lawyers or litigants in question.
The problem, however, is that either lawyer or litigant could then write to his or her counterpart, thanking the latter for the offer which had been made. This may lead to a scenario where the Omani Courts are asked to infer that an admission of liability has been made.
In other jurisdictions, it is accepted that parties sometimes make a settlement offer even when they believe they are not liable at all. The offer might be made simply to negate the management time and lawyers’ fees otherwise incurred. When offers are made in this way, they are often termed “nuisance value offers”.
For claimants, the position is somewhat easier than for defendants. Under Omani law, the losing party in a court case is unlikely to have to pay more than RO 100 towards the winning party’s legal costs. This means that claimants can claim a large amount and, if their claim fails, they suffer hardly any impact. However, the situation is naturally somewhat different if the defendant files a sizeable counter-claim, because this could lead to the claimant having to pay a large sum to the defendant.
Claimants can also feel comfortable in Oman sending a letter which contains their time-limited offer to settle. They can write to the counter-party, saying that they have a claim of, say, RO 750,000, but adding that they will accept RO 500,000 provided the latter sum is received within, say, 21 days of the date of the letter. The Claimant will also state in the letter that the time-limited offer constitutes a mere suspension of their full legal rights, and that they will revert to claiming the full RO 750,000 if the RO 500,000 is not paid within the requisite 21 days.
To conclude, extreme care must be taken in Oman as regards settlement talks and negotiations. This is of course especially true when the quantum of the claim is high.
Tuesday, December 11, 2012
Branch Offices in Oman - Cancellation of Commercial Registration
Many foreign companies looking to establish a legal presence in Oman to perform a contract with a government entity (or a government controlled entity) will opt for the establishment of a branch office in Oman.
It is important to note that a branch office can only be established if the foreign company has a contract with a government entity (or a government controlled entity). If the foreign company has a contract with a private sector entity, it will not be possible for the foreign company to establish a branch in Oman to perform such contract. Moreover, the foreign company needs to submit a written undertaking confirming that it shall be responsible for any liabilities of the branch office.
The main advantages of establishing a branch office (instead of an Omani company with a local partner) to perform a limited duration government contract are that there is no need for a local partner, there are no minimum capital requirements, the administrative and procedural requirements are minimal, the tax treatment is the same as with respect to other types of legal entities in Oman and a branch is 100 percent owned and managed by the foreign company (since this is basically treated as the Omani office of the foreign company and does not have a separate legal existence).
Since the establishment of a branch office is linked to a contract with a government entity (or a government controlled entity) the tenure of a branch office is also restricted to the terms and duration of the contract. The commercial registration of a branch office may be extended if the contract is extended for further periods or if the foreign company is awarded another government contract for a longer duration.
In this respect, it has been noticed that once the government contract has been duly performed and full payment for the services has been received, the foreign companies will often close the branch office without formally cancelling the registration of the branch at the Ministry of Commerce and Industry. One reason for this practice could be that the commercial registration of the branch is only valid until the date of completion of the contract and once this date has passed the foreign companies do not consider that any additional steps are required to be undertaken.
Although the registration of the branch with the Ministry of Commerce and Industry may already have expired, as a matter of good corporate governance, steps should always be undertaken to ensure that the commercial registration of the branch is formally cancelled at the Ministry of Commerce and Industry.
Moreover, the registration of a branch office with the Ministry of Commerce and Industry also triggers the requirement of registering the branch at the Secretariat General of Taxation at the Ministry of Finance. Accordingly, it is important to ensure that the Secretariat General of Taxation is also informed about the closure of the branch. In fact, a no objection certificate will be required to be given by the Secretariat General of Taxation (addressed to the Ministry of Commerce and Industry) confirming that it has no objection to the cancellation of the commercial registration of the branch and that there are no tax liabilities associated with the branch.
Furthermore, at the time of the registration of the branch, an authorized signatories form is also required to be filed with the Ministry of Commerce and Industry indicating the names, signatures, authority limits and financial powers of the authorized individuals (normally officers of the foreign company). The mere expiry of the branch’s commercial registration does not necessarily mean that the authorized signatories of the branch will not be able to use their powers any more and that the foreign company will no longer be liable for the actions of such authorized signatories.
Therefore, the formal cancellation of the commercial registration of the branch is also important to ensure that there are no continuing (tax or other) liabilities for the foreign parent company (or the individuals who are registered as authorized signatories of the branch) in Oman.
Wednesday, December 5, 2012
Islamic Banking: Shari'a Governance
One of the first matters to be addressed as the Sultanate of Oman moves to implement Islamic banking is Shari`a governance within Islamic banking institutions (i.e., full-fledged domestic Islamic banks, Islamic windows of conventional domestic banks and Islamic banking branches of foreign banks, which are referred to as “Licensees”). Shari`a governance is a subset of the general obligations and corporate governance framework and includes a range of topics that are particular to Islamic banking activities.
This article addresses a subset of those Shari`a governance matters, specifically certain matters pertaining to Shari`a supervisory boards (each an “SSB”) and related Shari`a governance entities and mechanisms. These topics are addressed in Title 2 (“Title 2”) of the proposed Islamic Banking Regulatory Framework of the Central Bank of Oman (the “CBO”), Version 2.0, of March 2012 (the “IB Framework”).
As a notable general position, the IB Framework makes reference to, and encourages (but does not seem to mandate) adoption of and adherence to, various guidelines of the Islamic Financial Services Board (“IFSB”). The explicitly referenced IFSB guidelines include the Basic Professional Ethics and Conduct for Members of the Shari 'a Board pursuant to the Guiding Principles on Shari 'a Governance Systems for Institutions Offering Islamic Financial Services (December 2009), the Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial Services (December 2009), and the Guiding Principles on Corporate Governance for Institutions Offering Islamic Financial Services (December 2006).
Under the IB Framework, the required Shari`a governance structure is implemented by mandating each Licensee to (a) provide, in its memorandum and articles of association, for the conduct of its business in accordance with Islamic Shari`a principles, (b) establish and maintain systems and controls to ensure Shari`a compliance of its operations and business activities (in addition to the normal compliance requirements), (c) appoint an SSB to oversee operations from a Shari`a compliance perspective and prepare and present an annual Shari`a compliance report to the Licensee’s Board of Directors, and (d) implement a system of Shari`a governance as specified in Title 2.
The Shari`a governance system is the “hallmark and the differentiating factor for Islamic Banks and Islamic Windows which sets them apart from their conventional counterparts”. Its critical elements are (i) the SSB, (ii) the Internal Shari`a Reviewer, (iii) the Shari`a compliance unit and the Shari`a audit unit. The ultimate responsibility for ensuring Shari`a compliance, and the implementation of the required governance systems, lies with the Licensee’s Board of Directors (“Board”), although both the SSB and management have related responsibilities.
Constitution of SSBs
In other words, the restriction on the employee’s right to compete should be no greater than what is necessary and lawful to protect the employer’s business interests.
Licensees must establish their own independent SSBs, although there is a limited outsourcing exception for small institutions as approved by the CBO. Foreign banks must demonstrate to the CBO that their SSB satisfies the requirements of Title 2.
Each SSB must be comprised of at least three Shari`a scholars, and each scholar must be specialized in fiqh al-mu’amalat (Islamic commercial jurisprudence). An SSB may also include one or more non-voting members who are not specialized in fiqh al-mu’amalat but have expertise in Islamic banking or related areas, such as finance, economics, law, accounting or the like and possess basic knowledge of fiqh al-mu’amalat.Licensees are encourage to the use of Omanis on SSBs and to encourage the development of relevant Shari`a expertise among Omanis. These provisions are supplemented by provisions that allow the SSB to consult with outside experts in appropriate circumstances on a case-by-case basis. As a general admonition, the IB Framework indicates that SSB members should come from diverse backgrounds in terms of areas of expertise, qualifications and experience in order to enhance the depth and breadth of Shari`a deliberations and, additionally, should be familiar with the domestic legal and regulatory environment and sensitivities of the Sultanate of Oman.
The IB Framework contains a number of required qualifications (“fit and proper” standards) for SSB members. Most are stated as general requirements, without specific standards. All members must be of respectable character and be of good conduct, particularly in terms of honesty, integrity and reputation in their professional business and financial dealings. SSB members must be Muslim. It is unclear whether this applies to only Shari`a scholar members or also non-scholar members. The rationale for allowing non-scholar expertise with respect to professional matters to be brought into the SSB on a non-voting basis (as noted below, and subject to the conditions noted below) supports an interpretation that such expertise should be sought at the highest and most refined levels, without regard to affiliation restrictions. This matter will be left to future clarification.
SSB members with a Shari`a background must be holders of academic qualifications in the field of Shari`a (a minimum of a bachelor’s degree) that includes the study of usul al-fiqh and fiqh al-mu’amalat from “a recognized institution” (an undefined phrase). Those members must also demonstrate “an adequate understanding of finance / banking in general and Islamic finance / banking in particular” as well as an understanding of the legal and regulatory frameworks applicable to the functions of the Licensee. Shari`a scholars must have accumulated overall experience of ten years or more (in teaching, research, issuance of fatawa and similar matters). And they must demonstrate a strong proficiency in Arabic. It is also recommended that they have reasonable understanding of English.
SSB members other than Shari`a scholars must be individuals generally recognized for their expertise in their respective field (e.g., banking, finance, economics, law, accounting, etc.). They must hold at least a master’s degree. Non-scholar members must have accumulated relevant experience of 15 years or more in the relevant field. These non-scholar members should demonstrate reasonable proficiency in English, and it is recommended that they have some understanding of Arabic.
The IB Framework provides for disqualification of an individual from SSB participation for a range of “for cause” events, including (a) cessation of good character and reputation or a position of respect among one’s peers, (b) failure to attend a substantial number of meetings without reasonable excuse (currently, 75%), (c) association with any unethical or illegal activity, including contravention of any of the requirements and standards of the financial, banking or corporate regulatory system, (d) conviction of any criminal offense, including financial impropriety or moral turpitude (except misdemeanors), (e) dismissal as an employee or director from any entity on the grounds of fraud, misrepresentation or breach of trust, (f) use of confidential and privileged information about the Licensee or its clients obtained as a result of his position in a manner that is detriment to the competitive interests of the Licensee in the market place (but, apparently, not if otherwise in contravention of confidentiality requirements), or (g) assumption of membership in the SSBs of two or more competing financial institutions in Oman.
With regard to clause (g) of the next preceding paragraph, and as noted above, no SSB member can be on the SSBs of more than one competing institution in Oman. However, an SSB member can be on the SSBs of more than one non-competing institutions. The example provided in the IB Framework is that an Islamic bank SSB member can also sit on the SSB of a takaful company or an Islamic fund management company. However, no SSB member can be on the SSBs of more than four institutions in Oman.
The SSB is appointed by the Licensee’s shareholders upon the recommendation of its Board. The IB Framework does not address situations in which a foreign bank might have a different method of SSB appointment. An SSB member may be appointed for a maximum initial term of three years, and can serve one consecutive renewal term of three years on that SSB.
Roles and Responsibilities of SSBs
The SSB is entrusted with the duty of directing, reviewing and supervising the Licensee’s activities in order to ensure Shari`a compliance. The SSB is obliged to issue fatawa in respect of matters considered by it, which fatawa shall be determined by majority vote of the SSB’s Shari`a scholars and are binding on the Licensee.
The SSB’s scope of work is prepared by the Licensee and approved by its Board and is set forth in a charter. The charter must address a range of matters, including, at a minimum, (a) its purpose, (b) the membership and composition of the SSB, (c) the SSB’s chairperson and secretary, (d) grounds for removal and replacement of SSB members, (e) responsibilities and authority of the SSB, (f) meetings, agenda, quorum, voting, minutes and procedural requirements, and (g) amendment matters.
The responsibilities of the SSB include, without limitation: (i) advising the Board and management on Shari`a matters in the Licensee’s day-to-day business; (ii) review and approve all policies, procedures, products, processes, systems and contracts as to their Shari`a compliance, each to be subsequently ratified by the Board; (iii) review and approve products and related documentation, including structures, contracts, marketing and implementing materials; (iv) performance of follow-up to ensure compliant implementation of products; (v) review and approve Shari`a compliance and Shari`a audit functions; (vi) provision of guidance regarding Shari`a compliance to legal counsel, external auditors and other related parties; (vii) provision of written fatawa on relevant matters brought to it through the Internal Shari`a Reviewer or taken up by the SSB itself; (viii) submission to the Licensee’s Board of an annual Shari`a compliance report that addresses the rather detailed matters, and satisfies the standards (including the detailed opinion standards and requirements), set forth in the IB Framework, and (ix) development and implementation of annual training programs for SSB members regarding deficiencies in knowledge regarding banking, finance, economics or other related disciplines for SSB members with Shari`a background and Shari`a-related knowledge for SSB members who are experts in their respective fields but do not have adequate knowledge of Shari`a.
The report’s opinion paragraph included in its annual report (clause (viii) above) must address a variety of matters as specified in the IB Framework. These include whether the SSB has examined, “to a reasonable extent on a test-case basis, each class of transaction, the relevant documentation and procedures”. As one might expect, the opinion must also state, whether, in the SSB’s opinion, the affairs of the Licensee have been carried out in accordance with the rules and principles of Shari'a, the CBO's regulations and guidelines regarding Shari`a compliance and other rules as well as with specific fatawa and rulings issued by the SSB from time to time. The opinion must also address whether, in the SSB’s opinion, the allocation of funds, weightages, profit sharing ratios, profits and charging of losses (if any) relating to investment accounts conform to the basis given by the SSB in accordance with Shari`a rules and principles and whether there has been income from prohibited sources. Obviously, flesh will be put on these bones in the future.
The SSB is required to define the key elements to be evaluated while reviewing and approving a new product. These key elements establish the basis for developing the relevant product prior to its final presentation to the SSB for approval. Key elements pertain to, at a minimum, essential features of the product, processes, structure, documentation (including legal contracts), risk and compliance considerations, marketing, collateral and other necessary details. New product development must include an opportunity for the expression of views by, among others, internal and external auditors, lawyers and others involved in the process. The SSB will determine a product’s Shari`a compliance in the context of relevant fiqh literature, evidence and reasoning.
The IB Framework requires the SSB to report to the Board, non-compliant activities that it has “reason to believe” [are being] carried out in a systematic manner by the Licensee. If those activities shall continue, the SSB is required to inform the CBO and report such violations in its annual Shari`a compliance report. It is likely that the “reason to believe” and “systematic manner” qualifications will give rise to the need for further clarification in the future.
The SSB is required to issue fatawa and guidelines relating to products and bank functions. These are required to be maintained as central reference tools, be disseminated to Licensee employees, and be published in the annual Shari`a compliance report.
The IB Framework outlines a system for the protection of confidential, privileged and sensitive information made available to the SSB. This information may pertain to, among other matters, new product development and transactions, SSB and management decisions, matters presented to the SSB, discussions and deliberations of the SSB, Licensee client information under the banking laws, and matters so designated by management.
Fiduciary Duty and Conflict of Interest Provisions
A welcome development in the IB Framework, although one likely to give rise to some spirited discussion, relates to the considerable array of provisions that are designed to address fiduciary duties, conflicts of interest and related matters involving SSB members. These are defined as obligations to all of the Licensee and its stakeholders, the general public and the industry. Some of those have been previously discussed and relate to prohibitions on SSB members acting on the Shari`a boards of more than one competing institution or more than four institutions in Oman. Others require fairness, objectivity and independent functioning by the SSB members, in both substance and appearance, free from conflicts of interest, and the members are required to continually assess that status.
In a move toward the development of more stringent professional responsibility standards than are seen in most jurisdictions, the IB Framework addresses situations involving even the appearance of impropriety. For example, SSB members shall not have (a) any relationship with the Licensee that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of a member’s independent judgment when delivering fatawa and rulings or (b) any relationship that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of independent profession judgment. These are strong standards, and constitute a strong move toward a code of professional conduct and professional responsibility for SSB members. It will be interesting to see how these requirements are given definition. Some definition is provided by the IB Framework’s restrictions on employment, board positions, relationships (including those with family members of, and stakeholders of, the Licensee) and managerial and operation responsibilities that are expressly specified. More detail will undoubtedly be forthcoming as the framework is implemented.
The Board is required to undertake annual checks on the independence and conflicts of interest of SSB members as well as their annual performance and report the results to the Central Bank of Oman. The SSB members are made solely and personally responsible for their own work as members of the SSB. Notably, the SSB members are admonished to “appreciate the diversity of opinions among various mainstream schools of thought and differences in expertise among the fellow members” of the SSB.
In the event of an actual or potential issue of independence impairment, SSB members are obligated to document the issue, review and address the issue with the SSB, and, if the issue is unresolved, resign from the SSB and take the issue to the Licensee’s General Assembly. This is yet another step toward a strong professional conduct and responsibility framework. How it will be implemented is yet to be determined.
Management Responsibilities to SSBs
SSB members are required to enable and assist the Licensee’s management by providing advice and guidance regarding Shari`a compliance. Management, on the other hand, is responsible for observing and implementing SSB fatawa, rulings and decisions, and making them available to those who have implementation responsibilities and to other stakeholders. It is obligated, on a timely basis, to disclose information and provide necessary informational access to the SSB through the Internal Shari`a Reviewer (or risk Board penalties). Management is obligated to allocate adequate resources (including people, systems and processes) to support the Shari`a governance framework.
In instances of non-compliance with the Shari`a requirements, the management is obligated to take remedial action, including notification of the Internal Shari`a Reviewer and the SSB, cessation of new business relating to the non-compliance, and acting on the remedial and preventative advice of the Internal Shari`a Reviewer and/or the SSB. These are commendable steps toward strong professional conduct and a professional responsibility system, but these steps leave a broad range of unaddressed questions.
Conclusion
The Shari`a governance system that is to be implemented in the IB Framework is already the subject of considerable, and spirited discussion in the Islamic finance, banking and investment industry. It will certainly evolve as it is given greater form and substance. All are urged to participate in the on-going discussions as this is a fundamental, and forward looking, centerpiece of the Islamic banking governance package that the CBO desires to implement.
