In recent years Oman’s financial sector has experienced fast-paced growth, including the introduction of new types of investment vehicles. One prominent development, which we have covered in past posts, was the launch of the first Omani private equity fund early in 2011.
Our previous articles on private equity funds focused principally on Oman’s legal framework for the regulation of investment funds. In particular, we cited several key areas in which the government authorities could do well to revisit certain provisions – which appear to have been drafted with traditional mutual funds in mind – and tailor them more closely to the unique characteristics of private equity funds.
This month, we turn to a topic that investors are more likely to encounter first-hand: the prospectus and the articles of association, which are the two key legal documents of an Omani private equity fund (a “Fund”).
The prospectus
The prospectus is an informational booklet about the Fund that the Fund’s sponsors prepare and distribute to potential investors prior to launching the Fund and accepting subscriptions from investors. The purpose of the prospectus is to provide potential investors with all of the relevant information about the Fund that the investors would need in order to make a properly informed decision about whether to invest in the Fund.
The Fund’s sponsors tend to view the prospectus as a marketing tool as well as a disclosure document. As such, prospectuses are sometimes glossy documents with ornate graphics and diagrams that make them resemble a cross between a sales brochure and a legal document. However, whether the prospectus’ format is plain or glitzy, its contents are required under Omani law to be fulsome, accurate and objective. Pursuant to the Executive Regulations of Oman’s Capital Markets Authority (“CMA”), the Fund’s prospectus (and any other promotional materials) must be approved in advance by the CMA. The Executive Regulations also contain an explicit prohibition against false or misleading advertising of a Fund, providing that “any contact or disclosure to market investment units shall disclose all facts and information pertaining thereto without exaggeration.”
The prospectus will typically contain, inter alia, the following key information about the Fund:
• A summary of the Fund’s legal and administrative structure, including the Fund’s legal relationship with the sponsor launching the Fund and the investment manager that will carry out the Fund’s investments;
• Details of Fund’s financial structure, including the framework under which investors will contribute capital to and receive returns back from the Fund; the Fund’s accounting policies and procedures; and the fee structure for the investment manager that runs the Fund;
• A description of the Fund’s investment approach, including its investment strategy, investment policy and investment processes;
• A profile of the investment manager that will operate the Fund, including a profile of the investment manager as an organization and details of the investment manager’s executive team members and their relevant experience; and
• Details of the Fund’s corporate governance structure, including the respective legal rights and responsibilities of the investors, the investment manager, and any relevant parties with respect to the governance of the Fund as a legal entity.
The articles of association
The articles of association (“AoA”) are the Fund’s constitutive legal document. The AoA is the ultimate source of legal authority over the governance of the Fund (subject, of course, to Omani law). Often, the AoA will come into play with respect to significant structural and governance issues which the Fund might confront – for example, a change in the Fund’s investment objectives, the Fund’s policies around investor redemption, or even liquidation and dissolution of the Fund.
AoA terms can vary significantly from one fund to another, but all Omani funds are required to include in their AoA certain core terms prescribed by the CMA, such as:
• Name, form, capital, and official currency of the Fund;
• Constitution of the management of the Fund;
• Investment objectives of the Fund;
• Method and frequency of transfer, issue and redemption of Fund units (if applicable);
• Procedures for dissolution and liquidation of the Fund; and
• Commencement and end of the Fund’s financial year.
Monday, February 6, 2012
Private Equity Funds – The Prospectus and the Articles of Association
Thursday, March 3, 2011
Legal Developments in Oman - March 2, 2011
Audit Committees
The Commercial Companies Law requires the board of directors of an Omani joint-stock company to form various committees from among its members to discharge some of the board’s delegated functions.
One such committee is the audit committee, which a publicly listed joint-stock company (an “SAOG”) is required to have. The composition and functions of an SAOG’s audit committee are prescribed by the ‘Rules on the Constitution of Audit Committee’ published by the Capital Markets Authority.
Composition and Purpose of the Audit Committee
The audit committee must consist of at least three non-executive members of the company’s board of directors – i.e., directors who are not salaried employees of the company. A majority of the audit committee members, including the chairman of the audit committee, must be independent directors – i.e, they and their first-degree relatives must not have occupied a senior post in the company (such as Chief Executive Officer or General Manager) over the past two years. At least one member of the audit committee must have financial and accounting expertise.
The purpose of the audit committee is to assist the board in ensuring the:
• reliability of financial reporting;
• effectiveness of internal controls; and
• legal and regulatory compliance.
The board decision appointing the audit committee should, inter alia, specify the terms of reference for the committee’s functioning, the location and quorum requirements for the committee’s meetings, and the methodology for the committee’s execution of its responsibilities.
The audit committee should specify in its charter for the board’s approval its objectives, membership, powers, responsibilities and liabilities, and the remuneration of its members.
Functions of the Audit Committee
An audit committee’s predominant function is the oversight of financial reporting and internal disclosure mechanisms within the company. This is why the Capital Market Authority requires audit committee members to be non-executive (and majority-independent) directors: an independent audit committee significantly enhances internal controls, the financial reporting process and corporate governance.
Additionally, the audit committee may also carry out related functions such as supervising the company’s regulatory compliance and business ethics, and developing independent reporting mechanisms that help the company detect and combat fraud and financial irregularities.
As described below, the CMA Rules delineate the functions for an audit committee and the specific responsibilities within each function.
External audit functions include:
• Recommending external auditors and overseeing their terms of engagement, independence, qualifications, and performance; and
• Reviewing the external audit plan and ensuring for the external auditors the accuracy and completeness of, and access to, documentation.
Internal audit functions include:
• Oversight of the internal audit plan and the performance of internal audit function and its efficacy; and
• Monitoring the adequacy of internal control mechanisms by analysing periodic reports generated by the auditors.
Financing reporting functions include:
• Developing a financial reporting system to detect financial irregularities and fraud based on best practices in accounting policies and principles;
• Monitoring any change in accounting policies and any significant departure from international accounting standards or non-compliance with the disclosure requirements prescribed by the CMA;
• Ensuring the accuracy of financial reporting generally and the accounting principles adopted; and
• Reviewing quarterly and annual financial reports and, in particular, the qualifications in the draft reports.
Corporate governance functions include:
• Serving as the liaison among the board of directors, external auditors and internal auditors and financial management;
• Reviewing risk management policies and practices;
• Reviewing proposed related party transactions and making appropriate recommendations to the board; and
• Formulating rules for small value-related party transactions without requiring the prior approval of the board or the audit committee.
Finally, many private companies also have audit committees that perform many of the same functions as public company audit committees. Although the Capital Market Authority’s ‘Rules on the Constitution of Audit Committee’ are not mandatory for companies that are not publicly listed, these rules represent the type of robust audit framework that every company should have to ensure strong and effective internal controls and financial integrity.
