Legal Updates - April 4, 2016

Capital Market Authority Decision No. 2016/2 – Amending the Regulation of Capital Market Authority Law

This decision was issued on 25 February 2016. It amends the Regulation of the Capital Market Authority Law by formalising the requirement for a listed company to disclose the initial quarterly unaudited financial results in addition to the annual, as opposed to just the initial annual unaudited financial results as set out in the original legislation. It also reduces the period of time allowed to disclose the results from thirty days to fifteen days.

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The Board of Directors' Report

To help ensure the effectiveness of the internal regulations of management of public joint stock companies in Oman, the Capital Market Authority (“CMA”) issued Administrative Decision 4/2002 which requires the board of directors of public joint stock companies to produce a directors’ report for each financial year.

The directors’ report provides an opportunity for the shareholders to review inter alia the company’s performance as well as fiscal information for the past year and to better understand the direction the business will take in the future.

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Insider Trading

The term ‘insider trading’ typically evokes images of nefarious plots and shady dealings. And indeed, illicit insider trading often fits that description. However, it is important to recognize that legal forms of insider trading also exist, whereby the insiders of a company are allowed to trade in the securities of the company entirely within the parameters of the law.

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Corporate Governance Law Update: Changes to Definition of 'Independent Director'

The Code of Corporate Governance issued by the Capital Market Authority was recently amended to redefine the terms ‘independent director’ and ‘related party’ in public listed companies.

While this amendment largely preserves the definition of ‘related party’ with minor changes, the definition of the ‘independence’ of an independent director has been changed significantly.

The earlier definition of independent director construed the term quite liberally; only persons who had held a senior position in the company during the preceding two years and persons who had entered into financial transactions with the company or its affiliates were excluded from holding the position of ‘independent’ director. Moreover, a 2002 clarification issued by the CMA had also made it possible for shareholders and shareholders’ representatives to become independent directors. This latter step naturally resulted in some tension with the principle of having an independent director on the board to impart an objective and unbiased standpoint without being clouded by real or perceived conflict of interest.

The recent amendment to the Code of Corporate Governance has significantly tightened up the definition of ‘independent director’ with the aim of improving corporate governance and better protecting shareholders’ rights and interests. The new definition requires that an independent director must enjoy complete independence from the company and contains an array of exclusions to prohibit persons with potential vested interests from holding the position of independent director. The new definition of ‘independent director’ excludes, inter alia, (i) shareholders holding more than 10% of the shares of the company or its affiliates and (ii) representatives of a shareholder holding more than 10% of the shares of the company or its affiliates, from holding the position of independent director.

Companies impacted by this amendment would be well advised to seek legal assistance to better understand the implications of the amendment for the composition of their Board of Directors and Audit Committees.

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Private Equity Funds – The Prospectus and the Articles of Association

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.

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Islamic Insurance Comes to Oman

Several months ago, in a ground breaking development, His Majesty Sultan Qaboos bin Said approved the establishment of Oman’s first Islamic bank. As the government authorities continue to work through the implementation of His Majesty’s instructions, it is becoming clear that changes and new opportunities are in store not only for the banking sector, but also for related financial sectors such as insurance.

Following His Majesty’s broad-based royal directive, many of the details of implementation have been carried out by government authorities such as the Capital Market Authority (CMA) and the Central Bank of Oman (CBO). For example, the local press recently reported that the CMA had issued important guidance in respect of Islamic insurance, or takaful. The CMA stipulated that conventional insurance companies would not be permitted to run takaful operations in the Sultanate alongside their conventional insurance businesses; any company wishing to offer takaful would be required to convert to a dedicated takaful company, or to open a new dedicated takaful entity.

This article provides a brief overview of takaful, as a basic primer on the Islamic insurance sector.


Insurance with Islamic principles

Essentially, takaful is designed to provide the same benefits to subscribers as conventional insurance –coverage against unexpected or catastrophic losses – while scrupulously adhering to the principles of Sharia (i.e., Islamic religious law). In particular, takaful is structured to comply with the core Sharia tenets prohibiting interest or unjust enrichment (riba), discouraging ambiguity in contractual terms (gharar), and minimizing the speculative nature of transactions (maysair).

Application of these principles to ‘takaful’ structures

In practice, there are two main ways that a takaful insurance scheme follows Islamic principles.

First, the takaful structures itself as a mudaraba (i.e., profit-sharing venture). The policy contract between the takaful operator (i.e., the insurance company) and the subscribers would specify how any operating surpluses that the takaful runs (e.g., excess of subscriber contributions received over monies paid out on claims) shall be divided between the operator and the subscribers. For example, the contract may state that any surpluses shall go 70 percent to the subscribers, as the providers of capital, and 30 percent to the operator, as the provider of services. This structure helps the takaful scheme avoid falling afoul of the prohibition on unjust enrichment.

Second, the takaful will seek to avoid prohibited elements of uncertainty by structuring its subscriber contributions as tabarru (from the Arabic “to donate, contribute or give away”). Under this concept, payments that the takaful makes on claims by a subscriber would be considered a partial donation by the other subscribers of the capital that they have contributed to the takaful.

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Oman Investment Funds

Over the next several months, we will examine certain provisions of the Omani Capital Market Law (Royal Decree No. 90/98) and the implementing executive regulations (Ministerial Decision No. 1/2009) pertaining to investment funds. The regulations apply to all forms of investment funds proposed to be established in Oman, including, for example, all forms of collective investment vehicles traditionally known as ‘private equity funds’ and ‘hedge funds’. Earlier this year, the first private equity fund in Oman was launched by a local investment company. The fund managers requested the Capital Market Authority (CMA) to waive certain provisions of the executive regulations to bring the fund more in line with general market practice and make it more attractive to investors and money managers.

Problems with a ‘one size fits all’ approach

Without an express waiver by the CMA, the regulations effectively would prohibit activity in one of the most important segments of the investment funds industry ─ traditional private equity funds and real estate funds. One problem which arises under Article 208 of the regulations provides that ’The capital of the fund shall be divided into investment units with equal rights’. Strictly interpreted, this regulation would prohibit the fund from issuing different classes of units with different voting and/or economic rights. For example, it is common in private equity funds to issue ‘side-letter’ agreements which provide certain investors with special voting, economic, exit and/or other rights. The referenced language would not allow such side letters and, as a consequence, would be problematic for fund managers interested in establishing an Oman fund.

The ‘one size fits all’ approach mandating the issuance of units of equal rights effectively ignores the fact that different kinds of funds are operated for different reasons because they can offer portfolio diversification opportunities, tailor-made solutions and higher returns.

Frequently negotiated investor rights and terms

It is standard within the fund industry to structure a fund, for purposes of both fund marketability and governance, so as to attach different rights to different classes of fund units, whereby certain units may carry economic rights only, and other units may carry voting rights only or both economic and voting rights. The spectrum of different economic and voting rights associated with units issued by funds, and the varied characteristics of a class of fund units, are usually the result of intense and prolonged negotiations between the manager and one or more sophisticated investors, where the investors may not subscribe to the fund (and the fund therefore may not launch) in the absence of the negotiated, preferential terms. Such preferential terms might include:

• shorter lock-up periods (or more frequent redemption dates) or commitment periods;
• reduction of management fees and carried interest payments;
• special redemption or excusal rights upon the occurrence of “key person events”;
• enhanced fund reporting and/or valuation requirements, carve-outs to transferability restrictions relating to the fund interest and other rights accommodating tax and/or regulatory issues specifically applicable to the investor; and
• specifically in relation to Omani pension funds acting as investors in funds, such pension funds generally negotiate special rights to accommodate the Omani law requirements that a pension fund invest at least 50% of its assets under management in Oman.

In respect of the recently launched Omani private equity fund, the CMA has demonstrated its willingness to waive the referenced restriction in Article 208 of the executive regulations. An amendment of the regulations to remove the blanket restriction on the issuance of different classes of investments units in a fund by the CMA undoubtedly would provide more certainty to the market and assist in attracting sophisticated investors and money managers to Oman investment funds.

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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.

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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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