Reserve Funds for Omani Companies

To help ensure that Omani companies maintain a solid financial position and are able to withstand shocks to their businesses, the Commercial Companies Law contemplates varies types of legal reserve funds for companies.

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Commercial Guarantor Liability

The basic element of a guarantee as recognised under Omani law is the existence of “offer” and “acceptance” between the guarantor and the creditor. A guarantee is characterised as a commercial guarantee if the underlying debt is commercial in relation to the debtor.

Under the Oman Commercial Code, the guarantors are jointly and severally liable among themselves and with the principal debtor and the creditor may choose to proceed directly against the guarantor or simultaneously against both the guarantor and the principal debtor regardless of whether or not the principal debtor is solvent.

It must be noted, however, that if the creditor brings an action against the guarantor, it is incumbent upon the latter to join in the debtor as a party. Failure to implead the debtor in the suit could leave the guarantor with no right of recourse against the debtor if the debtor has already discharged the debt or if the debtor is able to establish that the claim is a nullity or is time-barred. Similarly, the guarantor is obliged to put the debtor on notice before paying off the debt.

Upon discharging the debt, the guarantor is subrogated to the rights of the creditor and the guarantor will be entitled to ‘step into the shoes’ of the creditor and exercise the creditor’s rights against the debtor. At the time of payment of the debt, the creditor is obliged to deliver all the necessary documents to the guarantor to enable him to enforce the right of recourse against the debtor. If the debt is secured by a mortgage then the creditor must relinquish the mortgage rights in favour of the guarantor. The creditor has a duty to safeguard the securities held to cover a guaranteed debt and the guarantor would be released from the guarantee to the extent any damage or loss has been caused to the collateral due to the creditor’s fault.

The Commercial Companies Law requires explicit authorisation by the Articles of Association or by a shareholders resolution of a company for guaranteeing the debts of third parties that are not granted in the ordinary course of the company’s business. It is always prudent to obtain the shareholders approval before granting corporate guarantees.

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Omani LLCs: The Optimum Approach To Drafting Constitutive Documents

Key features of the Oman LLC - is it the appropriate corporate form for a particular business venture and investor relationship?

An “LLC” is probably in practice the form of limited liability Omani company (whether wholly Omani, or mixed Omani/foreign owned) most frequently chosen by investors for the conduct of business in Oman. The reasons for this choice are typically the lower minimum capital requirement of an Oman LLC, and a perception that an LLC is generally simpler and cheaper to operate, with fewer regulatory requirements, in comparison with an Oman joint stock company (an SAO) (either closed or public).

However, if an LLC is the chosen corporate vehicle, it is important for its founding shareholders to recognise at the outset the key differences between an Oman LLC and joint stock company, to be sure that the LLC form is in fact the optimum form of corporate vehicle for their proposed shareholder relationship and the achievement of the proposed corporate objective. Key LLC features which differ from those of an Oman SAO are as follows:

• a “shareholder”, or more accurately a “partner”, in an LLC should be regarded as having more of a “participating interest” in the LLC than as holding “shares”, since under the Commercial Companies Law promulgated by Sultani Decree 4/74 (the CCL), an LLC’s shares may not be represented by negotiable instruments;
  
• under the CCL, unlike an SAO’s shares, an LLC’s shares are not mortgageable, so an LLC is not an appropriate corporate form if company shares need to be charged to lenders as security for debt finance;


• an LLC’s shares must be fully paid up on subscription, unlike an SAO’s shares, the value of which is only required to be paid as to 50% on subscription with the remaining 50% payable within three years of incorporation;


• the sale of existing LLC shares are subject to a mandatory pre-emptive purchase right of the other partners, which probably cannot be effectively waived in advance of the proposed sale;


• an Oman LLC, by law, may not be managed by a board of directors. The CCL prescribes that an LLC’s management function is divided between managers (i.e., natural persons) appointed in this capacity by the partners, and the partners themselves, with the managers generally responsible for the LLC’s day-to-day management decisions and the partners for the LLC’s more strategic management decisions. Accordingly, if investors wish the company they incorporate to be managed by a board in the manner of a common law limited liability company, an SAO is likely to be a much more appropriate form of Omani company than an LLC. If an LLC is the chosen corporate form, the partners need to be alive to the fact that certain management decisions will need to be approved by a partners’ resolution rather than a decision of the manager(s).

Having said this, if the statutory features of an Oman LLC as described above are considered by investors to be generally appropriate for their purposes, the law applicable to an LLC allows its partners significant flexibility as to the terms on which they contract with respect to the LLC.

An LLC’s corporate agreements - constitutive contract and partners’ agreement

An LLC’s primary corporate document is its constitutive contract which is required to be registered with the Oman Ministry of Commerce & Industry (MOCI). LLC founders often elect to use the MOCI’s standard short form constitutive contract (which contains the bare minimum of corporate terms, e.g. the agreed corporate name, address, capital, partners and their participating interests, objects, etc). In accordance with its terms, the short form contract will be supplemented, where it is silent, by the applicable provisions of the CCL. In addition, LLC founders typically further supplement the short-form constitutive contract by an unregistered partners’ agreement, which may contradict the registered constitutive contract or mandatory provisions of the CCL.

We would not recommend that LLC founders adopt this approach to the incorporation of their LLC for the following reasons. Firstly, the standard terms of the CCL, which will as a matter of law be incorporated into the short-form constitutive contract, may not reflect the founders’ intentions as to their relationship as LLC partners and the operation of the LLC. Secondly, terms of a partners’ agreement which contradict those of a registered short-form constitutive contract, as amplified by the CCL, will not be enforceable. The CCL, although containing some mandatory requirements, allows much greater flexibility to founders as to the terms of their constitutive contract than might be initially thought. Accordingly, contracting on the basis of an expanded and “customised” constitutive contract in the manner permitted by the CCL, together with a partners’ agreement that merely amplifies and does not contradict this form of constitutive contract, is much more likely to provide an LLC’s founders with enforceable corporate contracts on terms which reflect their mutual intentions.

Customising a constitutive contract - key areas where the CCL permits flexibility in constitutive contract terms

As mentioned above, the CCL imposes some mandatory (including some minimum) requirements with respect to an LLC’s constitutive contract. However, the CCL also permits a substantial degree of flexibility as to constitutive contract terms. The following are three key areas in respect of which the CCL permits flexibility, and which can therefore be provided for in a constitutive contract in a manner which reflects the founders’ intentions as closely as the CCL permits.

Partners’ meeting approvals

The CCL prescribes the minimum quorum for an LLC’s partners’ meetings. This minimum quorum can however legitimately be increased in a particular constitutive contract, if the founders wish to ensure that a certain percentage (including 100%) of the “shareholding” is required to constitute a valid partners’ meeting.

The CCL also prescribes minimum percentage approvals for various kinds of partners’ resolutions. Once again, a constitutive contract can legitimately require increased approval percentages for particular types of partner resolutions, if this reflects the founders’ intentions as to partner decision-making.

Partners’ participation in LLC profits and losses and net assets on dissolution

The CCL does not require an LLC’s partners to participate in the LLC’s profits and losses in the same proportions as their capital participations. The CCL merely provides that a constitutive contract may not deprive a partner from any profit/loss participation. Accordingly, under both law and practice, a constitutive contract may specify each partner’s profit/loss participation as agreed by the founders, even down to a very small percentage participation, so long as it does not amount to nil.

Management control

The CCL provides that an LLC’s mangers will be appointed by or pursuant to its constitutitve contract, provided that the same does not contravene mandatory provisions of law. The MOCI’s standard short-form constitutive contract actually names the first managers, incidentally requiring an amendment to the constitutive contract (and thus 75% capital approval) on each change of manager. However, naming the individual managers from time to time in the constitutive contract is not a mandatory requirement of law. A constitutive contract can legitimately be drafted so that, for example, a manager may be appointed either by the partners’ meeting (on majority approval of those attending a quorate meeting) or by the decision of one partner only. As regards dismissal of a manager, the only mandatory CCL provision is that the partners’ meeting cannot be deprived of its statutory right to dismiss a manager. However, once again, providing in a constitutive contract that one partner only may also be so empowered is not contrary to mandatory law. Accordingly, by customising in this way the management provisions of a constitutive contract, it is possible to ensure, if desired, that in almost all circumstances an LLC’s management is within the control of a named partner.

Conclusion

In conclusion, we would recommend the following for investors considering the incorporation of an Oman LLC as the vehicle for their conduct of business within Oman. First, investors should consider whether the statutory characteristics of an LLC as described at the beginning of this article are compatible with their objectives, particularly in terms of their relationship as corporate shareholders/partners. If so, investors should seek to expand on the MOCI standard short-form constitutive contract and additionally customise it to achieve their mutual objectives in a manner permitted by law. In so doing, investors will be ensuring that their mutual agreement regarding the LLC is to the greatest extent possible enshrined in a registered contract which complies with the law, thus rendering its enforceability more certain. Finally, to be enforceable, any additional partners’ agreement should merely amplify matters agreed in the constitutive contract, and in particular should not contradict matters of Oman law as agreed under the constitutive contract.

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Corporate Law Focus - Personal Debts of Members of Commercial Companies

Many companies have a joint ownership structure. Indeed, many types of commercial companies – for example, limited liability companies or joint stock companies – are required by law to have multiple shareholders. However, joint ownership can make matters complicated when an individual shareholder of the company, whose assets include his interest in the company, is pursued by a creditor for personal debts (let us call this creditor the “personal creditor”).

The personal creditor will wish to access any of the shareholder’s assets that it can in order to claim payment of the member’s debts. However, if the personal creditor were able to withdraw the shareholder’s share of a company’s capital, this reduction in the company’s capital could adversely affect the company and its remaining shareholders. Likewise, if the creditor were able to accede to the shareholder’s interest in the company and become a shareholder in the company without the consent of the company’s remaining shareholders, this could adversely affect those other shareholders. Particularly in a privately held company (as opposed to a publicly traded joint-stock company), many shareholders are active in the company’s affairs – voting on key decisions; serving on the board and committees; even participating in day-to-day management – and are very selective about who they want to work with as fellow shareholders.

Fortunately, the Commercial Companies Law does prescribe rules for dealing with these types of issues. The statute provides that:

• A personal creditor may not claim the shareholder’s share in the company’s capital as payment of the shareholder’s debt; however, upon dissolution of the company, the personal creditor may claim as payment the shareholder’s share of the company’s assets remaining after settlement of the company’s liabilities.
• When the shareholder’s interest is in a company other than a joint stock company, a personal creditor may claim payment of the shareholder’s debt out of the shareholder’s share in the company’s profits.
• When the shareholder’s interest is in a joint stock company, a personal creditor may claim payment only out of the shareholder’s share of the declared dividends; however, the personal creditor may also – subject to the company’s articles of association and applicable law – require the public sale of the shareholder’s shares and claim payment of the debt from the proceeds of this share sale.

In addition to these statutory requirements, companies can impose additional requirements – e.g., via the company’s commercial contract or a shareholders’ agreement – to govern such matters as shareholder composition and capital withdraw.

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Commercial Companies Law & Super-Majority Voting Requirements

Under the Commercial Companies Law, a number of corporate actions require approval by a “super-majority” vote – for example, 75% – of the company’s shareholders. (Similarly, some corporate actions require a unanimous vote of the company’s shareholders.)

Super-majority voting requirements can play an important role in protecting the rights of the company’s minority shareholders. Moreover, super-majority requirements can also help to promote the long-term stability of the company and harmony among its shareholders, by ensuring that the key corporate decisions are undertaken only with a larger consensus.

Our article on minority shareholder rights (September 3, 2010) discussed a number of corporate actions for which the Commercial Companies Law mandates super-majority or unanimous shareholder votes. However, there are a number of other important matters which, unless specified in a company’s charter or in a shareholders’ agreement, would be subject to a simple majority vote. Such key areas and actions, for which a company may wish to enshrine super-majority (or unanimous) voting requirements in its charter or in a shareholders’ agreement, include the following:

• approval of the business plan and annual budget;
• merger or acquisition transactions;
• sale or purchase of assets that are material to the business;
• investments in other companies;
• commencement or settlement of legal actions;
• related-party transactions; and
• appropriate distribution of the company’s profits and bonus payments.

We note that while super-majority voting requirements, when prudently used, can promote minority shareholder rights and the stable and harmonious operation of the company, the injudicious or excessive use of super-majority voting requirements can potentially stymie the company’s ability to act nimbly and cause gridlock. We therefore recommend that you consult with legal advisors to help carefully craft the voting requirements in your company’s charter or shareholders’ agreement.

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