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.

Read More...

An Introduction to Equity Capital Markets Transactions

In recent years, the Sultanate has experienced tremendous growth not only of its national economy and physical infrastructure, but also of its financial system. Oman’s capital markets, in particular, have undergone significant development and modernisation since the legislation passed in 1998 to restructure the Muscat Securities Market.

Equity capital markets transactions, such as IPOs and rights offerings, are key events for the companies that undertake them, and such transactions often take on a larger importance to a nation’s economy and financial system. Yet these transactions tend to be shrouded in so much jargon and mystery that they sometimes can be difficult for laymen, and even experienced businessmen, to understand. Our mission in this article, and in the further articles on capital markets transactions in coming issues of the Client Alert, is to explain how these transactions work and why they are important to companies.

This article describes, at a fundamental level, what equity capital markets transactions are and why companies undertake them. Future Oman Blog posts will explore these transactions in further detail.

What is an Equity Capital Markets Transaction?

An equity capital markets transaction is essentially a sale of stock – ownership shares – in a company to investors. Investors buy stock in a company in order to receive a share of the dividends that the company pays out to its shareholders periodically, or in order to make a profit by later selling the stock to another investor for a higher price.

Large investors may also buy stock in a company with the goal of influencing – or even gaining control over – the management of the company. An investor, or group of investors, that acquires a large percentage of the company’s (voting) stock can vote its representatives onto the company’s board of directors and influence the selection of the company’s management. (Note that some companies have multiple classes of stock, with some classes carrying voting rights, and other classes carrying only economic rights such as the right to receive dividends or the right to be bought out at a specified time and price.)

There are different varieties of equity capital markets transactions, categorised according to who is selling the shares (e.g., the company itself, or its existing shareholders) and to whom the shares are sold (e.g., to existing shareholders, to private institutional investors, or to the investing public).

However, the most well-known type of equity capital markets transaction is an initial public offering, or IPO. In an IPO, the company “lists” its shares – that is, makes them tradable on a stock exchange – and creates and sells additional shares of the company to the investing public.

Another common type of equity capital markets transaction is a rights offering. In a rights offering, a company offers each of its existing shareholders the right to buy additional shares in the company at a specified price within a specified time period. (See the May 2010 blog post on rights offerings and their use in meeting Oman’s increased capitalisation requirements.)

Why do Companies Engage in Equity Capital Markets Transactions?

One of the most fundamental needs of any company is capital. A company needs capital in order to function – to fund the costs of starting up the business; to provide a cushion for the company’s finances during temporary gaps in cash flows; and to fund expansion plans such as hiring more workers, building new facilities or making acquisitions.

Companies can raise capital either by selling stock in the company (i.e., issuing equity) or by borrowing money, typically from a bank (i.e., taking on debt). The advantage to taking on debt is that doing so does not dilute the ownership stakes of the company’s existing shareholders. However, the disadvantage to debt is that the company must typically make regular interest and principal payments on the debt, which can be problematic, for example, to young and growing companies that are investing heavily in their business but are not yet generating significant cash flows.

Issuing equity, while having the disadvantage of diluting the existing shareholders, has the advantage of giving the company financial flexibility – the company can wait to pay shareholders dividends until it has achieved its growth objectives and has begun to generate profits.

Read More...

Selling Shares in a Limited Liability Company

Shareholders owning shares in a limited liability company (LLC) may seek to sell or transfer the shares at some point during the life of the company. In such a case, there are specific legal requirements in the Commercial Companies Law of Oman pertaining to such a sale or transfer.

Specifically, the shareholder wishing to sell his shares first must give notice of his intention to the manager(s) of the LLC and the other shareholders in the LLC. Each shareholder in an LLC has a right of first refusal, meaning a right to purchase the shares on the same terms, but before they are offered to a non-member of the company.

The non-selling members of the LLC may choose to purchase the offered shares before allowing those shares to be sold to an outsider. Issues may arise in cases where more than one shareholder is interested in purchasing the shares that are being offered. In such a case, the shares will be allocated between the members seeking to purchase such shares according to their proportional ownership in the LLC.

The specific procedures for selling the shares in an LLC are outlined as follows:

• The seller of the shares must give written notice to the manager of the LLC of his intent to sell. The notice must specify the number of shares, the name, nationality and address of the proposed purchaser, and the terms of the sale.


• The manager must acknowledge receipt of the notice and send a copy of the notice to each shareholder in the LLC. The manager must also notify the shareholders of their rights to purchase the shares according to the terms in the notice.


• If the shareholders wish to purchase the shares, they must give notice to the manager of the LLC and deposit the full amount of the purchase price within 45 days of the receipt of the notice by the manager.

Read More...