Foreign Community Clubs in Oman

In a post last month, we discussed local Omani associations, which are groups formed to carry out not-for-profit social, cultural or charity activities and are registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”).

This month, we cover a related topic: foreign community clubs. A foreign community club (or a foreign association) is similar, regarding its function and formation, to a local Omani association. However, there are some additional legal requirements for a foreign community club.

As with local associations, the Ministry supervises all foreign community clubs in the Sultanate of Oman. This includes monitoring their activities and issuing instructions and directives to them to maintain the purpose for which they were set up.


Eligibility for foreign community clubs

Each foreign community may establish only one club in the Sultanate of Oman and only one branch thereof in a region (provided that the number of community members is not less than five hundred in that region). Terms and conditions for the establishment of a foreign community club include:

• the number of the foreign community members working in the Sultanate of Oman is not less than two thousand;
• the number of founders is not less than one hundred (excluding those involved in diplomatic missions);
• each founder is above the age of twenty-five years; and
• a fee of OR 200 for the license is paid on establishment and renewal of the foreign community’s club or any of its branches.

Establishing a club

Applications are to be submitted to the relevant department at the Ministry along with the proposed articles of association. The articles of association are then approved by the Ministry and must be signed by all the founders and accompanied by a profile stating the founders’ names, community and professions.

The Ministry then reviews the application to ensure the foreign community club fulfills the necessary requirements to allow the granting of a license. Licenses are valid for two years, and may be renewed via the same process as the original application (except for the signature of the founders), provided approval of the renewal from the annual meeting of such club is submitted by the chairman together with other documents. The renewal application must be submitted to the Ministry at least two months prior the end of the license period.

The name, headquarters, purposes, financial year, number of directors and name of the chairman shall be recorded for each foreign community club at the Ministry. Any amendments must be approved by the Ministry.

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Government Directors in a Joint Stock Company

Following the recent changes to the composition of the cabinet of Ministers in the Sultanate of Oman, a number of joint stock companies which are partially or fully owned by the government have been essentially paralysed, from the perspective of corporate action, by the lack of a functioning board; the existing government directors were removed without any new directors having been appointed.

It goes without saying that the board of directors plays a fundamental role in corporate governance. Where the joint stock company is partially or fully owned by the government, the government appoints directors to represent the government’s interests, objectives and goals on the board. Such joint stock companies specify in their articles of association the number of directors who represent the interests of the Sultanate of Oman or any of its administrative units that own shares in the company.

The procedure for appointing a government director is both simple and straightforward. Article 132 of the Commercial Companies Law requires that the appointment of government directors is a decision taken by the Council of Ministers pursuant to the nomination of the Ministry of Finance and the relevant minister.

Furthermore, the law specifies that government directors cannot be removed from their offices except by approval of the Council of Ministers. This clearly indicates that the government is the only party which is able to appoint or remove its directors, without any constraints. The appointment and removal of directors is effective once the ministerial decision from the minister supervising the Ministry of Finance is issued. Upon issuance of this decision, the company then can appoint or remove the director by submitting the ministerial decision to the commercial registry in the Ministry of Commerce and Industry along with the revised list of authorised signatories and other relevant documents.

As a final point, we note that the government directors’ powers are similar to the powers of any other directors. However, the law points out that acts performed by government directors shall not subject the government directors, the Sultanate of Oman or the public entity to liability under Omani company law.

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Focus on Litigation: Joining Co-Defendants

A defendant in an Omani court case always should consider whether the culpability in fact lies with a party who has not been named as a defendant by the Claimant.

The ability for a defendant in an Omani court case to join in co-defendants is more straight-forward than might be appreciated. This applies equally to joining in Omani and non-Omani parties.

The procedure for joining a co-defendant involves the named defendant making a paper application to the court, attaching copies of the commercial registration documents in respect of the prospective co-defendant(s). This corporate documentation should be obtained from the relevant public register in the country where the entity in question is incorporated.

The defendant also needs to provide the court with full addresses in respect of the co-defendants. Accordingly, we habitually advise that a written Defence always should start with procedural defences, and also should include substantive defences as well.

Provided that a prima facie case is made out, the Omani courts are usually willing to join the other parties into the existing court action as co-defendants.
As an important caveat, we should mention that joining a non-Omani entity may delay the case by some months, as the Omani courts serve such entities with the documentation via diplomatic, country-to-country channels.

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An Introduction to Hotel Management Agreements

With the continued growth of Oman’s tourism sector serving as a centerpiece of the government’s ‘Vision 2020’ economic development plan, one can expect a significant number of new hotels to open in the Sultanate over the coming years.

This article explains what hotel management agreements are and why they are crucial to most hotel development transactions. Next month, we will cover some of the key issues that typically arise in the negotiation of management agreements.

What is a management agreement?

Many hotels, particularly the large-scale, luxury hotels on which the Omani tourism sector is focused, are managed by one of the major international hotel operating companies. These operating companies are the household names whose signage adorns hotels across the globe, such as Ritz-Carlton, Hyatt, Intercontinental or Mandarin Oriental. A number of the international operating companies own some of the hotels they manage. However, many of the operating companies are engaged principally in the business of managing hotels owned by other investors, in exchange for fees.

The management agreement is the primary written contract between the hotel owner and the operating company, setting out the parties’ respective rights and responsibilities, typically in exhaustive detail. There are often other ancillary agreements between the hotel owner and the operating company as well, covering such matters as the use of the operating company’s intellectual property or the payment of the hotel owner’s share of expenses related to activities – e.g., staff training, reservations or marketing – that the operating company conducts jointly for all of the hotels under its management on a regional or worldwide basis.

Why are management agreements so important?

Hotel management agreements are crucial for two main reasons. First and most obviously, large luxury hotels are big business – there is a great deal of money, jobs and prestige on the line for both the hotel owner and the operating company, so management agreements must be negotiated thoughtfully and drafted carefully, commensurate with their high-quantum, high-stakes nature.

Second, hotel management agreements are important because they are the framework that govern a very long-term business relationship. Most hotel management agreements run for a term of at least 10 years and often 15 to 20 years, typically with the option for the parties to extend for an additional 5 or 10 years by renewal. The hotel management relationship often lives on long after the individuals who entered into the relationship – on both the owner and operator sides – have left their respective organizations. Thus, a well-drafted management agreement can play an important part in maintaining a long, mutually prosperous and harmonious relationship between the hotel owner and the hotel operating company.

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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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Oman’s Anti Money Laundering and Combating Terrorist Financing Law – Part III

Over the past issues of the Client Alert, we have discussed certain provisions of Royal Decree No. 79/2010, Oman’s Anti Money Laundering and Combating Terrorist Financing Law (the “AML-CTFL”), which is designed to combat money-laundering and terrorist financing. In the April issue, we examined what constitutes the offence of money-laundering, how the authorities define ‘proceeds of crime’ and what actions could be deemed to be terrorist financing. In the May issue, we looked at the obligations under the AML-CTFL for all businesses that operate in Oman, financial and non-financial alike, to ensure their compliance with this law. This month, our final installment in this series provides an overview of the penalties which can apply if a business or person is found to have breached the AML-CTFL.

Penalties

The penalties for breaching the AML-CTFL are severe, and businesses and individuals alike would be well advised to think carefully before engaging in any business which could fall within the scope of this law. Some of the main penalties are as follows.

Firstly, a person who commits or participates in a money laundering crime, or attempts to do so, may be punished (subject to the exceptions below) with imprisonment for a term ranging between three and ten years and with a fine of 5,000 Omani Rials or greater. Notably, there is no upper limit on the fine element of this penalty except that the fine may not exceed the value of the funds which were the subject of the money laundering crime.

We previously established that if a person has information regarding an act of money laundering or terrorist financing (or has reason to suspect that such an act has occurred) and fails to report this to the authorities or informs a person that they are the subject of an investigation under the AML-CTFL and that investigation is harmed by the disclosure, then such failure to disclose or tipping off would be offences under Omani law. Failure to disclose or tipping off are punishable by (subject to the exceptions below) a term of imprisonment of up to three years and a maximum fine of 3,000 Omani Rials.

The public should be aware that the AML-CTFL also states that the disclosure of any procedures, report, analysis or investigation regarding a transaction that involved money laundering or terrorist financing, to the customer, beneficiary or anyone other than the competent authorities, would also constitute an offence under the AML-CTFL. This offence would be punishable by (subject to the exceptions below) a term of imprisonment for at least one year and a fine of up to 10,000 Omani Rials.

Exceptions

The penalties stipulated above can be doubled in the following cases:
• if the crime has been committed in complicity with one or more persons;
• if the offender commits the crime through an organized criminal gang;
• if the crime has been committed as a part of, or in connection with, other criminal activities;
• if the offender has committed the crime in an abuse of his position, e.g., by taking advantage of the powers vested in his office; or
• if the offender is a perpetrator or accomplice in the original crime from which the money laundering funds were obtained.

Conversely, if a perpetrator reports a crime under the AML-CTFL to the authorities and tells the authorities of the parties involved before the authorities had knowledge of the facts, then the reporting perpetrator may be exempted from the penalties stipulated under the AML-CTFL. Even if the report takes place after the authorities were aware of the crime, if it leads to forfeiture of the proceeds of the crime or the arrest of the other perpetrators, then the court may suspend a punishment of imprisonment for the reporting perpetrator.

Terrorist Financing

While some of the penalties above would encompass terrorist financing, there is a specific penalty under the AML-CTFL which relates exclusively to terrorist financing: any person who commits or attempts or participates in terrorist financing may be punished by a minimum term of 10 years imprisonment and a minimum fine of 10,000 Omani Rials. As with the similar money laundering penalty above, the fine element of this punishment has no upper limit other than that it shall not exceed the value of the funds which were the subject of the terrorist financing; this presumably means the money which funded the terrorist financing and not the resulting financial damage which was caused by that terrorism, although the law is not clear on this point.

Business Sanctions

Companies should note that in addition to terms of imprisonment and fines levied, the Omani authorities have the power to impose a number of other business-related sanctions for breaches of the AML-CTFL. These include the annulment of a company’s licence, prohibiting the trade of the company’s securities in the Omani financial markets and, ultimately the power to close the company down.

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Focus on Litigation: Raising Procedural and Substantive Defences

When defending against litigation proceedings in Oman, it is crucial not only to formulate the right defences, but also to deploy them at the right time.

It is a little-known point of Omani law that, in any Omani court litigation, all procedural defences must be stated at the beginning of the very first defence submission.

For example, if the Defendant has an argument that the Oman Courts should decline jurisdiction to hear the dispute, this contention must be explained and detailed in full at the start of the written Defence. The Oman Courts usually reject a procedural argument if it is not raised at the commencement of the case.

Similarly, it is also important to raise substantive defences at the outset of the litigation. If the written Defence does not include substantive (i.e non-procedural) lines of defence, in addition to procedural defences, then there is a risk to the Defendant. Namely, the Oman Courts may reserve the matter for judgment, reject the procedural argument(s) and then state that the defendant has accepted liability for the substantive claim against it by refusing to file any substantive lines of defence.

Accordingly, we habitually advise that a written Defence should always start with procedural defences, and should also include substantive defences as well.

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Islamic Banking in Oman- Part II

Islamic banking is poised to become a key fixture of Oman’s financial sector, following the recent announcement that His Majesty Sultan Qaboos bin Said has approved the formation of Oman’s first Islamic bank. Last month’s Client Alert provided an introduction to the religious, philosophical and economic principles that underpin Islamic finance. This month, we present an overview of some of the classic Islamic banking structures that are commonly used in jurisdictions where Islamic finance is already well established.

Mudaraba (capital provision)

This is an arrangement between an Islamic bank and an entrepreneur in which the bank contributes the capital to fund an entrepreneur’s company, in exchange for a share of the company’s profits. The two most notable features of a mudaraba are that (i) the bank contributes all of the company’s capital, and the entrepreneur contributes his ideas, technical expertise and management skills but no capital, and (ii) the bank and the entrepreneur share the profits of the company according to a pre-agreed scale, while the company’s losses would be absorbed entirely by the bank. A mudaraba structure is well suited to up-and-coming entrepreneurs who possess exceptional business ideas or talents, but lack the financial resources to get their company off the ground.

Musharaka (joint venture)

Under a musharaka, both the Islamic bank and the entrepreneur contribute capital to the entrepreneur’s company. The company’s profits are shared according to a formula that the parties pre-agree, and losses are apportioned pro rata to the parties’ respective capital contributions. Although management of the company may be however the parties agree, it is common for both the entrepreneur and representatives of the bank to be actively involved. A musharaka structure is well suited for an Islamic bank’s proprietary investment activities.

Ijara (lease)

An ijara is a lease structure in which the Islamic bank will buy a specified asset, and lease it to the banking customer at a specified rental price for a specified length of time. It is important for the terms of the lease to be Sharia (Islamic religious law) compliant – for example, not to charge interest or penalties that would be considered usurious and therefore haram (prohibited). Frequently, an ijara will include the option for the customer to purchase the asset at a specified price at the end of the lease period.

Sukuk (Islamic bonds)

Sukuk, or Islamic bonds, are securities representing an ownership interest in an asset or pool of assets. The assets underlying the sukuk will themselves be structured as Sharia-compliant vehicles – such as mudaraba or musharaka. The payments that sukuk bondholders receive are not designated as interest payments, but rather as returns derived from the profits of the business underlying the bonds.

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Overview of Real Estate Title Insurance

As Oman uses real estate registration systems for the transfer of land titles or interests in them, the Real Estate Register at the Ministry of Housing makes the determination of title ownership and encumbrances on the title based on the registration of various instruments affecting the title. This article provides an overview of real estate title insurance, which is a common feature of many jurisdictions worldwide and represents a potential tool for the Omani authorities to adopt in their continued development and enhancement of the Sultanate’s real estate framework. Title Reports In many jurisdictions, there are title companies that perform the service of reviewing the real estate records on file at the Real Estate Register and issuing a report which identifies the owner and all of the interests and/or agreements that are filed against that property. The fees for the title companies' services are paid by the buyers, usufructuaries and lessees for their services. Prior to the conveyance of title, an attorney for the buyer reviews the title report and advises the buyer of the "condition of title" to the property and whether it complies with the requirements set forth in the contracts between the buyers and sellers. Title Insurance The attorney then gives notice of any title objections to the seller, in order for the seller to cure such defects. At the closing of the conveyance of title, the title company converts the title report into a policy of title insurance, in favor of the buyer, usufructuary (or, as relates to a mortgage, in favor of the lender) which insures that the policy names the correct owner and identifies the agreements that have been filed against the property with the Register. In the case of either corporate ownership or individual ownership, a title company insures that the purchaser owns the property subject only to certain interests which are listed in a "title report". As part of the closing documents, the corporate entity delivers to the title company evidence of the company's organizational documents for the title company to review and determine whether the corporation has the power to own, lease and/or mortgage the property and whether the corporation is then currently in existence in "good standing" ─ i.e., that it has paid all of the corporate taxes and filed all of the required forms and taxes with the appropriate taxing authority. Features of Title Insurance Title insurance provides indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. Title insurance can be purchased to insure any interest in real property. Most institutional lenders would require title insurance to protect their interest in the collateral of loans secured by real estate. The basic elements of insurance provided to the lender cover losses from, inter alia, defects, liens or encumbrances on the title; non-marketability of the real property; invalidity or unenforceability of land rights. Taking account of the growing complexity of real estate transactions in Oman due to the recent surge in ITC and non-ITC real estate developments, the introduction of an appropriate law to allow title insurance would create more security and certainty in the market. Local Associations in Oman A local Omani association is a group, formed in accordance with its bylaws, comprised of a number of individuals with the objective to carry out not-for-profit social, cultural or charity activities and registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”). Permitted Functions An association may function in the following areas: • welfare of orphans; • welfare of children and adults; • ladies services; • welfare of the aged; • welfare of handicapped persons and persons of special needs; or • any other field or activities which the Minister may deem necessary to incorporate. An association is prohibited from engaging in certain activities including political activities, forming political parties and interfering in religious matters. Foreign associations, local organisations and sports and technical associations and clubs are governed by separate specific laws. Establishing a Local Association To incorporate an association, it must have written bylaws duly signed by at least twenty Omani founding members. The bylaws set out, among other things, the name, objectives, scope of the activities, details of the founding members, conditions governing membership and the financial resources of the association. The founding members must then hold the first general meeting of the association and elect the first board of directors from among themselves for a period of one year. This board then authorises the relevant member to apply for registration of the association with the Ministry. Governance Matters Once registered with the Ministry, the association needs to maintain various books, including a register of members and subscriptions paid, minutes of the meetings of the board of directors and general meeting, and account books at its premises. The Ministry has the right to inspect the registers, books and documents of the association as well as monitor the activities of the association to ensure that they are in conformity with Omani law and the association’s bylaws. All of the members of the association who have followed the bylaws and been a member for at least six months (except for the first general meeting) shall be entitled to attend the general meeting. There is a set procedure which needs to be followed for the calling and holding of ordinary and extraordinary general meetings. Copies of the minutes and any resolution adopted by the general meeting must be provided to the Ministry within fifteen days of the date of each meeting. The board of directors of the association needs to have between five and twelve members, and directors are appointed for two-year terms (except for the first board). The board is responsible for the activities of the association. As mentioned, copies of the minutes and any resolution adopted by the board must be provided to the Ministry within fifteen days of the date of each board meeting. The Ministry has the right to invalidate any board meeting or resolution adopted by the board if convened in breach of Omani law or its bylaws within one month of receiving the relevant documents. In addition, there are further detailed provisions in the law on the financing of associations, merger and dissolution of associations and public service associations, as well as the penalties for non-compliance with such provisions.

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International Law Update: UK Ministry of Justice Publishes Bribery Act Guidance (Part I)

Following on from the publishing of the UK Bribery Act 2010 (the “Act”) last year, the UK Ministry of Justice has recently published final guidance (the "Guidance") on the procedures which relevant commercial organisations can put in place to prevent persons associated with such organisations from bribing. The Act will enter into force on 1 July 2011.

The Act applies to all commercial organisations that are registered in the UK or that have any operations in the UK. Therefore, as mentioned in our article on the Act in the Curtis Oman Client Alert in September 2010, we anticipate anti-corruption clauses becoming widespread in commercial contracts between UK entities and Omani companies. In addition, the Act will be a point of concern for any Omani companies which have operations in the UK. We understand that investigations and prosecutions under the Act are most likely to be targeted at companies in extraction industries and transactions with government entities including politically exposed persons.

The new Guidance has revised all of the adequate procedures for commercial organisations to have in place as a statutory defence in the event of prosecution under the Act from the draft guidance published in September 2010, which was criticised as unworkable, inhibitive of customary business practices and detrimental to the competitiveness of UK companies. The UK Ministry of Justice has also addressed concerns raised by the business community over the ambiguous and potentially far-reaching nature of certain provisions of the Act, namely, regarding corporate hospitality, facilitation payments, suppliers and joint ventures, and foreign companies accessing the UK capital markets.

Corporate Hospitality

The Guidance reiterates the importance to businesses of “reasonable and proportionate” hospitality and promotional expenditures designed for improving corporate image, marketing products and services, or developing public relations, and adds that such expenditures are not intended to be criminalised by the Act. Reasonableness is determined within the context of the organisation’s size and nature of business and the customary practices of its industry.

Lavish or extravagant expenditures lacking in business purpose or to unnecessary or out-of-the-way locales are likely to raise an inference of intention to improperly influence foreign public officials. Accordingly, whilst it would be acceptable for a health care provider to furnish ordinary travel and accommodation to a foreign public official to visit one of its hospitals, a five-star holiday to the same official that is unrelated to a demonstration of the organisation’s services would be suspect. The Guidance provides additional examples of reasonable travel expenditures for foreign public officials. One of these is for flights and accommodation to visit distant mining operations to demonstrate a UK organisation’s safety standards. Another is for flights, hotels, fine dining and sporting event tickets for a foreign official and his or her partner to visit New York as the most convenient location for meetings with senior executives of a UK organisation, although this would be called into question if the executives had visited the official’s country with all the relevant documentation enabling such a meeting to occur the previous week.

Facilitation Payments

Facilitation payments are illegal under the Act. The Guidance contains no specific defences for making facilitation payments, unlike the Foreign Corrupt Practices Act, which has a narrowly construed exception for such payments. Duress is a factor to take into account when considering prosecutions for making facilitation payments, as it provides a common law defence in the UK.

Associated Persons

The Guidance further clarifies the definition of “associated persons” in the context of the corporate offence of failure to prevent bribery, with respect to suppliers and joint ventures.

Suppliers

Whilst mere sellers of goods are not to be considered “associated persons” for purposes of the corporate offence of failure to prevent bribery, suppliers of services that are within the organisation’s control are likely to be included. Indirect suppliers who perform services along a supply chain without any contractual relationship with the organisation are not likely to be associated persons.

Joint Ventures

The Guidance makes a distinction between the treatment of joint ventures that operate as separate legal entities and those which arise through contractual arrangements. Separate entities are not presumed to be associated with their members, and therefore bribes paid by such entities will not necessarily give rise to liability for a member’s failure to prevent them, absent a showing that the venture was performing services for the member and the bribe was paid with an intent to benefit that member. The analysis is different for contractual joint ventures, where an examination of the level of control of the members over the activities of the venture is appropriate. In such case, a member could be liable for failing to prevent a bribe made by the joint venture in the performance of services for that member.

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