Post-Incorporation Requirements

For new companies that are incorporated in Oman, it is often unclear what procedural formalities they must follow in order to get fully up and running. This article highlights a sampling of the key steps that new Omani companies must take:

• A company which has its share capital deposited in a pre-incorporation bank account should first seek to get the account reactivated by the designated manager of the company. The banks typically require evidence of commercial registration and of the authority of the manager, both of which can be established via the commercial registration documents issued by the Ministry of Commerce and Industry.
• It is mandatory for a new company to register with the Secretariat General of Taxation at the Ministry of Finance generally within three months of the date of incorporation.
• The company must obtain an approval from the relevant municipality for commercial operation, office signage, etc. The municipality assigns a distinct registration to each company.
• A new company must also enter into a lease agreement for its principal office, which lease must be registered with the relevant municipality. A related commercial requirement is obtaining a P.O. Box address for the company from the postal authority.
• In accordance with Oman’s labour laws, the employment contract of an Omani national employed by a company must be registered with the Ministry of Manpower, and within 15 days of the registration the employee must be enrolled with Public Authority for Social Insurance to allow for monthly social insurance contributions from the employer and the employee.
• If employing one or more expatriates, the company must obtain labour clearance from the Ministry of Manpower and employment visas from the Directorate General of Passport and Residence of the Royal Oman Police.

The above list is not exhaustive, as there might be other government-approval requirements depending on the company's business. Many of these administrative requirements can be performed by the company’s Omani public relations officer, and as lawyers we are able to assist with the more complex matters.

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Experts in Litigation

An issue that often arises in Omani litigation is the importance of experts.

Unlike in many other countries, the courts in Oman only recognise one expert - the expert appointed by the court. Therefore, the crux of many Omani cases is proving one's viewpoint to the satisfaction of the court-appointed expert.

That is not to say that the Omani courts always agree with their appointed expert. There are occasions where the courts totally override what the expert has concluded. Such a situation normally only happens where the courts decide that a provision of law is the reason why they wish to negate the expert's findings.

The court-appointed expert often will base his report on his oral discussions in meeting separately with each of the litigants. The litigants are each free to bring along to these meetings their legal advisors and any other technical third-party personnel.

In other words, if a litigant has a supportive report from a third-party expert, it is not enough to merely exhibit that document. The litigant should ensure that the writer of that report – i.e., the litigant’s own third-party expert – comes to the meetings with the court-appointed expert.

As a practical matter, the Omani courts place very little weight on the reports prepared by the litigants’ third-party experts. The courts want to hear what their own appointed expert has decided having read the relevant papers and having met with the litigants and with any individuals which the litigants bring to such meetings.

A final but important consideration: often the court-appointed experts wish to converse only in Arabic. This is a factor which should always be borne in mind, especially in choosing a litigant’s expert.

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The Uproar Surrounding Petroleum Contract Renegotiations

The prestigious Oxford Institute for Energy Studies, in its most recent newsletter, Oxford Energy Forum, published an article by Curtis Chairman George Kahale, entitled "The Uproar Surrounding Petroleum Contract Renegotiations." The article is posted here.

Introduction by the editors of the newsletter:
There are a number of fundamental issues that characterise the international petroleum industry. Their relative importance varies according to the interests of the different parties that constitute the industry. A private oil company will hold different views than a national oil corporation on what really matters; producers and consumers, or exporters and importers stand in different places on issues of interest. In this Forum a number of international authorities address some of these topics, sometimes shedding light on an obscure aspect but always assessing their import.

Two important oil problems – (a) the relationship between host countries and the foreign oil companies seeking investment access to upstream oil (or gas) reserves in their territories and (b) the peculiarities of the international oil price regime – have retained our attention.

The relationship between host and foreign oil (gas) investor is governed by contracts sometimes drafted within the framework of a petroleum law. There are instances when these agreements were entered upon at a time when the host country was politically or economically weak, or was badly advised, the consequence being a contract that put the host country at a clear disadvantage. Later the country, usually under a new political regime, realises the problem and seeks renegotiations. But some companies (if not all) reject the idea of renegotiation, or complain loudly about its unfairness. They refer to the principle of pacta sent servanda.

George Kahale, an eminent American lawyer, argues in this Forum that reference to the pacta principle does not provide complete justification for rejecting renegotiations. There are features of the oil industry that make contract renegotiations either inevitable or desirable. In brief, these are the long-term nature of oil upstream licences or agreements, the sharp volatility of oil prices, and the vital importance of oil revenues for the exporting countries. And circumstances can change radically at least once if not several times over contractual periods that usually extend over 20 or 25 years, if not longer. The sharp volatility of prices is an important change of economic circumstances for the simple reason that conditions agreed upon when oil prices were at a certain level become unacceptable when prices move to a significantly different level.

Interestingly, the attitudes of many oil countries seeking an improvement in the financial terms of their contracts are reflected in a statement of Mr Salazar, the US Secretary of the Interior, addressing an oil industry corporate audience: ‘Just as your shareholders expect you to get a fair return on your investments...the American people are asking the same of us as we manage their resources.’ What is good for the USA must also be good for other countries, a point concealed by the preferential treatment given to the superpower in many discourses.

The Kahale article, importantly, includes three case studies…

The Uproar Surrounding Petroleum Contract Renegotiations
George Kahale, III

In recent years, complaints of unfairness on the part of host states in the renegotiation of international petroleum contracts have become commonplace at conferences and seminars in both the United States and Europe. Not so often discussed are the legal issues underlying the particular cases – simply repeating the mantra of pacta sunt servanda is not a discussion. Even less attention is paid to the facts, a point which is the focus of this article. Without an understanding of the facts underlying a renegotiation, one can easily julep to the wrong conclusions, and that is precisely what seems to have been happening with alarming frequency on the conference/ seminar circuit, where conclusions are too often drawn from incomplete information derived from press releases or press reports.

Background 

This recent period is not the first time that the petroleum industry has provided the setting for political, economic and legal struggle.  The same was true in the 1970s, when the principle of Permanent Sovereignty Over Natural Resources[1] was trumpeted as loudly as pacta sunt servanda.  A wave of nationalisations gave rise to a series of arbitral decisions that would be cited throughout the coming decades, even to this day.[2]  When circumstances changed radically, the industry again became the incubator for what has been dubbed a new wave of ‘resource nationalism’.

What is it about the petroleum industry that seems to always place it in the eye of the storm? Here are some contributing factors.

First, upstream licences or agreements tend to be long-term in nature.  It was not uncommon for concessions granted in the 1950s to have a term of 50 years or longer.[3]  Production sharing agreements, the next generation of upstream contracts that became popular in many oil-producing countries when concessions fell into disrepute, were anywhere from 25 to 40 years in

length.[4]  Agreements of such duration tend to undergo fundamental changes at least once in the course of their life.

Second is the volatility of the price of the resource.  In the 1970s, the oil shock sparked by the Arab oil embargo was followed by another extraordinary price rise at the end of the decade.  The 1980s saw the market flooded with oil as Saudi Arabia increased production and market share with netback pricing.  The price of oil plummeted to less than $10 a barrel, and stayed relatively low throughout the 1990s, averaging around $18 per barrel for the entire decade.  In March 1999, the cover story of The Economist argued that the price could hover around $5 for some time.

Starting in 2004, the price environment again changed dramatically, averaging around $40 per barrel that year.   The seemingly endless upward spiral continued in the succeeding four years, with the price shooting right through the $100 per barrel barrier and reaching a peak of almost $150 per barrel in July 2008.  Given this kind of structural change in the petroleum markets, it is not unusual to see adjustments in contractual terms or fiscal regimes to take account of the changed circumstances.

Third, the economic importance of the petroleum industry to host countries cannot be overstated.  With the stakes that high, a mistake in petroleum policy can have devastating consequences for the host state concerned.  That is why matters relating to the petroleum industry tend to be considered matters of public policy in those countries.

Fourth, the best-known renegotiations and industry restructurings of the last five years have involved upstream contracts entered into in the 1990s, when the price of oil was a fraction of what it was to become and when privatisation was in vogue.  The Soviet Union had just collapsed and the prevailing attitude was that everyone would flourish from private ownership and exploitation of natural resources.  In that environment, many long-term agreements that were very unfavourable from the host country’s standpoint were concluded, agreements that invariably led to trouble as circumstances changed and the anticipated benefits of privatisation did not materialise.

“In recent years, complaints of unfairness on the part of host states in the renegotiation of international petroleum contracts have become commonplace.”

Finally, many of those contracts were not only economically indefensible, but they also purported to cede control over petroleum operations to private parties, often in a manner that raised serious legal issues going to the heart of the contracts.  Ownership of petroleum in the subsurface typically is conferred upon the state by constitutional mandate in host countries, and in some cases the political sensitivity of control over the hydrocarbon sector is at least as important as the legal issues raised by such constitutional provisions.  This explains the propensity to create new forms of contracts that pass constitutional muster and can withstand the political heat that often accompanies long-term contracts involving foreign, or any private, participation in the oil industry.  The proliferation of service’ contracts, in which the service contractor never acquires title to the oil produced, is attributable mainly to the perceived need to reconcile the desire to attract private investment with the legal and political constraints standing in the way of achieving that objective.

All this has led to contract renegotiations, and in some cases complete national industry restructurings, in the last few years.  In many countries, this has involved fundamental issues of structure and governance; all cases involved adjustments in government take.

Host countries that have taken measures in this direction include Algeria, Bolivia, Canada, China, Ecuador, Kazakhstan and Venezuela, all of which imposed new taxes and royalties on production, exports or windfall profits.  Bolivia and Venezuela also mandated structural changes for all contracts in their hydrocarbons industries.  In Alberta, Canada, the provincial government announced a 20 percent increase in oil and gas royalties.  The US Government provided Congress with a report in May 2007 on the question of increasing oil and gas royalties, including a comparison of royalty rates under fiscal regimes around the world, in response to concerns that government take was not keeping pace with record oil company profits.  Oil executives were called before Congress to defend windfall profits, and Sarah Palin’s Alaska collected billions in additional revenue from a new windfall profits tax.  The attitude of many governments is reflected in the following statement of US Secretary of the Interior Salazar to an oil industry audience last year:

Just as your shareholders expect you to get a fair rate of return on your investments and to be wise stewards of your balance sheets, the American people are asking the same of us as we manage their resources. . . .

That means we are going to take another look at royalty rates.  It means that tax breaks that are no longer needed, and which the American people can’t afford, will disappear.[5]

Three Case Studies

Three of the best-known renegotiations or industry restructurings of the last few years involved the operating service agreements (convenios operativos) in Venezuela, the gas production contracts in Bolivia, and the renegotiation of the world’s largest production sharing agreement, the one covering the Kashagan field in Kazakhstan.

In Venezuela, approximately 500,000 barrels per day were being produced under the operating service agreements, which were supposed to be pure service contracts.  The 1975 Law Regulating the Industry and Trade of Hydrocarbons did not allow, except in certain cases approved by Congress, any private participation in production.  Service contracts were allowed for basic services, such as drilling and seismic survey, but these were supposed to be pure service contracts, not contracts mimicking production sharing agreements that effectively granted the contractors a participation in the business.

The Venezuelan operating service agreements, although structured as service contracts, were in substance anything but pure service contracts.  They ceded control over petroleum operations in huge areas for 20 years, and compensation was based on the volume and value of production.  Many of the service providers were in effect senior partners in the business, on average taking more than half the value of production.  In some cases, the state company actually lost money for each barrel of oil produced, after accounting for the royalty owed to the State.  Making matters worse, the contractors, claiming to be only service providers, argued that they were subject to the non-oil income tax rate of 34 percent rather than the rate applicable to oil producers, 50 percent.

In April 2005, the Venezuelan Government intervened to require migration of the operating service agreements to the new structure of mixed company (empresa mixta) under the 2001 Organic Hydrocarbons Law, and 30 out of 32 contracts were successfully migrated over a one-year period.  The other two resulted in negotiated settlements.  The new mixed companies emerging from the migration of the operating service agreements are all subject to combined royalties and special advantages (ventajas especiales) of 33 1/3 percent, as well as the 50 percent oil income tax rate.  A special assessment for extraordinary prices also applies when the price of crude oil exceeds $70 per barrel.  Apart from the fiscal regime, a state company is by law the owner of at least 60 percent of the shares of each of the new mixed companies.  Basic minority protections are included in the by-laws, but the legal issue of control has been resolved.

Turning to Bolivia, we again hear a lot of talk about resource nationalism, but little about the facts of the old agreements.  Prior to 2005, contractors were taking 82 percent of production from Bolivia’s giant gas fields, paying only an 18 percent royalty.  This was after all investment that had long ago been recovered.  The contracts had never been approved by Congress, as appeared to have been required by the Constitution.

By 2005, the situation had become untenable.  A new Hydrocarbons Law was enacted in May of that year, imposing a 32 percent tax on the gross value of hydrocarbons (Impuesto Directo a los Hidrocarburos) in addition to the 18 percent royalty, thereby reducing the private party’s share to 50 percent.  The Hydrocarbons Law also provided a six-month period for migration of all existing contracts to one of the new legally sanctioned forms of contract.  That six-month period expired with no progress on the migration.

On May 1, 2006, the new administration again nationalised the industry, granting another six-month period for the conversion of the old contracts.  While the new operating contracts were being negotiated, the state company was given a provisional 32 percent share, reversing the old 18/82 split to 82/18.  Six months later, all of the contractors executed the operating contracts, which are structured as service contracts with the service providers receiving remuneration in cash, not oil.

The third case study is the renegotiation of the PSA covering the world’s largest discovery in three decades:  Kashagan in Kazakhstan.  There the heart of the problem was the concept of cost recovery, under which a large percentage of production, known as ‘Cost Oil,’ is allocated off the top to the contractors to recover their costs.  In the case of Kashagan, that percentage was 80 percent.  After allocation of that 80 percent to the contractor, the remaining production, known as Profit Oil,’ was allocated initially 90 percent to the contractor and 10 percent to the State, a ratio that was eventually supposed to change in favour of the State based on a set of complicated triggers set forth in the agreement.  Until then, the contractor would continue to receive 80 percent of the Cost Oil and 90 percent of the Profit Oil, or 98 percent of total production.

Despite what many feel is a textbook alignment of interests in a contract including such cost recovery provisions, experience shows that this structure is often a recipe for disaster, and that is exactly what happened in Kashagan.  Overall costs of the project increased by more than 100 billion dollars, and production, originally scheduled to start in 2005 or 2006, now is scheduled for 2012.  The net result was that in the world’s largest discovery in recent times, which is expected eventually to produce 1.5 million barrels per day, the state would have received a grand total of only 2 percent of the oil produced for at least the first decade of production, not including the relatively small participation of a subsidiary of the national oil company in the contractor consortium.  That was obviously an unacceptable situation, which most people with knowledge of the facts fully recognised.  In the renegotiation, the national oil company’s subsidiary doubled its stake in the project, a new priority share’ was allotted to the Government off the top, and new cost and schedule control mechanisms were introduced to help guard against future cost increases and delays.

What lessons can be drawn from these experiences?

First, bad deals spell trouble.  The worse the deal, or the more imbalanced the deal, the more likely it is to be renegotiated.  That goes for both sides.  One might say that the best form of stabilisation is an equitable deal.

Second, don’t believe everything you read in the papers.  Most of the renegotiations or industry transformations have ended in success, which says something about the reasonableness of the processes.  The objective has not been to exclude private participation from the petroleum industry or to make it economically non-viable, but rather to put it on a sound legal and economic footing.

Third, most renegotiations take place without adversarial proceedings, another indication that reason tends to prevail on both sides.  There is a school of thought that favours adversarial proceedings, mainly arbitration, as a negotiating tactic, but the wisdom of using that tactic would not appear to be borne out by experience.

Finally, terms such as resource nationalism’ are an oversimplification of what has been happening on the ground and are no substitute for informed analysis of both the facts and the legal issues underlying the major renegotiations of the last five years.

---

[1] Declaration on the Establishment of a New International Economic Order, G.A. Res. 3201(S-VI) U.N.Doc. A/ RE’S/S-6/3201 (1974); Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), U.N. Doc. A/RES/29/3281.

[2] Libyan American Oil Company (LIAMCO) v. The Government of the Libyan Arab Republic, Award dated April 12, 1977, 20 INTERNATIONAL LEGAL MATERIALS 1 (1981); BP Exploration Company (Libya) Limited v. Government of the Libyan Arab Republic, Award (Merits) dated August 1, 1974, 53 International Law Reports 331 (1979); Texaco Overseas Petroleum Co. and California Asiatic Oil Co. v. Government of the Libyan Arab Republic, Award on the Merits dated January 19, 1977, 17 International Legal Materials 1 (1978); In the Matter of an Arbitration between the Government of the State of Kuwait and The American Independent Oil Company (Aminoil), Award dated March 24, 1982, 21 International Legal Materials 976 (1982).

[3] See, e.g., Libyan Petroleum Law of 1955, Article 9(4) (“Concessions shall be granted for the period of time requested by the applicant permitted provided that such period shall not exceed fifty (50) years.  A concession may be renewed for any period such that the total of the two periods does not exceed sixty (60) years.”).  Thomas W. Waldo, Revision of Transnational Investment Agreements:  Contractual Flexibility in Natural Resources Development, 10 Lawyer Of The Americas 265 (1978), pp. 265, 279 (“Traditional petroleum concessions in the Middle East often had a duration of up to 99 years.”).

[4] Concessions fell into disfavour not merely for economic reasons, but because they appeared fundamentally inconsistent with notions of sovereignty.  They granted international oil companies control over petroleum operations, title to production, and control of the marketing of crude oil.  Production sharing agreements did not have the stigma associated with concessions because the national oil company was usually a party, receiving a share of production and exercising at least nominal control over operations through approval processes for work programs and budgets.  The reality did not always conform to the theory, as became evident from some well-publicized cases.

[5] Department of the Interior News Release, March 19, 2009, “Salazar Addresses the American Petroleum Institute’s Board of Directors” (http://www.doi.gov/archive/news/09_News_Releases/031909.html).

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Term Sheets in Loan Transactions

Term sheets are an important part of the loan transaction process. The initial draft of the term sheet is usually drawn up by the lender and outlines the terms of the proposed loan to the borrower. The term sheet is usually then negotiated between the lender and the borrower.

It is generally in the lender’s interests to keep the term sheet as broad and vague as possible. For example, it may set out details of a number of events of default but also state that the list is not exhaustive. This will give the lender maximum flexibility when it comes time to finalise the definitive loan agreement. The longer and more detailed a term sheet, the harder it is in practice for the lender to deviate from or add to its terms. The detailed terms will have been negotiated between the parties and the borrower will resist any further changes.

Typically, term sheets are not legally binding and simply set out the intentions of the parties. However, in some cases, certain clauses are deliberately made legally binding, such as the confidentiality clause where a customer is concerned that it has provided confidential information to a lender with which it does not have a current relationship or where the lender does not want its terms shopped to other lenders. To ensure there is no confusion over whether the term sheet is legally binding, it is always recommended that the term sheet contain a clear statement on this point.

Terms sheets generally expire by a specified date. The term sheet also usually states that provision of the loan facility is subject to (i) the lender’s satisfactory completion of due diligence on the borrower, (ii) approval by the lender’s credit committee (if this has not yet been obtained), and (iii) completion of a loan agreement and related documents satisfactory to the lender. The requirement that documents are satisfactory to the lender also gives the lender scope to depart from the term sheet during negotiations of the loan agreement.

Next month we will look briefly at the structure of a typical loan agreement.

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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.

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Anticipated Rule Change Could Spur IPOs of Family Owned Businesses

Family owned businesses play a central role in the economies of both developed and developing regions around the globe. Economic studies estimate that 40 percent of large companies in the United States and Europe are family owned. In the Middle East this percentage is even greater: more than 80 percent of Middle Eastern companies are owned or operated by a single family. However, the ownership dynamics within controlling families is quite fluid. Experts believe that over the next 10 years companies worth approximately US$1 trillion will be passed from one generation to the next within business-owning families.

In Oman, the central role of family owned businesses is even more pronounced. The local press has cited HE Yahya Bin Said Al Jabri, Executive President of the MSM, in reporting that 95 percent of Omani companies are family owned.

For this reason, safeguarding the future of Oman’s family businesses has been a key priority in the Sultanate’s economic development model. Recent plans announced by the Ministry of Commerce and Industry to lower capital dilution requirements suggest that the most promising future path for some family owned businesses may lie in tapping Oman’s public capital markets. This path leads directly to augmented share capital and strengthened corporate governance mechanisms.

According to a report in the Times of Oman, the government is preparing a new set of amendments to the Commercial Law which will lower the minimum capital dilution from 40 percent to just over 20 percent for family owned businesses undertaking initial public offerings (IPOs) on the Muscat Securities Market (MSM). By lowering the percentage of equity in the company that the law requires a family to relinquish, family owned companies should be more likely to float of portion of their shareholdings on the MSM.

The goal of these amendments and the policy behind them is that promoting public flotation will (i) strengthen family owned businesses by allowing them access to public investment capital; (ii) refine their corporate governance practices through adherence to listing standards; and (iii) streamline access to professional strategic and management advice that could fill potential succession gaps.

While Oman’s family owned businesses are currently among the strongest and most respected enterprises in the Sultanate, some family businesses may face vulnerabilities over the longer term. A leading professional services firm recently released a survey indicating that relatively few family businesses in the region survive beyond the third generation. That report also highlighted that only 16 percent of family owned businesses have instituted a clearly defined succession plan.

Another potential area of vulnerability for family owned businesses is the need for larger amounts of capital to compete in an increasingly international, big-player dominated environment. Concurrently, the more restrictive credit environment in recent years and some high-profile defaults by family owned businesses has made borrowing necessary capital much more difficult. Loosening the requirements for tapping the equity markets should afford family owned businesses another source of much-needed funds.

Similarly, as companies in many sectors grow larger, they often need a more formalised corporate governance structure in order to function properly. Becoming a publicly listed company and adhering to the MSM’s corporate governance standards should help provide structure and discipline to family owned companies.

Nevertheless, many family businesses have balked at the prospect of raising funds through IPOs. The current 40 percent capital dilution requirement has meant that any firm listing shares has had to give up a substantial ownership stake to public investors. Given that family control has been a central driver of success for many companies, few family businesses have been willing to relinquish that much ownership and such a degree of control. Further, bringing in outside investors and managers has been thought to risk disrupting the company’s culture and shifting focus from long-term development to short-term profits. Consequently, only eight percent of family businesses in the Middle East are publicly traded.

By lowering the minimum capital dilution percentage, the authorities’ objective is to enable family owned companies to bring in outside investors without giving up as much control. This change should enable more family owned businesses in Oman to partake of the advantages of public flotation, while mitigating its risks.

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Importance of Specifying Counter-Party Physical Address

Focus on Litigation

Much of the disputes process is centered on the usual elements of litigation: cogent legal arguments, meticulous gathering of evidence, and navigation of complex procedural requirements. Yet even after many years of practicing law in Oman, we are often reminded of how the actual day-to-day progress of a matter can turn on the most mundane of details – for example, ascertaining the physical addresses of the parties.

With the great urgency often surrounding the litigation process, such as filing a case or an injunction application with the Omani Courts, one small detail that sometimes gets lost in the shuffle – namely, omission of the actual physical addresses of the parties to the dispute – can inject considerable delay into the overall process.

The Omani Courts now require very exact information about the physical address of each party to a case. (If the party is a company with multiple physical addresses, the physical address of the company’s head office must be specified; if the party is an individual with multiple residences, the physical address of the individual’s primary residence must be specified.) A high level of detail is often required. It is, perhaps strangely, not enough to state that company X’s head office is in building Y. The Courts require us to state the exact floor of the building, the building number, and the way/street number, together with any nearby landmarks. If these details are not provided, the court will not allow the case to move forward.

Accordingly, it is very important for parties to know the exact physical address details of the entities in Oman with whom they do business. When doing transactions, one often knows only the other party’s postal address (typically a P.O. box). In Omani litigation, however, it is the physical address information which is of paramount importance. Whilst we can often help in finding out a physical address, it is prudent for companies to ascertain such information right at the beginning of their commercial relationship with a counter-party.

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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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Focus on Labor Law: Fixed-Term Employment Contracts

For most companies, entering into contracts that are well drafted and carefully negotiated is key to carrying out their business smoothly and successfully. Often, some of a company’s most important contracts are those with its own employees.

Employment contracts can be of indefinite duration or for a fixed term. As this article discusses, while employment contracts are typically of indefinite duration, fixed-term contracts can offer companies distinct advantages in some cases.

Employment Contracts of Indefinite Duration

In the Sultanate of Oman, as in other countries, employment contracts are typically entered into for an indefinite duration. This embodies the company’s and the employee’s shared good-faith intention to form a lasting relationship in which the employee is committed to the company, and the company is committed to the employee for the long term.

The difficulty for the company can be that, if the employment relationship sours or the economic viability of the business turns down, terminating an employee may often require more than simply providing the required notice. (The Omani Labor Law specifies that the notice period shall be a minimum of 30 days for workers employed on a monthly basis, or a minimum of 15 days for all other workers. The Labor Law further provides that if an employment contract specifies a longer notice period than the statutory minimum, the longer notice period specified in the contract shall apply). Beyond giving the required notice, companies may often find themselves facing unfair dismissal suits by the terminated employee.

There are a number of ways that the company can successfully defend against an unfair dismissal suit. If the employee has committed acts considered by the Omani Labor Law to be gross misconduct acts – including using a false identity, intoxication or assault at the workplace, or heavy absenteeism – the company may terminate the employee without having to pay damages (indeed, the Omani Labor Law provides that in the specified cases the company need not provide notice or pay end-of-service gratuity either). Furthermore, companies often succeed in defending against unfair dismissal claims by arguing that lay-offs in a money-losing division were economically necessary.

However, notwithstanding the foregoing, Omani courts are generally inclined to be highly protective of employees. And whether they would ultimately win or lose, most companies try to minimize the risk of unfair dismissal suits being brought against them in the first place. One way to mitigate this risk is by using fixed-term contracts.

Fixed-Term Employment Contracts

The Omani Labor Law allows for employment contracts to be for a fixed rather than unlimited duration, and explicitly provides that fixed-term contracts shall be effective, stating “The contract of work shall terminate [upon] … the expiry of its period or completion of the work agreed upon.” The Omani courts, in turn, are generally very respectful of fixed-term employment contracts. While the courts often hear unfair dismissal cases brought by employees whose contract of indefinite duration was terminated, the courts are unlikely to countenance unfair dismissal claims by employees who were asked to leave the company upon the expiration of their fixed-term contracts. Although the Omani Labor Law in general favors employees, its respect for fixed-term arrangements is one of the areas where the law is protective of employers.

Although they can be used in a variety of circumstances, fixed-term contracts are naturally most useful for hiring employees that will be working on a single, discrete project with a well-defined timeframe. Fixed-term contracts may also be especially useful to foreign companies that only plan to operate in Oman for a limited period of time. By lowering the risk of unfair dismissal claims, fixed-term contracts could help to protect against overhanging liabilities that could interfere with the company’s plans to smoothly conclude its affairs in the Sultanate.

There are subtle but important nuances to the Omani Labor Law, such as the requirement that a fixed-term employment relationship must be severed at the expiration of its term, lest a continuing relationship be deemed by the Labor Law to constitute a renewal of the employment contract for an indefinite period. In light of these complexities, we recommend that you consult with legal advisors in drafting your employment contracts, particularly for senior-level employees; employment contracts are truly a field where “an ounce of prevention is worth a pound of cure.”

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