Publications – Page 15 – Hammad & Al-Mehdar Law Firm

An Introduction to Venture Debt

Posted on April 16, 2020 - 2:09 pm by perpetual-admin

What is Venture Debt?

Venture debt is a form of debt financing that can be used by early and growth stage startups to raise capital. It can be used instead of, or in conjunction with, equity financings. Venture debt is an attractive form of raising capital for startups because it can usually be arranged much more quickly, an important consideration for startups facing a limited runway.

The main difference between venture debt and traditional debt financing is that venture debt is available for companies that lack assets or positive cash flow, or that want greater flexibility in the lending terms. Traditional lenders are often reluctant to finance equipment for startups based on the widely-accepted notion that startups have a high rate of failure. Venture lenders have emerged to fill this gap; such lenders can be individuals, venture capital investment companies or funds, or banks specialized in venture lending. The market for such lending in the Middle East is still in its infancy, but we envision growth in the sector in the near future.

Venture debt has benefits for both entrepreneurs and investors. Valuation of startups proceeds in a stair-step fashion between financing rounds, meaning that the inclusion of incremental capital from a loan allows startups to achieve greater progress between rounds, increasing the company’s valuation ahead of the next equity financing, and helping startups meet their milestones.

Types of Venture Debt

1. Venture term loans:

Venture term loans are generally structured as three-year loans (or series of loans) with warrants for equity. They can be used for runway extension, acquisition financing, project financing, growth capital, or equipment financing. The interest rate is usually 0-4% higher than traditional loans to compensate for the increased risk to the lender.

2. Lease financing:

Lease financing is a type of financing where the owner of the asset leases such assets (i.e. permits the lender to use the asset) in exchange for periodical payments. This can be especially useful for startups that require equipment to scale, and may also provide a tax benefit in certain jurisdictions where ownership of the asset is taxable (consider Saudi Arabia).

3. Revenue-based investments:

Revenue-based investments are a type of venture debt where repayments are tied to monthly revenues rather than a typical amortized payment schedule, often with a cap on the total amount (1.3x to 2.5x of principal amount of the loan). This reduces the payment (cash flow) risk on the company and offers lenders the comfort of a repayment commitment, but without a harsh timed payments requirement on the startup that does not look to its fluctuating cash flows or revenues. This type of venture debt product is commonly seen in angel and seed financings globally.

4. Convertible Notes:

Convertible Notes are the most commonly used form of venture debt, but unlike the other forms of venture debt these debt instruments can be converted into equity in the company. SAFE Notes and KISS Notes are the standard forms of convertible notes or securities, often used in venture investing because they allow parties to avoid complex term negotiations for investment in the earliest stages of growth companies.

Terms

Both startups and lenders should pay particular attention to the terms of the venture debt agreement, in particular the costs involved in borrowing. These costs can include a cost for borrowing the money, a cost while the money is being loaned, and sometimes even a cost to exit the loan.

The amount of the loan will be up for negotiation, but startups will generally be successful in borrowing around 30% of the last round on favorable terms. Lenders protect their rights by receiving warrants on the company’s common equity, and will often include covenants to ensure repayment, but borrowers will not be required to put up any form of collateral. The debt is usually short term, unlike more traditional commercial loans, due to the growth trajectories of VC-backed companies and the standard equity raise path (with a new equity financing every 18 months).

When to USE Venture Debt:

To purchase equipment during the growth phase;
After eliminating the concept phase risk and identifying product market fit;
When aiming to reduce founder and investor dilution;
To avoid exhaustive due diligence.

When to AVOID Venture Debt:

If there exists a significant risk of default. Venture debt lenders can call the loan and force the company to be sold or liquidated.
When a new raise is imminent. Investors will have to agree to repay the debt or invest below the debt in order of preference

Remember: Venture debt may be an attractive means of avoiding dilution, but it should be used carefully by entrepreneurs. If you are unsure about product market fit, venture debt can end the company before it even has a chance to begin. Entrepreneurs should remember it is sometimes better to have a smaller shareholding, than to have no company at all.

Force Majeure Event

Posted on April 8, 2020 - 1:08 pm by perpetual-admin

Update on COVID 19

Rules Governing the Transfer of Shares in Saudi Arabia

Posted on January 8, 2020 - 3:23 pm by perpetual-admin

On November 9, 2015, the Council of Ministers in the Kingdom of Saudi Arabia assented the Kingdom’s company law 1437H/2015G (The New Law) that was enacted in May 2016. The New Law modernized the Current Law following the consent of Saudi Arabia to the World Trade Organization and the continued initiative to modernize the legal and regulatory environment in the Kingdom to match with international trade trends and standards.

The New Law aims at promoting investment in SMEs by establishing a flexible entry strategy for investors. It also introduces the Kingdom to new corporate governance rules to align with international best practice. It aims at establishing clarity and efficiency in the regulatory framework to match the growth of the Saudi Arabian stock market, which has been opened up for Foreign Direct Investment.

The Ministry of Commerce and Investment will continue acting as the primary regulator of listed liability companies under the New Law. The Capital Markets Authority will oversee the operations of listed joint-stock companies. The two organizations will work together to draft and implement the requirements of share transfers under the New Law.

In the Saudi Arabian market, leveraged buyouts and venture capital investments constitute the primary private equity transactions. The market is predominated by local and regional private equity firms, quasi-government entities, family offices, and sovereign wealth funds. Private equity transactions usually involve investors acquiring the majority stake or significant minority interest through the transfer of shares. Unlike in established markets where the general partner and limited partners investment structure exists, the Saudi Arabian market supports direct investments by investors and through a fund established by a local asset manager who determines who will acquire the shares of a target. This is usually done through limited liability companies and joint-stock companies.

Share Transfer in a Limited Liability Company

The transfer of shares in a limited liability company is outlined by the Ministry of Commerce to entail the following steps:

Preparation of an amendment to the articles of association of the target company to reflect the name of the investor and exit of a shareholder, including identifying in the relevant shares and percentage to be owned by each party. The Ministry of Commerce & Investment (MOCI) regulations require the articles of association to be amended and presented for approval.
The next step involves seeking the approval of MOCI on the amendments done on the articles of association.
The Ministry of Commerce and Investment will then publish the amendment on their website as a public notification of the intent to transfer shares.
The final step is updating the commercial registration of the target.

Transfer of Shares in a Joint Stock Company

For joint-stock companies with foreign investors, if a license from the Saudi Arabian General Investment Authority is expected to be amended as part of the process, the same will be processed prior to commencing with the MOCI steps identified above. Similarly, if the foreign investment license is not required or does not need to be updated as part of the transfer process, closing the share transfer transaction in a CJSC will be a much easy process. It will only require the preparation and performance of the share transfer agreement and an update of the share register of the target.

If an amendment to the by-laws is required as part of the closing process, then a shareholders’ general meeting is required to approve the amendments to the by-laws. The notice for the meeting will be issues in a minimum of ten days. The general meeting approvals must be obtained prior to commencement of the share transfer process, which is usually completed in one business day. Post-completion of the commercial registration of the target will need to be updated to reflect any amendments to the target’s board of directors.

During the share transfer process, Saudi Arabia’s law implies a wide seller representation and warrant as to the ownership and title of the transferred shares and authority to transfer the shares. The implications are adopted from the sharia law, which prohibits unfairness in dealings (Ghobn) under which it is unfair for a transferor to sell shares they do not own.

Restrictions on Share Transfer

Article 161 of the Companies Law provides preventative right to existing shareholders of a limited liability company to acquire the shares of a transferor. The Minister of Commerce and Investment issued a ministerial directive on April 18, 2018, indicating that the admission of new shareholders into a limited liability company through the issuance of shares will require the unanimous approval by the existing shareholders. A transformer wishing to transfer their shares must notify the existing shareholders in writing, through the company’s management. Existing shareholders will then exercise their pre-emptive rights by bidding to purchase the shares offered at fair value within 30 days from the day the transfer notice is given.

Article 107 of the Companies Law restricts the transfer of shares to third parties in joint-stock companies prior to the publication of financial statements covering not less than two years since its formation or conversion from a LLC. However, the Capital Markets Authority may change the 2-year lock period for any joint-stock company that wishes to trade its shares publicly. Any shares bought back by a joint-stock company are deemed as non-voting shares under the New Companies Regulations. There are generally no stamp duty taxes or duties payable upon the transfer of shares in both an LLC and a JSC. Since Saudi Arabia is still governed by the Sharia law in its operations, it does not support the taxation of share transfers. However, a non-resident imposes a 20% capital gains tax on the disposal of shares of a Saudi entity.

Are you a local or foreign investor interested in investing in Saudi Arabia’s economy? Hammad & Al-Mehdar Law Firm is dedicated to providing you with a comprehensive outline of the regulatory and procedural changes, which will affect private equity investment in the form of shares. Contact us today and get the latest updates on Saudi Arabia’s Companies Law and the clauses that affect you when transferring shares.

Saudi Arabia Signs the Singapore Mediation Treaty

Posted on January 8, 2020 - 3:12 pm by perpetual-admin

The Singapore Convention (United Nations Convention on International Settlement Agreements Resulting from Mediation) is a recent United Nations Treaty intended to promote international economic integration. The Treaty provides a regulatory framework for the right to invoke and enforce settlement agreements among parties of states that ratify the agreement. The Convention enhances international trade by promoting mediation as an alternate and faster method of resolving trade disputes.

The Treaty was adopted on December 2018 and opened for signature on by August 7, 2019. Forty-six countries, including the Kingdom of Saudi Arabia, signed the Treaty becoming the first UN treaty to receive the highest number of signatories upon its commission. Singapore’s Prime Minister, Lee Hsien Loong, officiated the ceremony hailing the document as a powerful affirmation of multilateralism that establishes a mechanism for the enforcement of cross border meditated settlement agreements.

The Kingdom of Saudi Arabia was represented by Bader Al-Haddab from the Ministry of Commerce and Investment Undersecretary for Policies and Regulations who signed the Convention on behalf of the Kingdom, on August 7, 2019.

Summary of the Provisions of the Singapore Convention

Article 1: Provides for the scope of application of the Convention stating that it shall apply to international settlement agreements resulting from mediation concluded in writing by parties seeking to resolve a commercial dispute. It also provides the exemptions for its application such as in agreements concluded to resolve disputes arising from trade by a consumer for household purposes, inheritance, or employment laws. Agreements concluded through the court process are also exempted from the scope of the Treaty.

Article 2: Provides essential definitions of terms used in the Convention. This helps in providing clarity in and comprehensive understanding of the terms in situations where a party has multiple or no places of business.

Article 3: Addresses the key obligations of the Parties to the Convention with respect to enforcement and allowing a disputing party to appeal a settlement agreement. The article mandates disputing parties from member states to recognize a settlement agreement as proof that a dispute raised has been resolved.

Article 4: Lists the requirements for reliance on the settlement agreement. This includes the submission of a signed agreement and evidence that the agreement resulted from meditation. Since member countries have different forms of communication, this article acknowledges electronic communication and translations of agreements where the agreement is not written in the official language of the Party.

Article 5: Provides ground for action when a competent party refuses to grant enforcement.

Article 6: Provides for parallel application where an arbitral tribunal, court, or competent Party may adjourn its decision following the grant of the relief sought under the Convention.

Article 7: Where a settlement agreement is to be relied upon, this section allows flexibility to an interested party to avail themselves in the manner and to the extent allowed by the law.

Article 8: Outline the two reservations of the Convention. The first reservation allows a party to exclude the scope of the Convention to which government agencies are a party and the second allows for a declaration to be made to the extent that the parties have agreed.

Article 10: Appoints the Secretary-General of the United Nations as the depository of the Convention

Article 11: Governs the signature, ratification, acceptance, approval, and accession to the Convention by members

Article 12: Permits regional integration of organizations comprising of sovereign states and with competence over matters governed by the Convention to sign, ratify, approve, and accede to the Convention. This provides the organizations with rights and obligations of being a part of the Convention.

Article 13: Governs the application of the Convention to parties that do not have an existing unified legal system

Articles 14, 15, and 16: Govern the entry into force amendments, and any denunciations made under the Convention

What does the Singapore Treaty Mean for Saudi Arabia?

Being part of the Arabian Peninsula, the legal system in Saudi Arabia is founded on the provisions of the Islamic Sharia law. However, the need for international economic integration liberalized the Saudi legal system through the adoption of arbitration as a conflict resolution mechanism. The New York Convention and Saudi’s Arbitration Law of 2012 introduced the Kingdom to a new era of dispute resolution. The Kingdom, which signed the Singapore Convention in 2019, adds to its international treaties of promoting regional integration creating the following benefits.

Signing the Singapore convention is a great milestone to the Kingdom of Saudi Arabia, which has relied on meditation as a means of dispute resolution. The Treaty provides the Kingdom with an internationally recognized dispute resolution mechanism that will boost its cross border trade and investment.
Since the Kingdom of Saudi Arabia has been its doors to foreign direct investment through liberalization of its trade policies, the Singapore Convention will provide a regulatory foundation to support the rise of mediation into the main international dispute resolution arena alongside arbitration.
Saudi Arabia signed the Treaty in support of the growth of the institutional arbitration and mediation industry from the highest levels of decision-makers in the Kingdom, in pursuit of raising the Kingdom’s legislative and legal environment to a level consistent with the latest international standards applicable in this field.
The affirmative action to sign the Treaty was based on the 2030 objectives, which prioritize strengthening the Kingdom’s investment standing by implementing international legal and commercial standards with the aim of creating a favorable environment for long-term domestic and foreign investment.
Lastly, since the Treaty is an international binding instrument, it will bring added advantage bound to build assurance and stability to the Kingdom’s economy, contributing to Sustainable Development Goals.

The Future of Dispute Resolution in Saudi Arabia

International dispute resolution mechanisms through arbitration and mediation are being adopted globally as a way of promoting cross border integration. The basic idea behind the endorsement of the Treaty was to have the modern legal system provide a range of dispute resolution options for disputing parties to pick the mode of justice that is most suited to their needs, subject matter, and desired outcomes. The Singapore Convention hopes to provide an international law that provides parties with the desired dispute resolution options. After signing the Treaty, the next process will be ratifications process. According to Article 14 of the Singapore Convention, the Treaty will only be enforceable six months after three countries ratify it.

To get more information on the impact of the Singapore Convention on Saudi Arabia’s economy, contact us or call us on 966 (0) 920004626.

Why Should You Consider Commercial Franchising in Saudi Arabia Right Now

Posted on January 8, 2020 - 2:57 pm by perpetual-admin

Saudi Arabia is a kingdom that is teeming with possibilities for enterprising companies looking for new opportunities when it comes to commercial franchising. Here are a few reasons why these franchising opportunities exist, why they are so exciting, and how you can take advantage of them with the right kind of help.

Franchise Expansion Example: Abu Dhabi Bank and Jeddah Branch

The recent news that the Abu Dhabi Bank is expanding to Jeddah is just one example of how the commercial banking business is picking up in the kingdom of Saudi Arabia. They recently got a license from the Saudi Arabian Monetary Authority, or SAMA to start this franchising back in March. The license allowed FAB to operate three franchises in the kingdom.

They operate in 5 different countries.

In fact, FAB is now operating on three different continents, just expanding its business in Saudi Arabia recently. This is just one example of how the Kingdom is opening up and how those who take advantage can reap considerable rewards with the right help with getting licenses and navigating the new laws.

E-commerce Law Begins in Saudi Arabia

Those who seek to franchise through a digital approach need to consider both the new franchise and the new e-commerce laws. The e-commerce law, in particular, will govern anyone who provides services or goods to those who can access them in the KSA. This is an example of KSA opening up commerce to anyone in the world to offer goods and services to the citizens of KSA, but it’s also an opportunity for those going into commercial franchising in the area.

After all, plenty of goods and services need to be applied locally, even if they are purchased digitally. An example would be anything related to shipping or the transportation of people. The new law dictates that service provides a need to show consumers online terms and conditions as part of an electronic contract. The provider will also need to disclose details about their operations, about taxes, other fees, total price disclosure, and other information.

The KSA is interested in protecting consumers while opening up this market, which will surely include commercial franchises operating locally. This includes allowing the consumer to cancel orders if the provider has delivery delays of more than 15 days, for example.

An Impressive Market for Franchises

Recent studies have concluded that there are nearly 13 million e-commerce users in Saudi Arabia, which over 6 million more coming by 2022. These 19 million users will use over 480 dollars a day by that time. This is a huge opportunity for franchises to take advantage of, with the right representation.

New Franchise Law

One of the reasons for the recent interest in commercial franchise opportunities in the Kingdom of Saudi Arabia is due to the new franchise law that people brought to attention starting in October of 2019. This law will take effect on April 22 of 2020. It will apply to any franchise that operates in the Kingdom at all, either in part or fully. The Law is M/22 of 1441h (2019).

The law defines how the franchisee and franchisor are to interact inside the Kingdom of Saudi Arabia for one thing. The law creates a new registration and disclosure regime that will regulate franchise relationships with the Kingdom.

Opting out

There are commercial provisions in the law that restrict franchise interactions, but there are also opt-out clauses that allow franchisees to interact with the franchisor however they want. This is essential to the growth of commerce and it will help encourage the growth of commercial franchises in the Kingdom, leading to a potential boom and substantive opportunities for growth for anyone who seeks to take advantage of the new law.

Planning Window

There’s a 180-day period as a window before the effective date of the new law, which is an excellent time for parties interested in franchising to review the law with their attorneys to potentially plan their next steps when it comes to commercial franchise expansion into the country. Or, a company doesn’t have the representation they want or don’t have attorneys that they think are up to the task, it’s also a good time to get new representation with experts who understand the law, its implications, and how it can be used fully with potential ventures going forward.

In other words, this is the perfect time to find new attorneys that can help you navigate what is happening in Saudi Arabia since it’s a natural window before the law fully takes effect. After all, planning these things can take time, and that’s what you have a little bit of at the moment.

Getting Started with HMCO

The key to taking advantage of these laws and the other recent news in Australia is to go with a trusted set of attorneys such as HMCO. Hammad & Al-Mehdar are experts in areas of Saudi Arabian law including starting franchises.

Given the intricacies of the law, it’s going to be a dangerous thing to try going it alone, even if you have attorneys if those attorneys have no expertise in this specific area of practice. Making a mistake when it comes to the law in the KSA is often a fatal error for your business and your dreams of expansion in the future.

Not only are there two major laws that affect commercial franchising coming into effect in recent days or in the near future, but the interaction between the e-commerce and commercial franchise laws are going to be important to understand as well.

For more information on starting a franchise in the KSA soon, and staying within both of these laws as well as any other law that is in effect or may go in to effect in the future, make sure you don’t hesitate to go ahead and contact us today.

The faster you contact us about your intentions, the more quickly we can make sure that your venture has the best chance of success within the KSA as possible.

How Saudi Arabia Protects Minority Shareholder Rights

Posted on January 8, 2020 - 2:06 pm by perpetual-admin

Saudi Arabia Capital Market Authority (CMA) has passed several sweeping reforms to bolster protections for minority investors in Joint Stock Companies (JSCs) over the last five years. Recently, the World Bank recognized the Kingdom for its improvements. The initiatives are part of Saudi Arabia’s Kingdom Vision 2030. This strategic plan will help diversify the nation’s economy and reduce its dependence on oil-based businesses. It will also develop public sectors such as education, health, infrastructure, recreation, and tourism.

The organization ranked the nation as seventh in the world for its strong protection of minority shareholder rights in its “Ease of Doing Business” Index. Saudi Arabia jumped from its previous 63rd position to the top ten within a single year, according to Mohammed El-Kuwaiz, Capital Market Authority chairman. The nation was also named to the World Bank’s Top-20 Improvers in Doing Business 2020 list.

This article will discuss recent laws and amendments that will impact minority investor rights in Saudi Arabia.

Protections for Shareholders of Public Firms under Saudi Company Law

A minority investor is someone who owns less than a 50 percent stake in a company. Under Saudi Company Law, the nation has created protections for minority shareholders of public firms in its company law.

Under sections 76, 77, and 78, minority investors now have the statutory right to seek legal remedy against directors who abuse or mishandle their company’s operations. These directors can be jointly liable to compensate the firm and its shareholders.

Additionally, a company can file a liability suit against its directors when the board’s decisions have harmed all shareholders. Individual shareholders can also sue when directors’ actions damaged specific ones. Investors may only file suit if the firm’s litigation right remains valid, and they must notify the company that they will sue.

Recent Saudi Amendments that Will Impact Minority Investor Rights

Last year, the Council of Ministers approved 11 amendments to the Companies Law. Here are five changes to CL that will affect investor rights.

Ability to call meetings – Under previous Companies Law statutes, only shareholders (who represented half of the capital) could call an extraordinary general assembly meeting. The new Amendments have lowered the threshold. Now, shareholders who represent only 10 percent of capital can call a meeting.
Shareholder investigations – Shareholders (who represent at least five percent) may now initiate investigations by a competent judicial authority. They can ask for an investigation when the Joint Stock Company’s directors or auditors have acted suspiciously. (Article 100 of the New Companies Regulations).
Minority investor protection in JSC – There are new protections for minority shareholders in the New Companies Regulations. These include the following. Shareholders can only nominate board members based on the shareholder’s share percentage.
Cumulative voting procedures – Saudi law mandates cumulative voting for board appointments.
Independent audits – The statutes require each JSC to hold a general assembly-appointed audit committee separate from the JSC’s board of directors.

Saudi Law Minority Shareholder Rights during Mergers & Acquisitions

Saudi Arabia has approved several new statutes to protect minority investor rights during mergers and acquisitions. In 2017, the CMA’s Board of Commissioners issued a resolution to update the Merger and Acquisitions Regulations. These provisions replaced the previous one adopted in 2007.

The update resulted from the CMA’s efforts to regulate mergers and acquisitions within Saudi Arabia. The articles comply with the new Companies Law and best international standards for mergers and acquisitions. Investors should be aware of the following regulations.

Provision One: The Companies Law Article 94

Here are several statutes that protect minority shareholder rights under the Companies Law Article 94.

Validation of Meetings – An extraordinary general assembly meeting isn’t valid if only shareholders representing half of the company’s capital are in attendance unless the business bylaws allow for a higher proportion provided that such proportions shall not exceed two-thirds.
Notification for Second Meetings – Businesses must notify shareholders about a second meeting when they don’t reach a quorum at the initial one. The notice should comply with the Companies Law Article (91). The second meeting can be held an hour following the first. Companies must tell shareholders that a second meeting is possible when they advertise the initial assembly. The Authority will only validate meetings that have investors (representing one-quarter of the company’s capital) attending.
Quorums Are Not Required at Third Meeting – Companies should send a notice about a third meeting when shareholders don’t reach a quorum at the second one. The notice should follow the standards outlined in Article (91) of the Companies Law. Once a competent authority approves the third meeting, it is valid regardless of the number of shareholders represented.
Adopting Resolutions – At the extraordinary general assembly, a two-thirds majority vote of represented shares should adopt the resolution. These measures relate to capital increases/decreases, term extensions, and the termination or merger of the company will only be valid if shareholders reach a three-fourths majority vote.
Publishing Amendments and Resolutions – According to Article (65) of the Companies Laws, the Board of Directors must publish the resolutions adopted by an extraordinary general assembly meeting if they include amendments to company bylaws.

Provision Two: Merger and Acquisition Regulations

Minority shareholders have rights under Saudi Law during mergers and acquisitions. Here are a few statutes which discuss them.

Paragraph (c) of Article 3 – At the Offeree Company, all shareholders of the same class must receive equal treatment when another business makes an offer.
Paragraph (e) of Article 3 – If an Offeree Company is contemplating an offer, parties must provide information to all shareholders. They cannot limit information or share it with only a few investors. This regulation doesn’t apply to the following situations: 1.) When the Offeree Company provides confidential information to a legitimate Offer or regarding the offer (or vice versa). 2.) The Offeree Company gives confidential information by selling the shareholder, or the company, to a legitimate Offer or during a private transaction.
Paragraph (j) of Article 3 – If the Offeree Company’s Board believes there is an imminent, legitimate offer, it may not undertake any actions related to the company’s affairs. Their steps can cause the rejection of the offer. Others include moves that prevent investors from making informed decisions without the shareholders’ approval at an extraordinary general assembly.
Paragraph (o) of Article 3 – Directors and representatives can’t vote on resolutions where they have clear conflicts of interest. They shouldn’t vote at committee, general assembly, or board of director’s meetings. Conflicts arise when directors have personal interests related to the business deal. For example, conflicts may occur if a person serves as a board director and owns company stock. In another situation, a person belongs to the Offer or Company’s Board at the same time he/she manages the Offer’s one.
Paragraph (o) of Article 3 – Directors and representatives can’t vote on resolutions where they have clear conflicts of interest. They shouldn’t vote at committee, general assembly, or board of director’s meetings. Conflicts arise when directors have personal interests related to the business deal. For example, conflicts may occur if a person serves as a board director and owns company stock. In another situation, a person belongs to the Offer or Company’s Board at the same time he/she manages the Offer’s one.
Paragraph (a) of Article 23 -The Board has the right to exercise discretionary power to force certain persons to offer shares for purchase (according to Article 45 of the Capital Market Law). This situation can occur when a person (or group) increases aggregate interest shares through a restricted purchase that becomes 50 percent of an Exchange-listed class carrying voting rights. The Board can order an individual (or group) to sell shares of the same class if it doesn’t own the Offeree Company (according to Article 23 and other relevant regulations). Once an Offeree Company incurs obligations under this statute, it doesn’t need to extend the offer to its treasury shares.
Paragraph (a) of Article 23 -The Board has the right to exercise discretionary power to force certain persons to offer shares for purchase (according to Article 45 of the Capital Market Law). This situation can occur when a person (or group) increases aggregate interest shares through a restricted purchase that becomes 50 percent of an Exchange-listed class carrying voting rights. The Board can order an individual (or group) to sell shares of the same class if it doesn’t own the Offeree Company (according to Article 23 and other relevant regulations). Once an Offeree Company incurs obligations under this statute, it doesn’t need to extend the offer to its treasury shares.
Paragraph (a) of Article 24 – A person who purchases 40 percent (or more)of specific share classes that carry voting rights, may not control them for six months after purchasing this percentage. They must seek the Authority’s approval first if they wish to sell them.
Paragraph (a) of Article 35 – Companies must make information about the Offer immediately and equally available to all shareholders. They can distribute information through announcements, statements, presentations, and circulars that provide details about businesses involved. The companies should also publish this information on the Offeror and Offeree companies’ websites or through the exchange, or Regulatory Information Service Providers, no later than the end of the trading day.
Sub-paragraph (2/b) of Article 36 – Any proposed break-up fee must be a minimum size of no more than one percent of the Offer’s value. The Offeree Company’s Board of Directors and its Independent Financial Advisor must confirm that the fee is in the business shareholders’ best interest in a written letter to the Authority. They should disclose all breakup-fee arrangements in the Offer Document and the announcement (according to paragraph (e) of Article 17).

Your company deserves a veteran team that can handle your legal affairs in Saudi Arabia. Only trust the Hammad & Al-Mehdar Law Firm to handle your legal affairs. We’re a top-firm that has more than 35 years of experience. Our team has skilled litigators who specialize in international law and common law. We specialize in many sectors, including real estate, private equity, and venture capital. Count on us to provide you with exceptional customer service. Contact us to schedule a consultation today.

The ADGM Releases New Guidance about Robo-advisory Regulation and Governance

Posted on October 8, 2019 - 2:35 pm by perpetual-admin

The Financial Services Regulatory Authority of Abu Dhabi Global Market released a regulatory framework for Digital Investment Managers (Robo-advisors). They recently issued a new Supplementary Guidance: Autorisation of Digital Investment Management (“Robo-advisory”) Activities. The organization believes that these regulations will promote oversight, fairness, accountability, and transparency in the digital financial sector.

“Robo-advice leveraging AI and data analytics is an area of FinTech that has enormous potential to improve investment decision making in the Middle East and Africa region,” said Richard Teng, the Financial Services Regulatory CEO of ADGM. “With this guidance, we aim to make it easier for digital investment businesses to operate in ADGM and in turn provide investors with greater access to professional investment tools to help achieve their financial goals.”

The ADGM issued the guidance under Section 15(2) of the Financial Services and Markets Regulations 2015 (FSMR). According to the organization, the regulation is relevant to those who apply for Financial Services Permissions to conduct Regulated Activities, as defined in the FSMR (Section 19), where applicants undertake Digital Investment Management.

The ADGM defines “Digital Investment Management” as financial services that use algorithm-based technology. These tools require limited human interaction between clients and Robo-advisory providers. Their affluent customers are comfortable receiving financial services through digital channels. It also influences how they select service providers.

Digital Investment Management business models fall under two different categories within the GCC region. The first one is the fully digital model which requires little human interaction with clients, other than technical support services. The second is the hybrid model, where clients can interact with a financial adviser to discuss automated digital investment strategies produced by algorithm-based technology.

Digitized platforms allow financial managers to offer customized, cost-effective investment management services to their clients. Unfortunately, this technology has inherent risks that differ from traditional business investment models. The guidance explains how the FSRA applies regulatory safeguards to Digital Investment Managers. Additionally, the document discusses how managers can mitigate risks this technology poses to clients and the ADGM’s goals.

“As an international financial center, ADGM actively enhances its framework and platform to support innovation and the varying financial needs of businesses, investors, and consumers,” Teng said. “We look forward to welcoming more Robo-advisors to establish their presence in Abu Dhabi in ADGM and support investors with their innovative solutions.”

The guidance addresses two critical areas. The first involves regulatory permissions that the ADGM requires operators need to provide digital investment services. The second addresses how the FSRA will apply authorization criteria to areas such as governing technology and algorithms, and suitability and disclosure. The ADGM has established the following guidelines for Robo-advisors in their new supplementary guidance.

Permission Required for Digital Investment Management – As part of their business plan, Digital Investment Managers must have Financial Services Permissions to undertake Regulated Activities. They include credit advising, investment arrangements, and managing assets. Additionally, the manager may hold the assets of clients. They can also establish direct, asset-holding relationships with customers and regulated Custodians. In the latter case, the administrator needs an FSP to conduct “Regulated Activity of Managing Assets,” unless they meet exclusion criteria (Schedule 1, Paragraph 47.) FSP-accredited managers don’t need separate permissions to advise on investments, credit issues, or financial deals if these Regulated Activities are an incidental part of their business. For details, read Sections 3.1 – 3.4.

Prudential capital requirements – The ADGM requires Digital Investment Managers (who manage assets under 3C Category) to have a base capital of $250,000. Businesses that advise on investments or credit arranging deals must meet the $10,000 base capital requirement. The regulators require a higher prudential capital requirement for Digital Investment Managers because of the inherent risks involved with the investment process. These administrators can make investment decisions without first obtaining a client’s approval. Additionally, there is an increased operational complexity to hold client assets as part of the discretionary asset management process. For details, read Section 3.5.

Algorithm governance – Digital Investment Managers offer algorithms as their primary service. These professionals oversee critical components of the investment management process including portfolio allocation, risk profiling, and rebalancing. The FSRA requires Digital Investment Managers to create internal governance structures and hire a competent Board and top administrators. They must regulate and control the deployment, performance, design, and security of all algorithms. Qualified staff should ensure algorithm models functions, and provide documentation to explain its logical structure or decision tree. Additionally, businesses must establish safeguards to provide security and access controls for their model’s integrity. Companies should conduct ongoing monitoring and testing to assess whether the models achieve their outcomes and objectives. For details, read Sections 4.4 – 4.5.

Technology governance – Digital Investment Managers must ensure that its systems and controls are commensurate for the scale and complexity of its business operations. These controls include information transmission and storage, investor safeguards and protections, outsourcing, technical operations, and contingency arrangements. Additionally, managers must assess and mitigate risks for their clientele. For details, read Sections 4.6 – 4.7.

Suitability requirements – Digital Investment Managers should follow suitability rules outlined in the FSRA’s Conduct of Business Rulebook (COBS). The ADGM requires Digital Investment Managers to offer reasons for Specified Investments they recommend to clients. Companies should design a Risk Profile Questionnaire. They must ensure the information used to assess suitability can handle the risk and complexity of Specified Investment transactions on their platform. For details, read Sections 4.8 – 4.10.

Disclosure – The FSRA expects Digital Investment Managers to comply with the disclosure requirements in COBS. The professionals must provide sufficient details about the services they provide to Retail and Professional Clients. Digital Investment Managers should provide clear, fair communications to their customers that are not misleading. They should provide details about the nature and scope of services, products, and if they’re suitable to meet the client’s objectives. The companies should tell customers about any conflicts of interest. For details read Sections 4.11 – 4.14.

For a full list of requirements read the Supplementary Guidance: Autorisation of Digital Investment Management (“Robo-advisory”) Activities.

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Waqf vs. Trusts in Saudi Arabia

Posted on October 7, 2019 - 4:39 pm by perpetual-admin

Waqfs under Islamic law and trusts under English law are very similar. Both trusts and waqfs involve detaining property, leveraging a 3rd party to manage decisions for that property, and the eventual distribution of that property to a beneficiary. Still, both of them have key differences that make them entirely different. Not only are waqfs created uniquely, but they have some legal components that differ drastically from traditional English trusts. To fully understand trusts, waqfs, and the differences between them, let us break them down by definitions and legal components.

What is Waqf?

“A waqf was void without an ultimate charitable object.” Thus, outwardly at least, the motive for the creation of a charitable trust was to perform good works and please God. Only this declared motive was relevant to the validity of the trust.” — Influence of the Islamic Law of WAQF on the Development of the Trust In England: The Case of Merton College

A waqf is a charitable trust (or endowment) under Islamic law that is inalienable, irrevocable, and perpetual. The term waqf directly translates to “detain,” and a waqf can be thought of as detaining property for charitable or religious purposes for the sake of Allah. An essential component of waqfs is that the assets being donated cannot be consumable. In other words, money can be donated, but it will be invested, and the interest from that investment will go towards the charitable cause.

Here are a few legal waqf definitions:

Qurba: Getting closer to God through good deeds.
Waqif: The founder of the waqf
Mutawalli: The trustee for the waqf

There are two different types of waqfs — waqf al-Khairi and waqf al-Dhurri.

What is Waqf al-Khairi?

When a person plans to donate property, buildings, or assets for the sole purpose of virtue and charity for Allah, they are creating a waqf al-Khairi. Those who create waqf al-Khairi will choose public or quasi-public interests (e.g., mosques, roads, religious institutions, specific groups, etc.) The primary thing to note about these trusts is that they are being donated directly towards public (or quasi-public) charitable causes from the start.

What is Waqf al-Dhurri?

When a person plans to donate to a charity but wishes for their next-of-kin to receive benefits from that donation, they would create a waqf al-Dhurri. Like waqf al-Khairi, these waqfs can be both public and quasi-public.

The primary difference between waqf al-Khairi and waqf al-Dhurri is the allocation of the principal interest of the donated assets. With al-Khairi, both the remainder and current income are donated to charity, while the al-Dhurri allocates the remainder to charity and the current incomes to a next of kin.

What is a Trust?

A trust is a legal arrangement whereby a trustee holds onto assets granted by a granter for the behalf of a beneficiary. Trusts can be used to benefit charity, shield wealth from taxes, and distribute income to children upon death. However, charitable trusts (a specific subset of the English trust) is remarkably similar to the waqf. In fact, some scholars recognize the Islamic waqf as a primary influencer of English trusts and trust laws.
But that does not mean that they contain identical components.

The Differences Between a Waqf and a Trust

There are 3 primary differences between waqfs and trusts. For the purposes of this article, we are speaking specifically of charitable trusts and waqf-Khairi — since they are most similar in goal, reach, and concept.

1. Waqfs are Religious or Piously Based

All waqfs are created to promote charity as recognized by the Shariah. All waqfs must be “ayn” (capable of being touched), and the vast majority of waqfs are property and usufruct. However, waqfs can also be a donation of money, in which case the money will be invested into income-generating projects or investments and the generated income will be utilized for the charitable purposes of the waqf (or descendants in the case of waqf al-Dhurri)

In English law, trusts are legal tools that are typically leveraged to shelter income or benefit children. There is an immediate difference in concept and utilization due to the nature of the trusts. Waqfs are religious or pious, and they are legally dictated by the Qur’an and the Sunnah. English trusts, on the other hand, are dictated by a variety of legal documents and can be created for any reason.

2. Waqifs Cannot Receive Benefits from Their Waqf

When a grantor creates a trust, he or she can list themselves as the beneficiary of that trust. In the case of living trusts and self-settled trusts, trusts can be utilized entirely as a tool to shelter income from taxes. Waqfs, on the other hand, require that the waqif receive no benefit from the waqf itself. The creation of a waqf is the benefit itself, and the creator is given Hasanah (or continuous “good reward”) through their charitable deed.

3. Waqfs are Both Irrevocable and Perpetual

Once a waqf is created, it cannot be revoked under any circumstances. The waqif has no rights to revocation and cannot give himself rights to revocation the moment that the waqf is announced. This is also important — waqfs are considered created the moment the waqif announces his intentions. Thus, the waqf is legal before legal papers are drawn up.

Waqfs are also perpetual. While the creation of a waqf immediately transfers assets to the charitable cause, waqfs can also be created posthumously. In this case, it would be dictated in the will — which is called a suspended waqf. In the event that the waqfs original beneficiary ceases to exist (e.g., a mosque eventually ceases to exist) the assets from that waqf will instead be utilized for one of the following:

To benefit the poor
To benefit religious knowledge
To benefit a purpose nearly identical to the original purpose
To benefit the upkeep of other waqf assets (i.e., the income of one waqf can be leveraged to pay for the upkeep of another waqf)

With English trusts, rights don’t have to be either perpetual or irrevocable. There are legal reasons that trusts can be revoked, and there are plenty of trusts that are not perpetual.

Businesses, investors, and individuals looking for assistance with waqfs or that are interested in establishing a waqf, contact us. Hammad & Al-Mehdar Law Firm is a leading Saudi Arabian law firm with over 35 years of experience, and we give people the legal tools to help themselves, their community, and the greater good of Saudi Arabia.

The ADGM Enhances Crypto Assets Regulations

Posted on October 7, 2019 - 1:55 pm by perpetual-admin

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) recently updated its governance of crypto assets. In May 2019, the Authority released the second edition of its “Guidance for the Regulation of Crypto Asset Activities.” The regulation focuses on the FSRA’s oversight of crypto assets and related financial services that occur within the ADGM.

Last year, the ADGM released the first edition of its Guidance when it launched its comprehensive regulatory framework that oversees digital assets on June 25, 2018. The ADGM issued these new policies under section 15(2) of the Financial Services and Markets Regulations 2015 (FSMR).

The ADGM created the framework to address the full range of risks that crypto asset activities present for traders. These risks include money laundering, financial crimes, technology governance, consumer protections, custody, and exchange operations.

The FSRA notes that the new regulations will provide more clarity about crypto assets in light of recent technology developments.

The document addresses consumer protection, safe custody, technology governance, and disclosure/transparency. Additionally, they addressed Market Abuse and the regulation of Crypto Asset Exchanges in a regulatory approach similar to how global exchanges oversee securities and derivatives.

The FSRA’s enhanced Guidance applies to four types of persons:

Applicants for a Financial Services Permission to conduct Regulated Activity of Operating a Crypto Asset Business (OCAB) in the ADGM.
Authorized Persons (AP) that carry on Regulated Activity of Operating a Crypto Asset Business in or from ADGM.
APs that use Stablecoins, and Recognized Investment Exchanges with stipulations on Recognition Orders that permit them to carry on the Regulated Activity of Operating a Crypto Asset Business within the ADGM
Applicants/Authorized Persons that use Stablecoins in or from the ADGM.

The main features of the enhanced regulations are:

Stablecoins/Fiat Tokens: A Stablecoin is a cryptocurrency that has price-stable characteristics. This digital currency has increased in popularity during the past two years. Stablecoins are cryptocurrencies that have stable price characteristics. They are fully backed by fiat currencies, like the USD, or pegged against the consumer price index (CPI). FSRA will treat this currency as digital representations of money. The group defines the use of Stablecoins for Money Transmission purposes in its Financial Services and Markets Regulations 2015 (FSMR). They will license and regulate this activity as Providing Money Services. This Guidance also outlines the FSRA’s regulations of all issuers, custodians, and exchanges using Fiat Tokens.
Custody: The FSRA clarified the categories of approved crypto asset activities. The organization explained its expectations around custody governance and operations.
Technology Governance: The group introduced more clarifications and enhancements related to changes in the Crypto Asset’s underlying protocol that result in a coding change (fork). They also addressed associated governance and control expectations for license holders and crypto-asset exchanges.
FSRA Anti-Money Laundering and Sanctions Rules and Guidance (AML): The AML Rulebook fully applies to all regulated crypto-asset holders and operator activities. This updated Guidance also provides more clarity about the use of new regulatory and surveillance technologies.

The Guidance does not provide comprehensive regulations about crypto assets. Interested entities should consult Financial Services and Market Regulations (FSMR) for a full list of rules and see “Guidance & Policies Manual of FSRA,” and “Guidance – Regulation of Crypto Asset Activities in ADGM.”

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Recent Cases of Insolvency Law in Saudi Arabia and the UAE

Posted on October 7, 2019 - 12:48 pm by perpetual-admin

Insolvency refers to the inability of an entity to meet its financial obligations on time, such as paying its lenders. It may result from a reduction in cash inflow, an upsurge in expenditure, and poor fiscal management, among other reasons.

There is a slight difference between being insolvent and bankrupt. You can utilize different strategies to survive insolvency. Your options may include borrowing money, growing your income, or developing more lenient payment plans with your creditors. You become bankrupt when you run out of options to clear your debt.

Insolvency and Bankruptcy in Saudi Arabia

Before the bankruptcy law of 2018, insolvent companies in the UAE and Saudi Arabia had limited alternatives. It was criminal by default to be bankrupt, and business owners would get detained for failing to pay debts. For this reason, many would flee when their inability to pay became apparent.

Let’s discuss the genesis of the insolvency law in Saudi Arabia and the UAE and highlight some recent cases of insolvency.

The Inspiration Behind the Insolvency Law

The drop in oil prices from $115 per barrel in 2014 to a mere $27 in January 2016 hurt the economy of Dubai and Saudi Arabia significantly. Most small and medium-sized enterprises went into financial distress after customers couldn’t pay on time. The price of oil remains unstable despite having risen.

The UAE’s economic growth dropped to 3.1 percent in 2014 from 6.8 percent in 2012. At that time, the International Monetary Fund predicted that it would sink further to 2.3 percent by 2016. Experts reported more than 800 cases of business owners who had fled the UAE due to debt accumulated in six quarters.

Most of the runaway incidents involved companies that traded in goods. A decrease in bank lending and lack of liquidity had fueled the massive payment delays, forcing entrepreneurs to close shop.

Due to this trend, Saudi Arabia and the UAE found it necessary to reexamine the laws surrounding insolvency. There was a need to reassess the crime of bankruptcy and review the conditions for bounced checks. The insolvency law to come would also address insolvency proceedings initiated by creditors.

The Kingdom of Saudi Arabia (KSA) authorized the bankruptcy law in February 2018, which came to effect later in August. It consists of 17 chapters and 231 clauses which outline the procedures for bankruptcy. It provides friendlier avenues for dealing with insolvent entities to make business smoother in Saudi Arabia.

The UAE Supplier Who Fled to Britain

Pervez was a British trader who lost his business after becoming insolvent in Dubai. The construction materials supplier set up shop in the UAE before a financial crunch struck Dubai from 2008. His real estate customers would later pay only a percentage of invoices issued for supplied products and services.

He managed to survive as large scale construction work resumed in 2011 after the Arab Springs anti-government protests subsided. In 2014, another crisis took place following a regional slump in oil prices. Most customers in the construction industry either paid late or defaulted.

A fraction of his debtors ran away to avoid imprisonment, plummeting his market considerably. After some time, Pervez could not service his debts, and the bank froze his account.

He decided to flee to Britain when due dates of checks he had guaranteed approached. Soon after departure, his staff collapsed the business.

The case is synonymous to what many construction and trading companies have gone through in Saudi Arabia.

Saad Group and AHAB Bankruptcy

Maan al-Sanea owns the Saad Group, a company with interest in banking and healthcare in the city of Khobar, Saudi Arabia. Together with, Ahmad Hamad al-Gosaibi and Brothers (AHAB), Saad defaulted about $22 billion owed to banks in 2009.

For the past decade, creditors have been pursuing Saad and AHAB for the unpaid debts. Maan al-Sanea became insolvent despite having featured in the Forbes list of the world’s 100 wealthiest people in 2007. The authorities detained him in 2017 for failing to meet the said financial obligations.

Maan Al-Sanea’s Bankruptcy Filing Approved

Saad, Sanea’s company, was quick to file for bankruptcy soon after the new law came into effect. The court accepted his request, according to the Saad Group’s financial advisor.

The ruling was a leap towards resolving one of the biggest debt sagas in Saudi Arabia. In March 2018, the public gathered as Saudi government agents auctioned Maan al-Sanea and Saad’s vehicles and possessions in Dammam.

Regional and international creditors claimed at least 85 percent of the debt. Given the commercial law practices surrounding the Saad’s debt, experts saw a high chance of success in resolving the matter through bankruptcy law.

On approving the application, a Dammam commercial court appointed a third-party trustee to supervise the process of financial reorganization. Saleh A. Al-Naim, the trustee, notified Saad’s creditors to submit their claims in 90 days.

AHAB’s Application Accepted

A commercial court based in Dammam approved AHAB’s request to settle their decade-long dispute with creditors under the bankruptcy law. The ruling saved the conglomerate from liquidation as per the HSBC and Raiffeisen Bank filing.

The International Bank Corporation (TIBC) was pleased with the court’s decision to allow financial restructuring. AHAB owes the Bahrain bank close to $3 billion. In what a court in the Cayman Islands called a massive Ponzi scheme, TIBC had raised money in international markets and transferred it to AHAB.

This case was among the first ones to put the kingdom’s bankruptcy law to test in solving insolvency. After approving the filing, the court would appoint a bankruptcy trustee to evaluate and collect the claims of the creditors.

How the Bankruptcy Law Can Benefit You

The Kingdom of Saudi Arabia finally enacted the bankruptcy law in 2018. It provides better solutions to disputes between creditors and insolvent debtors in the KSA.

The law will allow distressed investors to re-evaluate their finances and meet their pending obligations to creditors. As a result, they will run their operations in smoother and more tolerable conditions.

The government hopes to boost the growth of the investment market and reduce cases of business liquidation. By so doing, KSA will stop losing substantive investors who undergo resolvable financial crises.