No More Side Agreements

Legislative changes to the way UAE companies are governed are making domestic and international investors with holdings in the country nervous, say industry observers.

Effective November 15, an amendment to the Commercial Company Law is set to ban the so-called “side agreements” forged by foreign and local co-owners of UAE businesses.

Side agreements have been a long-standing business practice that spell out the conditions by which both local and international partners will abide in the operation of a UAE-based company.

For decades, the side agreements have accompanied Article 22 of the Commercial Company Law that states that “it is a requirement for the establishment of a company to have one or more national partners whose share in the company’s capital is not less than 51 per cent.”

Under existing laws for most of the commercial sector, foreign investors can own a maximum of 49 per cent.
Legal analyst Jim Bright said the push to abolish side agreements was passed in 2004 but its implementation date was deferred for three years to give the Ministry of Economy time to find an alternative way to better protect Emirati business investments.

Three years ago, he said, the ministry was pressured to ban the side agreements in a “knee-jerk reaction” after the side agreements played a role in heavy losses in the domestic business community, he said.

The problem now, said Bright, is that if side agreements are banned, all existing legal handshakes in the past between foreign and domestic investors will be made null and void, leaving both parties on unfamiliar legal ground.
“It will be as if they (side agreements) never existed,” said Bright.

Another major downside once the law comes into effect, Bright said, is that it could discourage international investors who may be hesitant to sink money into the UAE without the legal protection of side agreements.

Canadian restaurateur Michael Ashley was considering investing in the booming UAE economy but quickly changed his mind after learning that company laws here only allow foreign investors to own 49 per cent of a business.

The climate will only be made worse, he said, without a companion side agreement to legally protect his interests.

“I’ve watched the UAE economy for some time and was extremely eager to buy into a piece of it but when I learned that I wouldn’t own my company outright, I was no longer interested,” Ashley said.

“The country is losing out on a lot of potential investment not only from Canada but I would guess from around the world.”