The World Health Organisation (WHO) declared the Covid-19 a pandemic in March 2020, and with a transmission rate higher than the seasonal flu, reported cases have continued to escalate globally. As Covid-19 continues to unfold, many ongoing and prospective commercial transactions in the United Arab Emirates (UAE) are facing an avalanche of uncertainty over when, if, and how these deals will or can be completed under the circumstances.
This is especially applicable for the more fragile industries that have been negatively impacted by Covid-19 restrictions and need immediate relief in the form of buyouts or JVs. As governments and public health authorities adjust their policies to respond to this challenge, UAE companies need guidance on how to best address the situation and limit the unprecedented disruption to their businesses.
As we are witnessing a new chapter in UAE's legal environment, we believe existing and potential investors interested in the UAE should keep an eye out for opportunities during Covid-19. Historically, economic crises often create opportunities for investors. In the case of the economic downturn caused by Covid-19, there is a high probability that interested investors will find opportunities in the accelerated sales at attractive prices of companies that are, unfortunately, facing financial difficulties. Furthermore, investors should also be on the lookout for companies going through a restructuring that requires investment to either maintain or expand its business due to the global changes resulting from the pandemic.
The UAE government has proven its ability to stand against the global pandemic's impact on its market by using advanced strategies, such as the implementation of legal technologies, as well as the liberalisation and structuring of foreign direct investment (FDI).
Pandemic boosts digital transformation
Over the past few years, the current legal culture in general, and in the UAE specifically, has gradually steered away from traditional ways of doing business, thanks to the introduction of innovative technologies into the field. Covid-19 has forced the legal industry to accelerate this process of digital transformation.
Although digital transformation has been a priority for years in the UAE, the local legal industry has scarcely taken notice and has underestimated its need to adapt to such transformation, except in a few free zones. Certain UAE free zones, namely the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), have set the pace in implementing digital transformation to deliver commercial and legal services without delay or disruption. Even if not by choice, the global pandemic has sped up the UAE authorities' move towards digital transformation. Although one may argue that the UAE legal industry, and especially its mainland authorities, have not yet had time to process the rapid acceleration of digital transformation, the UAE has demonstrated that it surely can, when incentivised, alter entrenched methods of delivering legal services.
Countries such as the US and UK have been working to incorporate innovative legal technology for years, heling to make the transition to a virtual legal system amid the pandemic smoother. As many judges have stated in these jurisdictions, legal tech tools are lifesaving and have prevented delays in the justice systems. Similarly, the UAE, starting with the Dubai Courts, reformed its traditional legal system in the wake of Covid-19 by implementing digital transformation to its legal system, and holding hearings remotely at cessation, appeal and first instance level, except for criminal cases. The other emirates will surely follow suit to prevent any further delay in legal procedures.
The UAE was one of the few countries in the region working to implement legal tech in its legal system prior to Covid-19. Back in April 2018, the UAE announced the Emirates Blockchain Strategy 2021 (and the Dubai Blockchain Strategy), which seeks to transfer 50% of government transactions onto a blockchain platform by 2021. The strategy envisaged three strategic pillars: government efficiency; industry creation; and international leadership.
Fast forward to 2020, the UAE government is preparing to respond to the global pandemic with new and powerful tools in the legal system, such as digital transformation, in an effort to bring a new wave of economic opportunity and ensure that no interruptions occur in commercial transactions during this period.
New strategies have been carefully considered. Being more efficient and cost-effective, these strategies have a high probability of increasing the number of commercial transactions in the UAE by both foreign and local investors. There will be no need to postpone deals and no issue in successfully completing transactions using compatible and secured virtual systems.
For example, in order to effectively transfer shares in many countries in the region, including in mainland UAE, sellers and buyers must notify and obtain certain government approvals, for instance from the department of economic development in the relevant emirate (DED). In the UAE, the parties must also be physically present before the public notary in order to sign the share transfer documents. Once the documents have been signed, the notarisation process is deemed complete and the share transfer is completed by the DED's issuance of a new licence reflecting the new shareholding structure.
We have recently assisted clients in successfully completing transactions using new technologies in several emirates. The government is using a combination of online and video conference methods to help provide notarial and other governmental services in mainland Dubai and Abu Dhabi to establish companies for new joint-venture transactions and complete share transfers for M&A transactions.
Though the various processes in effect are straightforward, they are new both to the authorities and to the investors and are therefore, for now, still time consuming. The processes generally include the preparation and submission of applications/requests and continuous follow-up with the authorities to ensure successful completion. We are confident that in a few weeks, the processes will become more efficient and less time consuming.
Electronic signatures (e-signatures) are available, recognised and enforceable under UAE federal law and DIFC laws with certain limitations. ADGM laws do not, generally, provide for e-signatures, however, English law principles are applicable and may allow for such. If a document can be e-signed pursuant to ADGM law and submitted to the authorities if necessary, then it should be enforceable. E-signatures have not been used much in previous M&A transactions where parties usually require a wet ink signature, but we envisage that due to this climate they may soon become the norm.
We have also seen recent changes by the Securities and Commodities Authority (SCA). The SCA now requires shareholders of public joint stock companies to hold general assembly meetings virtually, register attendance online and cast electronic votes on the announced agenda items and on some corporate matters such as the election of members to the board.
This requirement does not apply to other types of companies, such as limited liability companies. Technological advances in this regard are yet to be seen, especially if the minutes of such meetings, whether board or general meetings, require authorities like the DED to reflect the resulting changes on the licence of the relevant companies, such as a change in the manager of a limited liability company in Dubai.
We constantly hear and read about the negative impacts of Covid-19 on many legal sectors, especially M&A, due to certain regulatory requirements for an effective share transfer, as mentioned above. However, we foresee a more optimistic future with the application of digital transformation that has been in the works in the UAE for years. Furthermore, many concerns in M&A transactions that typically took longer to successfully complete, can now be completed virtually in a more efficient and cost-effective manner.
Continuing down the path of liberalisation of the UAE market
While many jurisdictions are increasing scrutiny of FDI, the UAE government has chosen to take a different route by liberalising its market and opening its doors to a new pool of foreign investors. Previously, the UAE Council of Ministers announced the approval of a list of sectors and economic activities eligible for up to 100% direct foreign ownership in UAE onshore companies (UAE FDI Regulations).
In March 2020, amid the pandemic, the UAE government continued its efforts to further liberalise and diversify the market to meet global investment standards and attract investors. Its main move was to issue the UAE Cabinet's FDI Positive List Resolution, which was implemented immediately and heralds a major development for both existing and potential foreign investors. The Positive List Resolution provides clear instructions concerning the 122 economic activities made eligible under the UAE FDI Regulations exemption and sets out the minimum capital, requirements and conditions for each economic activity, as well as any available incentives. The Positive List Resolution stipulates the type of companies (FDI Company) that can apply for FDI exemption, namely limited liability companies and private joint stock companies (including single shareholder companies). Furthermore, it provides clear guidelines for the relevant committees that handle FDI applications in all the emirates to properly evaluate applications.
The Ministry of Economy has also published detailed guidance in the form of a Foreign Investor Guide, which, among other things, sets out the step-by-step process for the incorporation of an FDI Company in the UAE. The guide also specifies that existing companies can apply to convert into an FDI Company. If the applicant owns entities in several emirates and intends to obtain FDI exemption for those entities, the FDI exemption application must be submitted to each FDI committee in the relevant emirate, preferably simultaneously, and tick the same boxes for each emirate to ensure that the group as a whole obtains the exemption.
Our team has successfully obtained FDI exemptions for well-known entities in the UAE in the past. Based on our previous experiences and current applications, we can predict that the Positive List Resolution will encourage many more foreign investors to take advantage of this opportunity. The authorities, relevant committees and the applicants now have clear guidelines in place at the federal level.
Embracing the change is a challenge, but as all forward-thinkers know, challenges bring opportunities. The UAE government continues to rise to the challenges brought by Covid-19 and continues the fight to maintain its market integrity and investors' confidence. With this mindset, the UAE will surely come out stronger than before. Legal tech is one of the few silver linings of this frightening global pandemic. The developments present an opportunity to improve overall efficiency in order to adapt to a progressive and agile working environment. We can surely expect new laws, regulations and procedures to be introduced by the UAE government soon as the local market continues to adapt.
Founding and managing partner of the Dubai office, Matouk Bassiouny & Ibrahim
Ahmed Ibrahim is the founding and managing partner of Matouk Bassiouny & Ibrahim, the Dubai office of Matouk Bassiouny. Prior to founding MBI, Ahmed was the regional head of the equity capital markets team in Al Tamimi & Company, Dubai. Before that he was group general counsel of ASEC Group, the Industrial platform of Citadel Capital Private Equity, and also a leading partner at Trowers & Hamlins, Cairo, where he headed the corporate commercial department. Ahmed has experience in equity capital markets, IPOs, M&As, JVs and general corporate/commercial matters.
Malack El Masry
Partner, Matouk Bassiouny & Ibrahim
Malack El Masry is a partner with Matouk Bassiouny & Ibrahim. Prior to joining the firm in early 2018, Malack was with Al Tamimi & Company (DIFC) for seven years as senior associate in the corporate commercial department. Before that, she worked with leading law firms in Cairo, Egypt, for 10 years, namely Zulficar & Partners and Shalakany Law Firm, where she was a senior associate. Her experience includes advising on M&A transactions, equity capital markets, including IPOs and rights issues, project finance transactions, including public private partnerships (PPP), and general corporate/commercial matters.
Associate, Matouk Bassiouny & Ibrahim
Dania Yassin is an associate with the corporate and M&A team of Matouk Bassiouny & Ibrahim. She has been working directly with the DIFC and ADGM for approximately two years, as well as local governmental entities in Abu Dhabi and Dubai. She is experienced in cross-border/multi-jurisdictional public and private M&A, joint-ventures, group reorganisations and general corporate advisory work. Prior to joining the firm in 2018, Dania worked on criminal and civil matters in California, US. She assisted in personal injury, criminal, employment and other legal matters.