Business Law in the Middle East

Pillsbury Winthrop Shaw Pittman LLP
Business Law in the Middle East
A practical guide for multinationals
4 March 2014
Christopher Gunson
Counsel

Contents
 What is the ‘Middle East’?
 Legal system
 Business Establishment and Foreign Investment
 Commercial Agency
 Other legal and business considerations
 Dispute resolution
1 | Business Law in the Middle East

What is the Middle East? (1): MENA Countries
 “The Middle East and North Africa” (MENA) (but excluding Israel,
to be discussed later in this presentation).
 Similar systems of laws, but very different political economies
 Oil-Producers v.s. Non-Producers
 Big v.s. Small Populations
 Monarchies v.s. Republics
Yemen
Egypt
Saudi Arabia UAE
Qatar
IranIraq
BahrainKuwait
Turkey
Oman
Jordan
SyriaLebanon
Libya
Tunisia
Algeria
Morocco

What is the Middle East? (2): GCC
 Gulf Cooperation Council (GCC)
 Union of Saudi Arabia, UAE, Kuwait, Oman, Bahrain and Qatar
established in 1981 following Iranian Revolution and Iran-Iraq War.
 Significant transnational union with coordinated laws and regulations.
 Substantial foreign investment and major projects in region.

What is the Middle East? (3): Oil & Gas
 Oil Producers
 Major producer and exporter is Saudi Arabia.
 Other major producers are Iran, Iraq, Kuwait, the UAE and Algeria.
 Other important exporters include Qatar, Oman and Libya.
 Additionally, Qatar is a major exporter of LNG.
0.7
10.2
(9.3 in 2010)
2.8
0.2
1.2
3.5
(4.2 in 2010)
2.5
0.12.5
0.2
0.8
0.4
0.1~1.0
(1.6 in 2010)
0.08
2.1
0.03
Millions of barrels produced per day (mbbl/day) (2011)

What is the Middle East? (4): Populations
 Population
 Egypt, Turkey and Iran have largest populations.
 Countries with smaller but substantial populations include Morocco,
Algeria, Syria, Iraq, Saudi Arabia and Yemen.
 Countries with very small populations, such as UAE, Bahrain, Oman, Qatar and
Kuwait, are centers of foreign investment.
Figures in millions of people (2010)
2
82
26 8
22
2
7731
1
4
72
23
6
10
36
32
4
6

What is the Middle East? (5): Government
 System of Government
 Nationalist and socialist revolutions achieved independence (Algeria, Tunisia,
Lebanon) or overthrew monarchies (Turkey, Libya, Egypt, Iraq, Syria, Yemen, Iran)
during the 20th century.
 Royal families survive in the GCC countries, Jordan and Morocco.
▲ = Monarchy
▲ = Republic (date of revolution)
(1953)
(1967/1970)
(1979)
(1949)
(1969)
(1956)
(1962)
(1943)
(1958)
(1922)

What is the Middle East? (6): Arab Spring
 Arab Spring
 Protests that began in Tunisia in January 2011 quickly spread
(protests erupted in every Arab country except Qatar and the UAE).
 Republics have been most vulnerable, whereas monarchies have appeared more
resilient, enjoying greater popular loyalty, and have circled the bandwagon to
protect each other.
▲ = Regime change following protests
▲ = Regime change threatened

UAE Legal System (1)
 No written law when the Gulf Emirates
became protectorates of the British
Empire in the 19th century. Sheikhs
ruled based on the Shariah Law and
tribal custom.
 First written law when the British
sent in magistrates from Sudan
to prescribe the oral decrees of
the Sheikhs.
 Independent police force and courts
established in the 1950s with British
influence (although court system
adopted Egypt/Civil Law model).
 UAE Constitution established in 1971,
uniting six (later seven) Emirates into
one federation.
Abu Dhabi in 1960

UAE Legal System (2)
 Egypt adopted a Shariah-influenced version
of the French Civil Code in 1949. This law
was adopted across the region
as the basic civil and
 In the UAE, modern federal legislation:
 1980: Labour Law, Central Bank Law
 1981: Commercial Agency Law
 1984: Commercial Companies Law
 1985: Civil Code, Islamic Banking Law
 1992: Civil Procedures Law
 1993: Commercial Code
 2002: Modern IP legislation
 No banking law, arbitration law, bankruptcy
law, or comprehensive administrative law. Abu Dhabi in 1980

A note on Saudi Arabia
 The UAE, as a Shariah-influenced Civil Law system from Egypt, is similar to
most Arab countries from Morocco to Oman – except for Saudi Arabia, which
is truly unique in its administrative, legislative, and judicial system.
 Sharia principles forms the basis of all law. The “Basic Law” if 1996
provides that the Koran is the Constitution.
 No Civil Code (only such country in the MENA region along with Oman)
 No Commercial Code (only such country in the MENA region).
 No Penal Code (only such country in the MENA region).
 Judges are not trained jurists but Islamic scholars who make decisions
based on Shariah principles more than legislation or.
 Plenty of rules are not written but customary or enforced due to
government discretion (e.g. prohibition on women from driving cars).
 Limited legislation is more specialized and includes Labour Law,
Companies Law, Foreign Investment Law, IP, and Tax.

What is Sharia (Islamic Law)?
 Sharia is the moral and religious law of Islam based on the Koran and other
religious texts, with core concepts that include:
 prohibition on uncertainty (including prohibition on gambling)
 equality of (economic) rights
 prohibition on usury and interest
 Sharia forms “a principle source of legislation” (except in Saudi Arabia), but direct
applicability generally limited to family law and inheritance for Muslims.
 “Islamic finance” is a way to structure Sharia-compliant financial products, using
different types of security and no payments of “interest.” These structures are
rarely based in legislation.
 Sharia can impact business in the following ways:
 enforceability of option contracts (prohibition on gambling/uncertainty)
 insurance business structure (prohibition on gambling/uncertainty)
 payment of default interest (prohibition on interest)
 business succession (Sharia prohibits wills)
 different classes of shares not permitted (principle of equality of rights).

Challenges in Middle East Business Law
 Challenges:
 Often, there are no provisions of written law.
 When there is written law, it is vague, with varying levels of ambiguity and
room for interpretation.
 When there is clear written law, the administrative authorities may take a
different approach, and government agencies openly follow some
practices that are not consistent with certain provisions of law.
 Information is often not clear and rumor-based.
 People are reluctant to say “no” in Arabic culture (making tasks seem
simple when explained, when they are in fact more challenging)
 Required approach:
 Do not rely solely on written law, nor on spoken advice
 Take an appropriately practical approach

Business Establishment
and Foreign Investment

Foreign Investment Restrictions on Share Capital (1)
Kuwait Up to 49% (100% permitted in certain strategic sectors)
UAE
Up to 49% (100% permitted in freezones)—restriction on
foreign investment may soon be lifted with new Companies
Law
Oman
Up to 70% (100% permitted for US investors under terms
of US-Oman Free Trade Agreement)
Qatar
Up to 49% (100% permitted in certain strategic sectors),
limited to 25% in listed companies
Saudi
Arabia
100% (subject to the “negative list” of prohibited sectors, and
other sectors limiting foreign investment; also, license from
Saudi Arabia General Investment Authority (SAGIA) is
required)
Bahrain 100%
The Six GCC Countries

Turkey 100% (generally follows EU rules)
Jordan Up to 49%
Lebanon 100% (no land may be owned by company with foreign shareholders)
Egypt 100% (subject to approval from General Authority for Foreign Investment, GAFI)
Iraq 100% (no land ownership; certain sectors restricted)
Syria 100% as of 2009 (certain sectors restricted)
Iran 100% (but extremely rare in practice)
Yemen 100% as of 2009
Libya Up to 65% in specific sectors, otherwise no investment without investment license
(but 100% often permitted when license granted)
Tunisia Up to 50%, greater foreign investment requires approval
Algeria Up to 49%
Morocco 100% (generally few restrictions)
Foreign Investment Restrictions on Share Capital (2)

Legal restrictions on foreign investment
Bahrain,
Syria,
Yemen,
Saudi Arabia,
Egypt, Morocco,
Iraq, Iran, Turkey
UAE, Libya,
Oman, Tunisia
Kuwait, Qatar,
Algeria, Jordan
Less
restrictive
More
restrictive
Letter of the law is only one aspect…
Responsiveness of government
More
responsive
Less
responsive
UAE,
Bahrain,
Oman,
Morocco
Qatar, Turkey
Tunisia, Jordan
Algeria, Lebanon
Libya, Syria,
Kuwait, Yemen,
Saudi Arabia, Egypt,
Iraq, Iran

Dubai’s Freezones
 Dubai “Free Zones”: epicenter of multinationals in the Middle East, free from
foreign capital restrictions
 Development and History
 First free zone was the Jebel Ali Port, established as “customs free zone”
in 1980 (goods for re-export were exempt from customs).
 Jebel Ali developed into an area exempt from municipal law and foreign
investment restrictions (100% ownership by foreign investors), managed
by an independent authority.
 Over the last decade, the free zone model was applied to numerous
sectors focusing on media, e-commerce, technology, healthcare,
outsourcing, commodities, and more.
 Dubai International Free Zone (DIFC) is its own independent common law
jurisdiction.
 Today, more than 25 free zones in Dubai.

Dubai Free Zone Map
 There are so many free zones – is there a map available?
 Good question!
 The answer is: no.
 Therefore, Pillsbury has made one

49%
80%
Foreign capital investment in a UAE LLC
(outside the free zones)
1. Shares and Voting Rights
Strictly limited to 49% maximum—possible
criminal liability for any encumbrance or
restriction on 51% of shares held by local
nationals.
2. Company Management
Full Control of Manager and/or Board
Permitted—can be placed in company articles.
3. Dividends
Generally, public notary and government
authorities will recognize 49% foreign
shareholder the right to receive up to 80%
of dividends—this also can be placed in
company articles.
General Manager and/or board of managers

Structuring foreign investment
 Share Ownership
 At the share ownership level, a foreign company cannot own more than 49% of
shares.
 Be warned—seeking to exceed the limits set by law (such as through sideletters
and powers of attorney on exercise of voting rights) is a criminal offense.
 Documents (company articles, Operating Agreement) must be drafted so that
minority shareholder holds veto rights.
Operating Agreement/Shareholder Agreement
(if possible, also Company Articles):
“No shareholder meeting shall be assembled without the
shareholders holding 52% of the shares being present.”
“No resolution of the shareholder meeting may be made
without 52% approval of all shareholders”
49%

Overview of Commercial Agency Law
 Most MENA countries have a “Commercial Agency Law” that grants
substantial protections to local distributors
 Typical characteristics:
 Agency and sale of goods restricted to nationals and their companies
 Exclusive rights held for agents
 Agent registration system
 Protection from termination (including non-renewal) and right to claim
compensation
 Dispute resolution only through local courts
 Commercial Agency Laws apply to all relationship structures by which
a local party is selling goods and services, whether it is an agency,
distributorship, franchise, or other type of relationship.

History
 Registered “Commercial Agency” introduced as concept in Syria in 1952
 Spread to Tunisia, then Saudi Arabia incorporated the concept in 1962
as a protectionist measure to secure local trading families
 Spread to Kuwait in 1964, then slowly across the Arab World
 Common characteristics—but each country has different rules and
different challenges, and therefore different strategies to be adopted
1977
1982
1962
1997
2000
1952
2004
1959
1975
1996
1967
1995
1973
2002
1992
1964
 Year that Agency Law (or relevant Commercial Code) implementation
▲ = Very restrictive
▲ = Restrictive
▲ = Less restrictive

Strategy for Agency Agreements
 All distributor agreements, agency agreements, franchise
agreements, and similar agreements must be drafted with extreme
caution!
 Companies selling their products and services in the Middle East
need to know:
 local law protections held by local distributors
 agent registration system and registration mechanics
 plan ahead—what to do if the relationship sours
 exercise caution in licensing IP
 Consequences:
 Inability to smoothly terminate agent or distributor
 May have to pay compensation upon termination, or commission even after
termination
 If a formal dispute arises, agent may be able to block imports of foreign principal
goods into the territory

Other Legal And Business
Considerations

The Middle East Work Week
 Ten years ago, most countries had a Saturday
through Wednesday work week, and a Thursday-
Friday weekend
 Today, Jordan, Qatar, Kuwait, UAE, Bahrain, Syria,
Egypt, Libya, Iraq and Algeria have adopted the
Friday-Saturday weekend. As of 2013, Oman
and Saudi Arabia have also adopted the Friday-
Saturday weekend
 (The Thursday-Friday weekend remains in Yemen,
Sudan, Afghanistan and Iran)
 Some countries—Lebanon, Tunisia, Morocco and
Turkey—have always followed the “international”
Saturday-Sunday weekend
 This creates (manageable) issues in organizing
cross-border schedules and deadlines, and drafting
contracts (“Business Day” definition)

US Export Controls and Sanctions
 Office of Foreign Assets Control (OFAC) – sanctions enforcement
 US law can substantially impact what goods are exported abroad
 Numerous sanctioned countries and organizations in the Middle East:
 Iran
 Sudan
 Syria
 former Iraqi Baathist officials
 terrorist organizations
 Risks for US companies are compounded because the heavy trade
between Dubai, UAE and Iran is well-known
 The export or licensing of technology may require export licenses

Anti-Corruption
 US FCPA Prohibits Bribery of Foreign Public Officials
 US law criminalizes bribery of foreign public official (under the definition of
US law)
 Large number of FCPA investigations involve the Middle East, which
makes it a high-risk jurisdiction for many companies
 Department of Justice is increasing enforcement
 Additionally, bribery is a criminal offense in most Middle Eastern countries
 UK Bribery
 A newer regime that may have stricter requirements than the US FCPA
 Required measures for persons subject to jurisdiction
 Implementing a careful compliance system and monitor it on an ongoing
basis
 Importantly, advising local employees and agents of US law requirements

Israel: Arab League Boycott and US Anti-Boycott (1)
 Arab League Boycott
 Three prongs:
 Primary boycott: Products and services that originate in Israel
 Secondary boycott: Businesses that do business with Israel
 Tertiary Boycott: Businesses that do business with boycott violators
 “Primary boycott” still actively enforced in most countries, many countries still
maintain “blacklist” of companies and businesses deemed to violate the boycott
 US Anti-Boycott Law
 US implemented “anti-boycott” law in 1977 to encourage non-compliance with Arab
League boycott
 Requires reporting of any request, condition, or contractual provision to comply
with boycott provisions, and fines for express compliance with boycott

Israel: Arab League Boycott and US Anti-Boycott (2)
 History of the Boycott
 Through the Cold War, many multinational had to choose between doing business
with either Israel or the Arab World—but not both
 Arab League nation coordination ended in 1994, when Jordan established relations
with Israel and the GCC announced it would only follow the primary boycott
 Following that, many multinationals do business in Israel and the Arab World
(but typically managing Israel business from Europe or the US)
 Doing business in Israel from the Middle East
 It remains a criminal offense to import Israeli products in most countries
 Unpredictable levels of enforcement by authorities
 In conclusion: this issue must be handled delicately—risks in seeking
express compliance with US law may include:
 increased scrutiny from Middle Eastern government agencies
 bad relationship with local partners and employees (who may be sensitive to local
reputation risk, and criminal and personal liability under local law)

New York Convention
 Litigation in the Middle East (outside of Saudi Arabia) follows a Civil Court
system based on Arabic language written pleadings. The perception is that
proceedings are slow, judges lack commercial experience, and courts favor
local interests.
 Most countries are party to the 1958 Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (“New York Convention”)(except for
Iraq, Libya and Yemen), and additionally, two regional conventions (Riyadh
Convention, GCC Convention).
Shaded countries: NY Convention Signatory States

Regional Arbitration Forums
Cairo Regional Centre for
International Commercial
Arbitration (CRCICA)
GCC Commercial Arbitration
Centre, Bahrain
Dubai International Arbitration
Centre (DIAC)
Dubai International Financial
Centre (DIFC-LCIA)
International Arbitration and
Conciliation Centre, QatarBDCR-AAA – Bahrain Chamber for
Dispute Resolution
Abu Dhabi Commercial
Conciliation and Arbitration
Centre (ADCCAC)

Arbitration Award Enforcement
 These three conventions should (in theory) provide a route for
enforcing an international arbitration award in every country.
 In practicality, there are issues with enforcement in many countries,
and a large amount of uncertainty.
 Using a regional arbitration center may give you more avenues to
enforcement (using not just NY Convention, but depending on the
country, also the Riyadh Convention and the GCC Convention).
 The current favored forum for international arbitration in the region is
the DIFC-LCIA Center in Dubai (previously, forums in Bahrain and
Cairo were preferred).

Thank you for your kind attention.
Christopher Gunson
Counsel
christopher.gunson@pillsburylaw.com
+971.50.554.6205

Business Law in the Middle East

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