Relaxing or Constraining Foreign Ownership Structure in the United Arab Emirates

Abstract: This essay covers the subject of foreign ownership restrictions in LLCs in UAE mainland. In the beginning the study will guide us through an overview of the incorporation process and recognized company structures, which further specifies the differences between free zone and mainland. Accordingly, the study narrows down to focus on mainland LLCs, where the 49/51 rule, which restricts foreign investors to own more that 49% of a company in UAE mainland, will be presented. As the restriction on foreign ownership rights often results in conflicts between concerned shareholders, the paper investigates strategies to resolve such disputes. What we find is that conflicts between a foreign owner and a local owner usually origin in the ownership structure. The problem is to determine which is the “valid” structure: is it the registered structure (accordingly with the 49/51 rule)? Or, is it a different structure agreed in a separate contract, i.e. side agreement? Side agreements usually stand as an affirmation of trust to specify that the UAE shareholder is not in fact the real owner of 51% share capital but rather the agent holding the same for the benefit of the foreign shareholder. Several studies are included to provide diverse conclusions and perspectives on foreign ownership restrictions, and a significant passage through case law presents deliberations of side agreement’s “validity”. UAE’s legal development in terms of the New CCL and the Anti-Fronting Law is then identified and explained. While the New CCL aims to relax foreign ownership restrictions in certain sectors, the Anti-Fronting Law’s target is to prohibit side agreements. It is found that the UAE will face a period of thoughtfulness, as it is necessary to find a balance between the country’s intentions of attracting international capital whilst ensuring a central role for UAE nationals in the domestic economy. It is also discovered that prohibiting side agreements could have a rather harsh impact on minority shareholders, who often relies on such arrangements. This further strengthens the support against the adoption of the Anti-Fronting Law. Ultimately, the thesis will outline advantages and disadvantages while considering if foreign ownership structure should be restricted or relaxed in light of the two new laws and of side agreements. It is determined that the New CCL’s positive implications overtake the negative aspects. Side agreements are proven valuable tools, if it keeps all parties satisfied and reflects the true agreement. Evidentially, it is found that the there should be no adoption of the Concealment Law. Focus should lie on the New CCL, providing relaxed ownership structure toward foreign investors. Side agreements should instead be acknowledged along with the 49/51 rule in the New CCL.