GCC update. NASDAQ Dubai Listing Rules consultation. January Contents

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1 January 2011 GCC update. NASDAQ Dubai Listing Rules consultation On 18 January 2011 NASDAQ Dubai issued a consultation paper proposing changes to its Listing Rules that have been in effect since Many will remember that NASDAQ Dubai proposed changes in 2008 which, whilst not adopted at the time, opened up a constructive dialogue between NASDAQ Dubai and various stakeholders including investment banks, law firms and issuers. Such dialogue resulted in a re-think of the Listing Rules and has led to this new consultation process. The proposed changes to the Listing Rules are principally designed to encourage retail participation in IPOs and attract small and medium enterprises and family companies whilst maintaining international regulatory standards. They also seek to separately deal with equity securities, debt securities, fund securities, structured products and Islamic securities. The key proposals include the following: > Prospectus requirement and greater interface with Dubai Financial Services Authority ("DFSA"): IPOs must be conducted using a "Prospectus" as opposed to an "Exempt Offer Statement" (each as defined in the DFSA s Offered Securities Rules). In practice, this means that it is the DFSA as opposed to NASDAQ Dubai which will be the principal interface with the issuer with regard to the offering document. The content and scope of offering documents is unlikely to change as historically issuers have prepared such documents to Prospectus standards. It is understood that the DFSA expects to further align the contents requirements for Prospectuses with those of the EU Prospectus Directive. Contents NASDAQ Dubai Listing Rules consultation... 1 Changes to Dubai property rules for offshore entities... 2 Bahrain s new Corporate Governance Code... 4 New public debt law for the United Arab Emirates?... 5 United Arab Emirates ratifies foreign arbitral awards under New York Convention... 5 Dubai International Financial Centre s first Sharia a compliant REIT... 6 United Arab Emirates bankruptcy law tested by property developer... 7 > Genuine investor interest: There must be genuine investor interest in the securities. On IPOs this means that at least 10% of the offer must be set aside for retail investors or there must be at least 400 security holders. This is intended to ensure liquidity in the securities. > Specific rules for different types of securities: The Listing Rules are to be restructured to deal separately with equity securities, debt securities, fund securities, structured products and Islamic securities. GCC update Issue 3 1

2 > Alternative eligibility requirements to attract wider range of equity issuers: The current Listing Rules require issuers to have a minimum market capitalisation of USD 50m. The proposals allow companies that do not meet this market capitalisation test to list on NASDAQ Dubai provided that they qualify under one of the alternative tests (i.e. a market capitalisation of USD 20m, a profits test or an assets test) some of which also impose a regulatory lock-in of 12 months. > Replacement of sponsor regime with lead manager regime: Under the current Listing Rules, issuers are required to appoint a sponsor. The sponsor owes a number of regulatory duties to the issuer and NASDAQ Dubai in relation to the listing. It is proposed that the sponsor regime is dispensed with. Issuers may, however, choose to appoint a lead manager to carry out a similar role to that of the sponsor. > Shortening of listing application review process: The proposed rules do not make reference to the existing 12 day review process for listing applications. The 12 day review period is considered to be "out of sync" with the shorter listing application and review processes in other international markets. This change demonstrates a potentially streamlined process. The consultation period ends on 17 March 2011 and NASDAQ Dubai expects the new Listing Rules to be effective in the second quarter of However, this will depend on the feedback NASDAQ Dubai receives in the consultation process and the approach taken to address it. NASDAQ Dubai expects the new Listing Rules to be effective in the second quarter of During the consultation period there will be some uncertainty as to the process that NASDAQ Dubai and the DFSA adopt for potential issuers wishing to list their securities. The consultation process is a welcome step to aid the development of NASDAQ Dubai as a genuine alternative to other exchanges in the Middle East. Please contact Richard O Callaghan or Hardeep Plahe for further information. Changes to Dubai property rules for offshore entities Significant changes to the rules applicable to offshore entities acquiring interests in property in Dubai took effect on 1 January New guidelines issued by the Dubai Land Department ("DLD") change the registration regime for real property rights in Dubai for companies incorporated outside the United Arab Emirates ("UAE") or otherwise treated as offshore. With effect from 1 January 2011, only companies registered as offshore entities with the Jebel Ali Free Zone Authority ("JAFZA") are eligible to register real property rights with the DLD, according to the guidelines. The requirement for JAFZA registration is an addition to the existing law which provides that offshore companies are able to own real property rights (perpetual freehold, leasehold or usufruct titles up to 99 years) in specified areas in Dubai subject to registration with the DLD. Accordingly, from 1 January 2011, an attempt by a non-jafza offshore company to register a real property right in Dubai would now be refused and so any agreement GCC update 2

3 purporting to transfer or grant such a right to a non-jafza offshore company would be invalid. In order to apply for registration of a real property right, the JAZFA offshore entity will need to submit to the DLD a JAFZA registration certificate (attaching the company's shareholder certificate and memorandum of association) and a separate undertaking to notify the DLD of any change to the share ownership of the company. JAFZA have yet to release details of the specific requirements for obtaining their registration certificate. The guidelines do not apply retrospectively. Offshore companies' current landholding interests should not therefore be affected. The guidelines do not suggest that any future changes in control of such entities will trigger any further requirements or fees. The guidelines are generally perceived to be an attempt to ensure that due diligence is carried out in relation to the identity of those who ultimately own real estate interests in Dubai, rather than driven by a wish to generate revenue for JAFZA and/or the DLD. This would explain the requirement for an undertaking to notify the DLD of any changes in share ownership after a property is registered. It is not clear why JAFZA was chosen as the conduit for foreign ownership, as opposed to (or perhaps in conjunction with) other offshore jurisdictions within Dubai such as the Dubai International Finance Centre. The massive scale of real estate investment in Dubai enabled by the Law has been well documented. The benefits of using an offshore corporate vehicle to purchase interests in land in Dubai include being able to bring investors together, often as part of a fund or trust arrangement, enabling future entries and exits from the ownership of the underlying asset to be achieved as share transfers rather than land transfers, thereby avoiding the levy of fees and charges. The guidelines will have an impact on structures which are premised on the ability of foreign companies to acquire or hold real estate interests in Dubai. The guidelines will have an impact on financing or investment structures which are premised on the ability of foreign companies to acquire or hold real estate interests in Dubai. While some structures may be able to accommodate adding an appropriate JAFZA layer into such structures, more complex challenges exist where there are good legal or commercial reasons to propose holding the real estate asset offshore (for example, to benefit from foreign insolvency or trust regimes). Additional administrative steps and expenses will, of course, arise where a JAZFA company is incorporated to hold property in Dubai. It is not clear whether the Dubai Government will issue primary legislation amending the existing law - legally it would appear necessary for it to do so because issuing restrictions on who can buy or register real property does not seem to fall within the competences of the DLD (which are generally limited to creating administrative rules for record-keeping). A statement dealing with how JAFZA and the DLD will implement this change, to supplement the guidelines, would be welcomed in the interests of certainty and clarity. Please contact Sarosh Mewawalla or Richard Davies for further information. GCC update 3

4 Bahrain s new Corporate Governance Code The role of corporate governance - the system by which companies are directed and controlled - has been under examination internationally in the wake of the financial crisis saw new corporate governance codes in many countries including, the United Kingdom ("UK"), the United States ("US"), the United Arab Emirates ("UAE") and in the Kingdom of Bahrain. A project to revise corporate governance standards across the European Union is underway. Across the Gulf Corporation Council ("GCC") region (comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), all countries except Kuwait have now adopted corporate governance codes. Bahrain s new Corporate Governance Code (the "Code") came into effect on 1 January It supplements Bahrain s Commercial Companies Law ("CCL"). The purpose of the Code is to establish corporate governance principles in Bahrain based on international best practices and to attract investment by providing protection to investors. The Code applies to all operating joint stock companies incorporated under the CCL. Initially, the Code applies to public companies but should be used as a model by all other companies to the extent that it applies to their circumstances. Subsequent revisions to apply the Code directly to other types of company are expected. Compliance with the Code is not mandatory but non-compliance must be publicly disclosed and explained. The Code is based upon nine core principles of corporate governance, supported by directives and recommendations. The principles cover a range of issues including the board s role and responsibilities, directors duties, internal compliance and audit procedures, management structure, remuneration, communication with shareholders and governance reporting and additional governance requirements and disclosures for "Islamic" companies. Key directives and recommendations in the Code include that at least half of the company s board should be non-executive directors and at least three of those are to be independent directors. The chairman and the CEO should be separate persons and the chairman should be an independent director. The board should establish audit, remuneration and nomination committees and such other committees as may be needed. The Code also recommends further shareholder communication including maintaining a company website and direct communication with major shareholders on a continuing basis. The principles and accompanying directives and recommendations provide a minimum standard of corporate governance and should be complied with. Compliance with the Code is not mandatory (in contrast to the mandatory regimes in the US and the UAE), but non-compliance with the recommendations must be publicly disclosed and explained to shareholders annually (in common with the "comply and explain" principle in the UK and a number of GCC countries). Companies may adopt higher standards of corporate governance and some companies may be required to comply with additional directives or guidance that may be issued by regulators, such as the Central Bank of Bahrain. GCC update 4

5 Now that the Code is effective, companies are required to be in compliance by the end of Key next steps for companies include adopting corporate governance guidelines and ensuring that corporate governance is an item on the agenda of the next AGM. Please click here to view Linklaters Briefing Note on the UAE Corporate Governance Regime (February 2010). Please contact Scott Campbell or Hardeep Plahe for further information. New public debt law for the United Arab Emirates? A draft public debt law, aimed at creating a sovereign bond market and managing sovereign debt, is reported to have been approved by the Federal National Council of the United Arab Emirates ("UAE") on 28 December The draft law requires Presidential approval before it comes into force. The text of the draft law has not yet been released publicly. It reportedly limits the Government debt to 25 per cent. of the UAE s gross domestic product (GDP) or AED 200 billion. A debt management office at the Ministry of Finance is expected to be established to more closely regulate Government (and Government-related-entity) debt, as well as to oversee sovereign bond issuances and other financial instruments. The draft law, once passed, will represent a key step toward the issuance of the UAE s first sovereign bond. Sovereign-related entities, which have been active players in the international bond markets, are reported to be looking to raise funds through bond issues because of the need to fund maturing bank debts and long-term local projects. The law, once passed, will represent a key step toward the issuance of the UAE's first sovereign bond. Please contact Richard O Callaghan or James Martin for further information. United Arab Emirates ratifies foreign arbitral awards under New York Convention The Federal Court of First Instance in the Emirate of Fujairah has ratified two English arbitral awards (without reviewing their merits) in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the "New York Convention") in a recent case. This is believed to be the first time a United Arab Emirates ("UAE") court has done so since the UAE signed the New York Convention in The New York Convention provides for the mutual enforcement of arbitral decisions amongst signatory countries. Under the New York Convention, the enforcing court should not ordinarily revisit the substantive issues of the dispute but should ratify a valid foreign award. However, there has been some concern that in practice a UAE court may re-examine the merits of, or may refuse to enforce, a valid arbitral award issued in a country which is a signatory to the New York Convention, including on grounds of UAE public policy. The decision is encouraging it shows that a UAE court will, in the right circumstances, enforce arbitral awards made outside the UAE. However, the GCC update 5

6 UAE courts are not bound to follow the decision as, in common with other civil law jurisdictions in the region, there is no doctrine of binding precedent in the UAE. While courts may be persuaded by previous decisions, this case may be of limited persuasive force for various reasons. First, the defendant did not appear or present arguments to the court, though duly notified of the proceedings. The court appears to have been persuaded solely by the arguments made by the claimant s counsel. Secondly, this was a first instance judgment in the emirate of Fujairah; it is not clear how persuasive this decision would be in court proceedings in the other emirates, particularly Dubai which has its own courts system and is not part of the UAE federal judicial system. Should a UAE court be asked to ratify a foreign arbitral award under the New York Convention in the future, that court could well take a different view, particularly if objections are raised by a responding party and the court engages in more detailed debate of the issues. Please contact James Martin or Caroline Cheney for further information. Dubai International Financial Centre s first Sharia a compliant REIT Emirates REIT, a real estate investment trust established as a joint venture between Dubai Islamic Bank and the French property firm Eiffel Management, is the first announced REIT to be structured in the Dubai International Financial Centre ("DIFC") and will be subject to the new Collective Investment Funds regime implemented in Emirates REIT has been structured so as to be Sharia a compliant. The first DIFC REIT will be subject to the new Collective Investment Funds regime. Under the Dubai Financial Services Authority ("DFSA") Collective Investment Funds regime, a DIFC REIT is a closed ended domestic property fund, structured either as an investment company or investment trust, whose investment objective is aimed primarily at investment in income-generating real estate (being real estate, certain real estate-related assets as well as other property funds) and which must be listed and traded either on NASDAQ Dubai or an exchange established in a jurisdiction recognised by the DFSA as having an equivalent level of regulation to that in the DIFC. A DIFC REIT must distribute at least 80 per cent. of its net annual income and will be subject to a borrowing threshold of 70 per cent. of net asset value. As an income generating fund, there are certain restrictions on a DIFC REIT from investing in development assets. The DIFC REIT is not exempt from the foreign ownership restrictions which apply to the ownership of non-freehold real estate in the Emirate of Dubai (unlike public joint stock companies listed on the Dubai Financial Market), and careful consideration will be required if it is intended that the DIFC REIT is to have exposure to such assets, not least because the DFSA's Collective Investment Rules require, as a general principle, domestic property funds to hold good marketable legal and beneficial title to real estate assets. Please contact Scott Campbell or James Coleman for further information. GCC update 6

7 United Arab Emirates bankruptcy law tested by property developer Bankruptcy laws in the United Arab Emirates have been much discussed in the wake of the financial crisis but little used. Corporates which have faced financial difficulty in the UAE have typically initiated private restructurings with their relationship lenders to address their problems or, as in the case of Dubai World and its subsidiaries, government intervention has led to a change of law to facilitate bespoke restructuring solutions. As a result, the federal bankruptcy legislation is broadly untested in the UAE courts. The courts wide discretion in bankruptcy proceedings leads to even further uncertainty as to how proceedings may play out in practice. Federal bankruptcy legislation is broadly untested in the UAE Courts. Al Murjan Real Estate LLC is understood to be the first substantial property developer in the UAE to file for bankruptcy under the UAE Commercial Transactions Law (Federal Law No.18 of 1993). Al Murjan Real Estate LLC, a joint venture between His Highness Sheikh Abdullah bin Rashid, Deputy Ruler of Umm al Quwain, and Al Khalijia Investments, reportedly filed for bankruptcy in the Emirate of Sharjah in November The deadline for claims by investors against the company arising out of it s stalled White Bay resort development was reported to be 7 January There is limited information in the public domain about Al Murjan s bankruptcy proceedings. Some sources seem to indicate that the bankruptcy proceedings may be a gateway to liquidation for the property developer, although this is not clear and some confusion arises due to the interchangeable references in publicly available information to bankruptcy, insolvency and liquidation terminology. It is important to draw a distinction between bankruptcy and liquidation which, under UAE law, are separate procedures, governed by different regimes and having different objectives. Bankruptcy seeks to rehabilitate a distressed company following discharge of its debts through agreement with its creditors, whereas liquidation is a termination procedure involving the realisation and distribution of the assets of the company to satisfy, as far as possible, its liabilities. While the linkage between the two regimes is not wholly clear, the legislation does provide that the court may commence liquidation proceedings where the assets of a company remaining at the end of bankruptcy proceedings are insufficient to carry on its business. How the Al Murjan bankruptcy proceeds will be a matter of great interest for many (particularly for property developers in financial difficulty) as the proceedings represents relatively uncharted territory. UAE bankruptcy laws are currently under review but it is not known when the new law is expected to come into force. Please click here to view Linklaters client briefing on Bankruptcy and corporate rescue in the UAE: overview and observations (July 2010). Please contact James Martin or Caroline Cheney for further information. GCC update 7

8 Contacts For further information please contact: Sarosh Mewawalla Gulf Managing Partner (+971) sarosh.mewawalla@linklaters. com Scott Campbell Partner (+971) scott.campbell@linklaters.com James Martin Partner (+971) james.martin@linklaters.com Authors: Sarosh Mewawalla and Caroline Cheney This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2011 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on firm is registered with the Dubai Financial Services Authority. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at gccupdate@linklaters.com. A Ninth Floor, Currency House Dubai International Financial Centre PO Box , Dubai United Arab Emirates Telephone (+971) Facsimile (+971) GCC update Issue 3 8