How To Protect Your Investment In An Abu Dhabi LLC

15th September 2014

Setting up a Limited Liability Company (LLC) in Abu Dhabi, as the foreign party, you can only hold a maximum share of 49%. The remaining 51% share is required to be held by either an Emirati National or a 100%-owned Emirati company (local sponsor). Its prudent to choose your local sponsor carefully so that you can maintain full management and financial control of your business.

Can the foreign party be in control in an LLC?

Many organisations struggle with the concept of setting up a business and technically ‘giving away’ the majority share. However, it is possible to structure an LLC where the foreign party is protected, takes management control and receives total profits. By engaging with a professional local sponsor service, such as the Gateway Group, a structured agreement is set up whereby a corporate entity holds the 51% share of the business. This corporate entity will be dedicated to the provision of sponsorship and therefore totally focused on the arrangement with the foreign party and in effect hold the 51% shares in trust until such time that the foreign party should decide to sell, share transfer, or liquidate. The corporate entity acts as a nominee local sponsor.

A separate Memorandum of Understanding (MOU) or Shareholder Agreement is a binding agreement between the two parties that will be set up to ensure that the foreign party has 100% management and financial control of the business. Engaging with a corporate entity ensures that the agreement is structured and the relationship is managed professionally.

Can the foreign party secure the profits?

The Memorandum of Association (MOA) is the notarized document that the foreign party will sign with the local sponsor. Whist the foreign party can only hold a maximum 49% share of the LLC, under the Commercial Companies Law NO. 2 of 2015, the profit share does not have to mirror the shareholding and can actually be split up to 90% in favour of the foreign party. The MOU, mentioned above, could include clauses agreed between the two parties for whereby the local partner elects for the foreign partner to receive it's 10% share of the profits in return for a fixed fee.

Will the nominee local sponsor keep to the terms of the agreement?

Reputation is key, and trust is everything, especially in this part of the world. Therefore, it is important that the corporate entity meets the provisions in the agreement and values the relationship. Too often, we hear of companies setting up with unknown individuals and they subsequently struggle to communicate with them, arrange for them to attend signings or are stuck because they are travelling and haven't provided a Power of Attorney (POA). With Gateway’s service offering, the communication is with a knowledgeable, experienced Western professional on a day-to-day basis, who has powers for signings, which can be arranged at the foreign party’s convenience (subject to Notary Public timings).

What if something happens to the local sponsor?

Importantly, this structure also tackles issues associated with inheritance in the United Arab Emirates (UAE). Should a local individual sponsor pass away, the LLC could end up needing to cease operations whilst the estate is distributed amongst the deceased’s beneficiaries. The relationship with the individual will be gone and the new owners of the 51% may not be known to the foreign party, may not be interested in the business, may feud over the shares – the possibilities are endless. The LLC would be in a state of uncertainty – which is never good for business. With a corporate partner, the LLC has the peace of mind of business continuity. This may not be the first thing on your mind as you go to register for your Trade License and embark on your company formation, but further down the road, should this situation arise, your business will not come to a standstill.

What is your exit strategy?

Should the foreign party’s strategy change in the future and they need to terminate the agreement – there is a very simple, structured exit strategy of a minimal notice period. There are no long tie-ins and no high exit fees with a professional sponsorship platform, such as that provided by Gateway. Nobody wants to lose business, but equally, its better to let a client go and wish them well rather than allow the relationship to turn sour. However, beware – traditionally, terminating such agreements could be difficult, costly and time consuming.

Are side agreements legal?

The side agreement is an MOU setup to outline the agreements and provisions of the two parties alongside the suite of company formation documents. It should be noted that the side agreement can’t be notarized. However, this is a very common way for lawyers to structure agreements and its worth remembering what was mentioned earlier in this article, that reputation and trust are everything in business in Abu Dhabi, so if such a corporate entity was to break the terms of such an agreement, then the reputation would be tarnished. So it is not in the corporate entity’s interest to break this agreement.