Foreign investors have long struggled with the 51% local ownership requirement under UAE law. The goal has always been to devise ways of approximating 100% beneficial ownership by the foreign minority shareholder while still satisfying the local ownership requirement.
This has been a feature of the UAE corporate landscape for so long that those familiar with doing business in the UAE seem to have become complacent, waving away the fundamental fact that they are only minority owners of what they view as their wholly owned entities with vague references to “side agreements” or “scheme documents” that have become the norm when structuring minority protections in UAE limited liability companies (LLCs), by far the most common vehicle for foreign investment in the UAE.
Briefly, the so-called “side agreements” are a set of documents pursuant to which a UAE national who owns 51% of an LLC agrees to transfer all of the economic benefit and control over those shares to the foreign 49% shareholder (or its nominee), creating a plausible commercial construct to make the arrangements appear legitimate (when in reality the construct is entirely false), thereby giving them a better chance at enforcement by a UAE court if challenged.
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James Bowden is a partner at Afridi & Angell, a UAE-based law ﬁrm with ofﬁces in Abu Dhabi, Dubai, the DIFC and Sharjah.
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