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‘New legal regime more investor-friendly’ ‘Laws not implemented are of no use’

KUWAIT’s reformed commercial laws are more advanced than the existing commercial laws in Dubai. They have the potential to attract FDIs and rev up Kuwait’s economy; however, the moot question is, “Will the new laws be implemented in an effective manner?” In this interview, Alex Saleh, a Partner and the Head of Office of Al Tamimi & Company’s Kuwait Office, and a highly ranked lawyer by Chambers & Partners, talks to the Arab Times about the changing legal landscape in Kuwait. He is excited about the many advantages the new commercial vehicles offer for foreign and Kuwait investors to do business in the country.


Question: Tell us about the some of the recent development in Kuwait’s commercial laws?
Answer: The legal landscape was very different when I started. There was the civil code, the commercial law and the old company’s law. The government and the parliament have made a good push to overhaul the laws in the last five years. So, now there is a set of good laws for foreigners to do business here through joint ventures and other instruments, or for that matter even for Kuwaitis. The government passed the PPP law a few years ago to allow public, private partnership. Az Zour is one such project which was closed recently.

We are representing the government in Ummul Haiman wastewater project. So, there is a whole legal regime available now for these infrastructure projects with the participation of foreign expertise and foreign investment. We also saw the Company’s Law getting completely revised and the new law was issued last year to allow for more modern corporate structuring whether through joint ventures or through legal entities, and the regulations were issued last year. So, when we structure entities, whether with Kuwaitis or foreigners or both, there’s a lot more flexibility in terms of using more modern techniques.

Kuwait has one of the lowest levels of Foreign Direct Investment. The Foreign Investment Bureau that was set up to attract FDI’s wasn’t able to issue a lot of licenses over the last 15 years. May be about 14 or 15 licenses were given and a majority of those were to foreign banks. So the new law was issued recently called the Kuwait Direct Investment Promotion Authority (KDIPA). This will make it easier for foreign companies to set up here, either through Joint Ventures or 100% ownership. It’s going to be more of a one-stop shop solution.

Normally, when you set up a company here it takes a little bit longer than what you would see in other countries. This delay could frustrate foreign companies who are used to setting up companies a lot faster in other jurisdictions. So, hopefully, with the new authority you can get all the necessary approvals from the various departments and agencies at one place. Add to it the incentives like 100% foreign ownership, tax holidays and so forth, and the deal gets very exciting.


Then there have been other laws like the anti-corruption law. There was also the privatization law that was passed, but we haven’t done a lot in privatization. The tax law was revised a few years ago in 2008.
Then we have had the Capital Markets Authority because of the excesses in the stock exchange. In the last 12 months, CMA has really become active. If you have a well regulated stock exchange, you will draw in more foreign investment because investors will now have more confidence in the system.
All these are changes in the legal landscape. In the 90’s we were still using the old legislation which had nothing for a lot of these new transactions. With these new laws, it’s really an exciting time in Kuwait.
However, now we need to implement these laws. Law is no good if you are not implementing them.
Hopefully you are going to see a lot more involvement in business from now onwards. It’s not just foreign investors but even Kuwaitis are bringing back a lot of their funds from overseas because they are feeling more comfortable with the new legal regime as well.
 

Q: What are the vehicles through which foreign investors can invest in Kuwait?
A: Joint Ventures (JV) are one way for foreign parties to do business in Kuwait. It’s normally entered into between foreign and Kuwaiti parties. The typical arrangement in a JV is that either the Kuwaiti side or the foreign side will initiate a idea for a project in Kuwait. The foreign party might have the technical expertise or the global network, while the Kuwaiti side might have the capital or the local knowledge.
So, you see a lot of arrangements done on that with each side bringing something different to the party. Typically, when they come together, you can do two types of Joint Ventures. You can do the Unincorporated Joint Venture, which is a private contract. We see a lot of that between the foreign side and the Kuwait side if it’s just to do one project.


90 % of these Joint Ventures are about receiving a contract from one of the ministries or one of the K Companies. It’s about bringing the two parties together and defining the agreement. The agreement will talk about what each side will do. Usually the Kuwait side will be responsible for procuring licenses, bringing in foreign labor and so on, and the foreign side will bring in the know-how and expertise.
The downside of the unincorporated joint venture is that it’s not a legal entity. So, to the extent that there are problems in that project the joint venture partners are personally liable.
However, the upside is that it’s very easy. It’s just a private contract between parties and they can start tomorrow.
 

Q: Why can’t unincorporated Joint Ventures work for long-term projects?
A: If the goal is to do a number of projects or do business together, what we normally do is a Joint Venture Partners’ Agreement. This is a little bit different from the first joint venture. This agreement will define a roadmap for the two parties to set up a company. They will be owners in the company. What will be the percentage of share for each party, how much will the company be capitalized with, who is going to be the manager if it’s a WLL, who will be the board of directors, what are the objectives of the company and so forth will be defined in the agreement.
 

Q: Does a Joint Venture Partners’ Agreement have legal validty?
A: Well, the contract is a private contract, and within the contract it talks about setting up the company. And once the company is set up, they will do business through the company, which will be licensed and registered through the ministry of commerce and industry. And that has value if you are going to be doing long term projects, because now you don’t have personal liabilities as a shareholder. It’s the company that has the liability.
 

Q: Can disputes between partners in such an agreement be settled in court?
A: Yes, because we call the contract a Joint Venture and Shareholders or Joint Venture and Partners Agreement. So the contract plays two roles: one is the roadmap to setting up the company, and once the company is set up, if it’s a WLL, you have a memorandum of association that’s registered and notarized at the ministry of justice. If it’s a shareholders company then it will be a memorandum and articles of association.
But because it’s sort of a boilerplate, there’s a lot of other issues that has to be settled between the parties. Once the company is set up you have to define the rights and obligations of the two parties, which are post establishment issues, and they are put in one contract.
The good thing about these agreements is that before the new company’s law it was unclear if Kuwait courts would uphold them. But in the new company’s law we have a specific section which states that these agreements are valid, legal and binding. So long as it’s not violating any of Kuwait’s laws or the Company’s Law, it’s enforceable.
That gives us a lot of comfort while advising both Kuwait and foreign companies before they enter into such agreements.
 

Q: What are the other partnership vehicles you have other than Joint Ventures?
A: If there’s a foreign company that’s going to do business in Kuwait for a short term, then you can appoint a Kuwait agent. You can’t do business here just as a foreign company. So, the first level here is to appoint a foreign agent, and you do business through that Kuwaiti company’s commercial license. That’s the easiest and the quickest way.
If you are doing a project, then the two sides can establish a Joint Venture. If it’s going to be a one-time project you can go for unincorporated JV as I mentioned.
If they want to go further, you see two typical models, which is the WLL, or the limited liability company, or the joint shareholding company. Those are the two main vehicles.
What’s good about the new company’s law is that it envisions a number of other vehicles as well, like the single person vehicle, where if you have a company that wants to do a project, and it doesn’t want any partners but wants to own100 %. This is possible through the single person vehicle.
 

Q: Can a foreign company use this vehicle to start business here?
A: Because we have 51-49 percent restriction on foreign ownership, they would have to first get a license from KDIPA.
 

Q: Does that mean a foreign company can own 100% of the business?
A: Well, that was the purpose of the foreign investment bureau that was set up in 1998. You have two laws: the company’s law and the foreign investment bureau which was superseded by the KDIPA.
The company’s law states that there is 51-49 percent foreign ownership restriction, where a foreign non-GCC person cannot own more than 49%. But the foreign investment bureau was set up to alter this condition and allow a foreign investor to own 100 % of the business provided he meets certain criteria, such as adding value to the nation by bringing in new technology or hiring a lot of Kuwaiti nationals and so on. Basically you’ve got to show that the country would benefit from your investment.
The problem with the old law was that it was efficient because in 15 years only about 15 licenses were issued, and the majority of them were for banks. So, that’s why they decided to overhaul the whole scheme last year and revise the bureau to be the KDIPA.
 

Q: What is the reason that the foreign investment bureau couldn’t issue more licenses?
A: There was a lot of bureaucracy, and the applications weren’t just getting approved. The government felt that this wasn’t working and there was a need to overhaul the law. Now, any applicant who meets the criteria will get the license.
There are primarily three things that a foreign investor who is coming into Kuwait is looking for: Can I get a company established quickly? Can I have a majority ownership of up to 100%? And can I get a tax holiday? Foreign companies pay taxes here, and they can get tax holidays of up to 5, 7 or 10 years.
So, once these laws are implemented and are in effect, you will see a lot of foreign investments coming into Kuwait.
 

Q: Are there foreign companies in Kuwait with 100% ownership?
A: Yes, there are some 14 or 15 such foreign entities, but nine of them I think are banks. So, there is a lot of room to grow. But they have to show that they are brining something like jobs, know-how technology and so on, which I think is fair.
 

Q: In which sectors do you see JVs happening a lot?
A: You will see it obviously in a lot of the ministry construction contracts. So, you see a lot of foreign developers and contractors in development projects. Seventy percent of JVs are happening in these sectors.
We would like to see more of it in the industrial sector like pharmaceuticals, manufacturing and technology. But that’s in the minority.
 

Q: How does Kuwait’s commercial law with all the latest developments compare with let’s say the law in Dubai?
A: The interesting thing is that with all the latest reforms, now our legal regime is more modern than Dubai. It’s more investor friendly, clearer, and there’s more regulator authority than you have in Dubai. Dubai doesn’t have a CMA like ours, or the foreign investment bureau like ours. Yes, it has the free trade zone that allows companies to come in 100% within that zone.
Our company’s law that is passed now is more modern and allows for more complicated structure than other jurisdictions. However, that is only one step. Fine our laws are more developed here — which Dubai will catch up with quickly as they are in the process of passing a lot of new laws — but you have to implement these laws properly and you’ve got to have government bureaucrats who understand these laws well and take the right decisions. This is why we need to work on our efficiency. When you tell foreign companies that it will take 60 to 90 days to set up a company, they will look elsewhere to invest. Hopefully, KDIPA will set right those issues.
The regulations to support these new laws haven’t been issued yet. So, it hasn’t been tested yet. So, let’s see what happens in a year from now.
 

Q: What do you expect to see?
A: I would like to think that we will see improvement and progress compared to what we currently have.
 

Q: Can you shed some light on dispute resolution in a joint venture?
A: The main thing is that when the parties come together where do they agree to settle their disputes. There are two things you can do. You can settle the dispute in the Kuwait courts or you can agree to arbitration. Those are generally the two routes.
If it is a complicated case with a lot of English language documentation, I usually recommend foreign arbitration. In the past, we used to recommend ICC arbitration, which is International Chamber of Commerce based in Paris. The French are good at civil law issues, and we have a civil law jurisdiction.
We are also used to doing a lot of LCIA arbitration, which is based in London. It stands for London Court of International Arbitration. More recently, in the last 5 years, Dubai has developed a good arbitration center in their DIFC. They call it the DIFC-LCIA, and I like it because the LCIA rules are generally well known and it’s close to Kuwait. It certainly helps if it’s a large English documentation case, because all the arbitration will be done in English.
If the documentation is in Arabic, I recommend Kuwait courts here. They do a very good job.
 

Q: Should these details of dispute resolution be finalized prior to signing the agreement?
A: It is part of the agreement.

Q: Can you tell us some of the latest JVs that you were involved in?
A: Well we recently acted as legal counsel for lenders in the completion of the Az Zour North Independent Water & Power Project in Kuwait, the country’s first Public Private Partnership project. Acting on behalf of a consortium of international and local lenders, we closed the debt financing of US$ 1.43 billion. A lot of people are looking at the transaction because it’s groundbreaking for the country.
The lenders group included the Japanese governmental agencies, Japan Bank for International Cooperation (JBIC), Nippon Export & Investment Insurance (NEXI), foreign commercial lenders such as Sumitomo Mitsui Banking Corporation, Standard Chartered Bank and Kuwait’s own National Bank of Kuwait.  The debt finance will be used by the Project Company, Shamal Az-zour Al-Oula for the Building, Execution, Operation, Management & Maintenance of the First Phase of Az-Zour Power Plant KSC, to build a combined cycle natural gas-fired power plant with the capacity of approximately 1,500 MW and a seawater desalination plant with a capacity of approximately 105 Million imperial gallons per day at Az-Zour North.

biography

Alex Saleh is a Partner and the Head of Office of Al Tamimi & Company’s Kuwait office.  With over 20 years of both MENA and US experience, he has accumulated sizable expertise in the areas of banking & finance, mergers & acquisitions and large-scale infrastructure projects.  Establishing the Kuwait office of Al Tamimi & Co in the fall of 2009 with only 3 lawyers, Alex has since grown the office to over 20 lawyers.
He represents the majority of the financial institutions based in the State of Kuwait in all facets, including basic bilateral facility agreements, syndicated loan transactions (conventional and Sharia-compliant) and project finance.  Within the banking arena, he has developed strong and professional relationships with most of the lenders he represents as well as the relevant banking and investment regulatory bodies.   In addition, since the financial crisis of 2008, Alex and his team have advised both foreign and local creditors on most of the debt restructurings occurring in Kuwait with respect to investment and related type companies.


In the corporate arena, Alex has closed on a significant number of MENA-based merger & acquisition deals in various industries including energy, pharmaceuticals, finance, communications and aviation.  He has also represented many private equity groups in many of these acquisitions developing and building a good relationship with them over the years. In addition, Alex has also been involved in most of Kuwait’s large infrastructure projects such as power generation plants, water desalination plants and wastewater projects, in the context of both public private partnerships and more traditional structures.  On various transactions, he has alternatively represented the State of Kuwait, private sponsors and project lenders depending on the particular deal.

Finally, on a consistent and annual basis, he is ranked as a Leading Lawyer by Legal 500, Leading Lawyer by IFLR 1,000 and Highly Ranked Lawyer by Chambers & Partners.  Also, he has also been voted by his peers as one of the world’s leading Islamic finance lawyers conducted by the IFLR, as a leading lawyer by Islamic Finance News (IFN) as well as being the official IFN Kuwait correspondent on Islamic Finance.  He has also led several teams that have received multiple awards by IFN for Sukuk & Country Deals of the Year.  Alex is a regular speaker in various GCC seminars and conferences, including more recent presentations in the areas of debt restructuring, capital markets and PPP projects.

By Valiya S. Sajjad
Arab Times Staff


By: Alex Saleh

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