Structuring a Joint Venture in the UAE

19 Sep 2023

A well-strategized joint venture (JV) creates immense value and enables a business to achieve its formalised and desired organisational goal. A joint venture, in simple parlance, being a strategic business association between two or more entities encourages a fundamental contribution of separate and individual expertise and resources for massive value creation and to gain scale and strength within a market space with shared risks, rewards and common goals. Functioning on such business facilitations can be a very rewarding vehicle in order to withstand and compete through new and fluctuating business cycles of economic growth and recovery. Numerous companies use such strategic alliance models to sustain the aforementioned cycles and to enter new corporate domains, further expanding and solidifying a company’s domestic and international anchorage. 

Corporate giants such as Amazon, Volkswagen, GlaxoSmithKline, Rio Tinto and Siemens in many instances own and depend on such structures of alliance and partnerships and generate twenty-five per cent (25%) or more revenue.

Therefore, a joint venture is among the treasured choices of companies to domestic as well as foreign companies intending to set foot into the UAE market or to evolve and advance their existing operations in alternative to a distribution or agency disposition. 

With beyond 50 jurisdictions and distinctively designed mainland and free zone areas, UAE offers varied options for such structuring and defining where, and what type of entity, is to be incorporated depending on the activities that the JV will be undertaking. 

UAE permits foreign equity in JV under the structures of a Limited Liability Company (LLC), a share partnership company (SPC), public and private joint stock companies (JSC), a limited partnership company (LPC) and a Joint venture company (contractual venture or consortium company). 

Additionally, as a welcomed move, the country hosts a widened invitation to foreign direct investment and the UAE government has granted foreign investors full ownership rights under specific business categories allowing foreign investors with 100 per cent ownership rights by way of federal decree law number 26 of 2020, amending the provisions of federal law number 2 of 2015 on Commercial Companies which provided for a ceiling limit of 49 per cent to foreign ownership, and thus annulling the requirement of a major Emirati shareholder. 

A JV in UAE is more commonly formed either contractually or as a limited liability company under federal law number 2 of 2015 (the Commercial Companies Law).

One of the appealing advantages of a contractual JV is that it can be confined to a single project and therefore, the winding up procedures also become easy upon completion of the purpose. This can be a favourable option to prospective foreign partners who intend to enter the UAE market for single project purposes and do not wish to advance into recurring financial obligations such as an annual registration fee for the company. On the contrary, an advantage of a JV established as a Limited Liability Company is that such a structure benefits JV partners by limiting their liability and also enables an easier passage of shareholder interest than it would otherwise. 

That said, it is more frequently recommended that a Joint Venture company be incorporated as a holding company in either one of the financial free zones in the UAE namely, the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM). Such zones are common law governed and also enable easier and more effective enforceability of common provisions of a joint venture agreement due to zone-specific regulatory and legal framework and a more flexible regime similar to that of other foreign jurisdictions. The holding company is then recommended to set up and operate subsidiaries in order to execute the activities of the JV company in other UAE jurisdictions. Such a strategic scheme, when compared with other jurisdictions in the country can be perceived as more time and cost-effective.

Furthermore, it is of crucial importance that a JV structure and partner are rightly selected and negotiated on a well-supported and comprehensive joint venture agreement that clearly outlines and defines important terms and conditions including party entitlements and respective obligations. The agreement should ideally cover important clauses on board and management arrangements and the matters reserved for the board and shareholders, resolution of deadlocks, funding obligations and other restrictive and general governance covenants with careful consideration of the governing law of the joint venture agreement.  JV parties should lay major emphasis on placing an exit plan to safeguard their interests in line with the company’s ultimate goals, the duration and purpose of the business relationship and any other continuing business goals. 

Additionally, it is worth placing a well-drafted memorandum of understanding (MOU) to set out a commercial understanding between the shareholders or partners in relation to the operations and governance of such business relationship in order to make the process of drafting and negotiating more comprehensive contractual documentations such a shareholder’s agreement or a joint venture agreement more efficient and effective.

It is essential that prior to setting up a joint venture, a budget and business plan are formally decided between the partners with proper legal advice from the best lawyers, in order to avoid any potential risks of disagreement between them in relation to the abovementioned documents since an eventual winding up of a newly incorporated JV company would lead to be a prolonged and expensive process in the UAE. 

Furthermore, it is important to consider the factor of time when establishing a joint venture company. In order to avoid any delay in incorporation, it would be proactively strategic for the JV partners to collect and combine all documentation that is required for such incorporation parallelly when negotiating and mutually concluding a budget and an effective joint venture agreement. 

Another strategic and time-saving approach is in the execution of the JV agreement between the partners prior to incorporation and allowing the joint venture company to become a party after such incorporation by executing a deed of adherence that would act as a supplementary legal document.

In finality, certain pivotal considerations such as tax, compliance and other requirements essential to the formation of the company are worth considering along with management, liability and governance structures and distribution of profits and losses when deciding on an appropriate JV structure and revisiting questions such as the choice of zone, whether onshore/mainland UAE or free zone establishment; foreign ownership restrictions, if any; funding requirements and any other risks involved along with mitigation strategies and an appropriate form of business type suitable to the intended entities with a corresponding business plan is deemed vital.