11 Apr 2022
What is an SPV and why do companies avail such entities? A Special Purpose Vehicle (SPV) also known as Special Purpose Companies (SPC) is a separate legal entity formed to fulfill or undertake a limited, specific, or temporary business purpose or activity. SPV is a subsidiary created by a parent company to isolate financial risks, which have a separate legal status, assets, and liability structure, and maintain a separate balance sheet from that of the parent company. SPV has a wide range of uses and benefits.
Uses and Benefits of SPVs
Risk sharing: A parent company can create an SPV to allocate its projects involving high risks. The risk involved in the projects can be shared with this SPV and if the parent company ends up in bankruptcy while carrying out any high risks involving projects, it will not affect the SPV. And also, if the SPV ends up in bankruptcy while carrying out its project involving risks, it will not affect the parent company who created the SPV, since it is formed to fulfill a specific business purpose or activity.
Asset transfer: SPV can be used to transfer assets. Once the assets are transferred to the SPV they become unidentifiable. And also, SPV can help to transfer non-transferable assets, for instance, mine, power plants, gas plants, etc.
Financing: Some investments can be used to ring-fence, increase the amount of debt owed to the parent company, or finance parental assets (or SPV assets) without subjecting them to cross-liabilities.
Real-estate investment: SPV can be used to obtain title to real property, thereby, limiting the resource of mortgage lenders depending on the location of the asset.
Securitization: Through securitization companies reduce their funding costs. Companies can use SPV as an entity through which they can securitize a loan. In this respect, SPV will purchase these assets by issuing debts and this provides a priority right to those persons who are the holders of the asset-backed security to receive the payments in respect of the debt.
Raising Capital: In certain situations, SPV can be used to raise capital at favorable rates with creditworthiness determined by the collateral of the SPV, rather than the credit rating of the parent company.
Intellectual Property: SPV protects the intellectual property right of the companies from the pre-existing licensing deal. It can be used to separate valuable intellectual property into a separate structure with minimal liabilities. And also, it can be used to raise funds and enter into license agreements with third parties separate from its parent company.
Private Company Limited by Shares
LTD and Restricted Scope Company are the two legal setups for SPVs provided by the ADGM.
Private Company Limited by Shares- LTD: The private limited companies are the most common forms of SPV in ADGM. The ADGM regulations are more flexible to convince investors all over the globe to establish SPV in ADGM.
Restricted Scope Company: This legal structure is unique in nature in a way that the information regarding the formation of SPV is not disclosed on the public register. But full disclosure to the registrar is mandatory for its formation. A restricted scope company can be established only as a family office or subsidiary of the public company.
SPV and foundations in the ADGM must have a Company Service Provider (CSP) unless exempt. Company Service Provider is a licensed person appointed to provide company services in the ADGM. The services provided by the CSP include the assistance in setting up the SPV, providing registered office to the entity incorporated in ADGM, providing directors, company secretaries, nominee shareholders, accounting services, etc.
ADGM Foundations
An ADGM Foundation is a separate legal organization incorporated with its features. It is a recent concept established by the financial free zones which are similar to companies without shareholders. ADGM Foundations provide access to individuals and organizations into the corporate structure. The ADGM Foundation like trust is used for many purposes such as wealth management and preservation, tax planning, family succession planning, corporate structuring, and asset protection. As compared to trust, the founder of the foundation can retain more control over the foundation.
ADGM foundations offer a strong balance of client confidentiality and high transparency in ADGM’s globally recognized legislative environment. ADGM foundations are useful for international clients who seek to effectively manage and oversee their properties and money within competitive and international jurisdictions. ADGM foundations act as an alternate to trusts for monetary planning and structure.
Advantages of ADGM Foundations Regime:
- Access to DTTs in the UAE (subject to requirements of the UAE Ministry of Finance)
- Asset management
- Strong administrative features on which the Foundation Council operates on a par with a Board of Directors. The duties of council members are set out in the ADGM Foundation Regulation. The government follows international best practices and sets a regulatory standard for the Foundation Council. These criteria include legal obligations similar to those of directors in the company law.
- Guaranteed by Guardian supervision. The Foundation Council is administered by the Guardian and makes sure that it complies with the charters and by-laws of the Foundation. The appointment of a Guardian after the death of the Founder is mandatory and optional during the Founder’s lifetime.
- Legal personality as opposed to trust. Having a legal personality, as a company can, gives foundations the flexibility to enter directly into contracts and arrangements.
- Separation of responsibilities while upholding control of properties. The Foundation is a separate legal establishment that permits the separation of responsibilities among the Foundation and the Founder.
- Eternal existence after the life of the founder. As a company, a foundation is a permanent concept that consents adjustments to continue, and thus offers certainty after the death of the founder.
- Wealth Protection Mechanisms
ADGM Foundation is a leader within the UAE in regulation and offers a variety of attractive terms. The government provides the dominance of the foundations and the nominal set-up costs, both inside and outside the ADGM. The commitment requirement for primary assets is only $ 100, which does not require a physical office. The government also provides limited public disclosure of anonymity in the public register