Q. What is the role of a commercial lawyer in the business of a law firm?
The role of a commercial lawyer in the modern legal arena has evolved from being a legal technician to a business advisor. The lawyers who are commercially aware of the requirements of the traders will be able to manage their business by helping them achieve their business objectives, by delivering practical solutions to their concerns. Legal and commercial awareness is the attitude which reflects the current market conditions with an understanding of the developments in law. In involves an understanding of the economical, social and political framework in which law operates.
Q. What are the different modes of company set up through which foreign investors can invest in Kuwait?
In order to do business in Kuwait any foreigner should have a legal entity for which they should set up a commercial company or appoint a local agent. Kuwait has a civil code, commercial law and the company law which details the procedures for setting up of a company in Kuwait. A foreign person or entity may enter the Kuwaiti market and conduct business in the following ways;
(1) Limited Liability Company;
(2) Joint Stock Company;
(3) General & Limited Partnership
(4) Joint Venture.
(5) Agency set up
Limited Liability Companies
The limited liability company is simple to establish and to operate and, therefore, is popular among foreign investors. The Companies Law provides that at least 51 percent of a limited liability company shareholding must be owned by a Kuwaiti citizen. The limited liability company may not be used for insurance, finance and banking activities. After the filing procedures are completed necessary approval from various governmental bodies should be obtained i.e.
Registration of the Company with the Chamber of Commerce; Registration with the Public Authority of Civil Information (PACI); Registration of the ‘commercial signs’ with the Municipality; Registration with the Ministry of Social Affairs; Registration with the immigration department.
A joint venture company does not have a legal personality and therefore it is treated as a private contract. The joint venture (Company) may transact business with third parties only through one Partner, who is personally liable for the transactions he enters into with third parties. The transacting Partner’s liability to third parties is unlimited. The liability of a non-transacting Partner is limited to his share in the joint venture. Normally, the joint venture agreement will devise guidelines or framework on how to form a legal entity in Kuwait. Joint Venture Agreement is common in government projects.
The Agency Laws of Kuwait insists on a number of conditions which need to be fulfilled for registration of a commercial agency. For that, the Agency Agreement needs to be duly registered with the commercial agency register at the Ministry of Commerce and Industry (MCI).The Agent must be an eligible Kuwaiti national or a wholly owned Kuwaiti entity incorporated in Kuwait. The agency agreement must be in writing and should include the name, nationality and address of the Agent and the Principal; the products, commodities and services covered in the agency relationship; the area of operation; the commencement date and the duration of the Agreement
Q: Can you suggest some of the important changes that have come about in the foreign business relationship?
A: Under the 1960 Law a company with limited liability was required to have a Kuwaiti partner holding at least 51% of the parts. In December 2012, the Companies Law Decree No. 25 of 2012 has been promulgated in Kuwait. Later on, Law No. 97 of 2013 amending certain articles of Law Decree No. 25 has been promulgated. The Companies Law Decree No. 25 of 2012, as amended by Law No. 97 of 2013, has replaced the Commercial Companies Law No. 15 of 1960 (the “Companies Law”).
The implementation of the Companies Law primarily addresses corporate establishment and governance in Kuwait. Due to the implementation of the new commercial laws there will be more involvement of foreign expertise and foreign investment. It gives more flexibility in company incorporation procedures and the time delay in obtaining the license is also addressed.
The law allows professional partnership allowing the people with the same profession to establish a business entity under closed joint stock company, Limited Liability Company or general or limited partnership.
The Foreign Investment Bureau was initially set up under the Foreign Direct Investment law (FDI) No. 8 of 2001 to enable the foreign investors to own 100% foreign investment. However, FDI was not able to issue licenses for new entrepreneurs as per the growing demand. Only investors in the financial sector benefited from it. Moreover, there was undue delay in the processing the licenses which made the foreign investors shy away from it. However, the revised FDI Law No. 116/2013, apart from 100% foreign investment, aims at providing foreign companies more viable options. For example, the license to open and operate a branch in Kuwait and to establish a representative office to exclusively conduct marketing studies (not commercial operations).
What are the legal measures usually adopted by the legal department of a corporate for the smooth functioning of the company?
A: Legal governance, risk management and compliance are the set of tools, methods or system adapted by the legal departments of a corporate in order to implement an integrated approach to resolve the corporate problems. Legal governance involves the establishment, interpretation and execution of the policies and guidelines. The risk management is the process by which an organization evaluates the risk, identifies potential risks and prioritizes the risk based on the organization’s business objectives. The legal department helps in mitigating these risk factors. The legal compliance ensures that the organization follows the laws, regulations and rules of the relevant country where the organization carries out its business.
Q: What are the functions of the compliance department of a company?
A: Identification of the risks, prevention of risks, monitoring/detection of risks and resolution of the risks are the major tasks conferred on the compliance department of a company. For which they provide advisory services as well as strive to remove the compliance problems through court trial, if necessary. Also, there has been a significant increase in interest in Corporate Social Responsibility (CSR) in recent years
Q: What are the key objectives of the compliance department of an investment company?
A: The protection of the investors, ensuring a transparent market, maintaining confidence of the consumers and reducing the crime rate. All laws relating to the establishment of the financial institution and regulation of trading of securities is explained under Law No. 7 of 2010 (‘The Law of Capital Markets Authority’). The Law of Capital Markets Authority aims to protect shareholders from tampering and manipulation of Shares. The main advantage of the Law of Capital Markets Authority is that there is prosecution for violators. The introduction of the Capital Markets Authority is a welcome move and is now actively involved in regulating the stock exchange. Only through a well regulated stock trading system more investors can be attracted to Kuwait. However, improvement in the implementation procedures of the law is necessary for proper enforcement of the law.
Q: Whether the arbitration mechanisms are helpful in resolving a dispute with a foreign partner?
A: The dispute resolution mechanism between two business partners will be as per the terms agreed between the parties in the contract. As a general rule, a foreign partner will seek to have his disputes resolved by way of arbitration or the courts in his jurisdiction for the sake of convenience and acquaintance. The main advantage of agreeing to arbitration is the ease in implementation of the arbitral award. Kuwait is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 and therefore arbitral awards are readily enforceable in Kuwait than a foreign (Court’s) judgment. Therefore, inclusion of arbitration provisions in agreements with foreign contracting parties may give some advantage to the foreign partner.
Q: An unusual case where the lack of proper legal compliance system in a company ended up in court case?
A: The law of precedence is not followed in Kuwait i.e. precedent established by the previous cases will not be considered while judging a case. There may be similarities in some of the disputes but each case will be decided based on its merits applying the rule of law. In a recent case a foreign company (49% shareholder in a local company) entered into a Share Purchase Agreement (SPA) based on mutual understanding with the local partner that on signing the SPA its shares in the local company will be transferred to a newly formed company through separate agreements. However, after signing the SPA the local company refused to transfer the shares and the share purchase agreement remained valid, which ended up in a lengthy legal battle. If corporate governance policies were effectively complied within corporate, such legal hassles could be avoided as the risks would be properly evaluated before entering into contracts. If there is lack of certainty in business relationships it will be difficult to enforce legal rights
Q: Whether the new Company law of Kuwait eased the procedures in the Transfer of shares.
A: Yes, the new Companies Law has introduced new provisions and amended previous provisions to allow more flexibility in the establishment and operations of the companies, including the transfer of shares by investors. The new law introduces separate procedures to enable investors to more easily transfer their legal ownership interests in a WLL. The procedures are as follows:
• The consent of the existing partners must be obtained in order to sell shares to third parties.
• In the event unanimous consent from the partners is not obtained, the conditions of the transfer offer can be published in the Official Gazette.
• If the existing partners do not exercise their right of redemption within fifteen days of publication, then the partner is free to transfer any share.
• The request to transfer shares must be attached with a certified cheque for the full value of the assigned parts in the assignor’s name.
• When amending the memorandum of association, only the signatures of the transferring partner and the transferee are required, thereby eliminating the need to obtain the signatures of all the partners on the amendment of the memorandum of association (Article 100).
Q. What are the measures the foreign contractors who are new to Kuwait should undertake?
The process of entering into a foreign market diversifies a business enterprise but contracting should be done on market terms complying with the local laws.
Entering into an agency relationship is the easiest way to start operation in Kuwait. However, proper evaluation of the agency agreements and proper understanding of the agency laws of the country is crucial in overcoming the legal hurdles. The foreign investor should be aware that the agent will be entitled to a fair compensation from the Principal if in case the Principal withdraws from the agency agreement before its expiry for no apparent reason or if the Agent is not in default. The new agent could also be held jointly and severally liable with the principal for any damages arising under Articles 281/282 of the Commercial Law.
Big Contractors entering into Kuwait should be aware of their offset obligations. Foreign contractors who meet certain criteria should enter into offset obligation. Offset obligations are applicable when the single cumulative value of supply contract(s) awarded to a foreign contractor is equal to or greater than KD 10 million and in defense contracts with a value of KD 3 million. The offset obligation is effective from the date of signing of the supply contract and is equal to 30% of the monetary value. There is a bank guarantee equivalent to 6% of the total monetary value of the supply contract. The penalty that National Offset Company imposes on the foreign contractor is by cashing the bank guarantee or by excluding the foreign contractor from entering in future contracts.