Managing Cross Border Risk, a Collaboration with IR Global
We were delighted to be asked to contribute to an IR Global publication ‘Managing Cross Border Risk: A Jurisdictional Guide of How to Manage Risk in Multi-Nationals’, sharing our extensive corporate knowledge of the UAE jurisdiction. Associate Dina Assar drafted the section, which we share with you below. For the full report, visit the dedicated page on IR Global’s website here.
1. When representing a client with significant business activities in foreign jurisdictions, what are the key risk-related concerns that arise in a cross-border context and how can a parent company minimize such risk?
The UAE being one of the most active international business hubs in the region, we come across many multinational clients with diverse business portfolios that stretches across multiple regions and jurisdictions. When representing those clients, we are generally faced with problems related to the application and interpretation of the law, as well as jurisdictional and inherent cultural challenges. These may relate to public policy misinterpretation, judge’s understanding and / or expertise in relation to our clients’ line of business (being different to typical business in the country).
The challenges can be summarized as follows:
- Laws being vague with varying levels of ambiguity and room for interpretation;
- When there is clearly written law, the judicial or administrative authorities may opt to take what appears to be a contradictive approach. Some government agencies follow practices that are inconsistent with certain provisions of law or are subject to a different interpretation of such provisions;
- Local courts can still take jurisdiction over certain disputes presented to them, even though the parties may have contracted to submit the dispute to a jurisdiction outside the UAE;
- Culturally, people are reluctant to say “no” in Arabic cultures (making some tasks seem simple when explained but more challenging in practice).
Accordingly, we always advise our clients not to rely solely on written law, but rather to take an appropriately practical approach. This must consider local customs in terms of interpretation provisions. It is helpful to rely on judicial precedents in the UAE (even those not strictly binding, especially ones issued from the court of Cassation, as they are often followed by judges in the courts of First Instance and Appeal.
2. What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level and how can control issues be managed to minimize liabilities?
Parent companies based in jurisdictions outside the UAE are advised to keep tight control over their UAE subsidiaries to mitigate the different risks that may arise from operating in an environment that is legally and culturally different.
Such control would initially start from the inception of the subsidiary entity in the UAE – or the Middle East – where we advise clients on the ideal type of company formation, depending on their business activities and other economic factors. Appointment of management and delegation of authority is a critical part of the process.
After the company is formed, we advise and support our clients to maintain a strong corporate governance program for their UAE and Middle East entities. For example:
- Functional AGMs;
- Ensuring provisions of commercial companies law and tax law (if any) are adhered to, especially in terms of timelines, statutory disclosures and submissions to governmental authorities and regulators;
- Maintaining accurate financial records, as per the provisions of the commercial companies law and the subsequent financial laws of the UAE; and, most importantly,
- Oversight on management and control over their authorities.
3. What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?
By having a subsidiary in a foreign jurisdiction, parent companies are automatically assuming certain risks and exposures inherent to such jurisdictions. We support our clients to reduce these risks, prioritizing the development of a risk mitigation plan which balances risk and liability and focuses on enhancing preventive measures.
A very common example in the UAE would be if a company took the Dubai International Financial Centre (“DIFC”) as a place to operate. This will – in most scenarios – automatically expose them to other means of common law principles which might negatively affect the style or direction of the client’s business. Nonetheless, for international clients, a place like the DIFC allows them to operate comfortably with common international laws and standards.
4. What are your 3-5 key considerations for multinationals operating in high-risk industries and jurisdictions?
- Make sure the jurisdiction is the right jurisdiction to operate in;
- Choose a reliable local partner;
- Take best measures when appointing management and delegate them precise authorities;
- Make sure to visit the jurisdiction to understand the culture and interact with people on the ground.