Special Purpose Vehicles’ (“SPVs”) are private corporate entities formed for special purposes, such as holding assets, entering into a new venture, segregating financial and legal risks by separating assets and liabilities. Usually an SPV can have any legal form and conduct any type of activity that the founder selects.

In Abu Dhabi Global Market (“ADGM”), the “SPV” is considered as a special type of vehicle, incorporated as a private company limited by shares and has a limited and specific activities that can be attributed to it.

Their popularity among founders and investors can be attributed primarily to ADGM’s flexible, secure and straightforward regulatory framework. Nonetheless, the regulatory framework alone does not solely dictate the success of ADGM’s SPV as three additional key considerations should be taken into account: (i) the SPV’s nature and activities, (ii) the simplicity of the establishment process, (iii) the minimal mandatory annual submissions that follow the incorporation and the associated costs.

We shall be discussing below all of these crucial factors below.

• The SPV’s nature and activities

An SPV is defined as a passive holding company, and whilst most SPV’s are structured under the form of a private company limited by shares (A company in which shareholders’ liability is confined to the capital amount they subscribed to.), they can also come under the structure of restricted scope company (“RSC”) (Which allows certain categories of applicants to benefit from limited disclosure on the public register). These entities are designed to isolate and manage specific assets and liability serving a multitude of purposes like investment holding, real estate management, project financing, consolidation, and risk mitigation… However, they are not permitted to engage in any commercial operations.

• The Regulatory Framework

Regarding their regulatory framework, ADGM SPVs are established in accordance with the ADGM Companies Regulation of 2020, which superseded the 2015 Companies Regulation. Pursuant to this regulation, SPV applicants will be categorized as either “Exempt” or “Non-exempt”. If an applicant does not meet any of the criteria for exemption specified by the law, it automatically defaults to the non-exempt category. If classified as Exempted, SPV applicants would not be required to appoint a Company Service Provider for the SPV application and management, whereas Non-exempt applicants must appoint and retain an ADGM approved Company Service Provider (“CSP”) for these purposes. Additionally, the entity must comply with other regulations and rules such as the Data Protection Rule of 2021 among others.

• The simplicity of the establishment process

The main prerequisite for any SPV involves satisfying a Nexus requirement: any SPV must demonstrate a suitable connection or ‘nexus’ to ADGM, the UAE, and/or the GCC Region. This connection can be established through various means, including providing documentary evidence that:

• The SPV is owned or controlled by a private company, family office, or individual based in the UAE or GCC.
• The SPV holds assets located in the UAE or the GCC Region.
• The SPV facilitates transactions linked to, or confers real or economic benefits to the UAE.
• The SPV’s purpose encompasses the issuance of Securities intended for admission to the Official List maintained by the Financial Service Regulatory Authority (FSRA) and/or trading on a Recognized Investment Exchange or other licensed platform established in ADGM.

Once such pre-requisite is met, then the incorporation can officially be processed. The process itself is straightforward, involving the collection of required documents and the submission of the application on the official ADGM portal.

After the submission of the application, ADGM will conduct a review and provide an answer within a few business days: It will either approve the application or return it for correction. Once the corrections are made and the application resubmitted, the Registrar authority will review it and grant final approval.

It is important to note that SPV fees are associated with various stages of the incorporation process, including $200 for Name reservation, $400 for the Incorporation application, $300 for Data Protection registration, and $1000 for commercial license issuance, bringing the total fees to $1900.

• Mandatory annual submission

Finally, it’s important to highlight that SPVs are obligated to fulfill the following annual mandatory submissions:

• Renewing the Commercial License;
• Renewing the Data Protection policy;
• Filing the Confirmation Statement;
• Filing the Annual Accounts of the SPV;

SPVs offer unparalleled benefits for founders and investors in ADGM. With their ability to segregate financial and legal risks, straightforward establishment processes, and flexible regulatory framework, SPVs stand out as the optimal choice for facilitating various business activities while ensuring compliance and operational efficiency.

Marlene Tayah

CSP associate

For personalized guidance regarding SPVs, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

When it comes to managing and protecting wealth, the choice between a trust and a foundation can significantly impact the effectiveness and efficiency of your estate planning strategy. Trusts and foundations, though similar in some respects, are distinct legal structures with unique advantages and disadvantages, especially for individuals with assets in civil law countries. This article explores the fundamental differences between trusts and foundations, highlighting the benefits of each, and provides guidance on choosing the appropriate structure for your needs

• Trust

A trust is a fiduciary arrangement where the legal owner of assets, known as the settlor, transfers legal ownership of those assets to another party, referred to as the trustee. The trustee, who can be an individual or a corporation, holds and manages the trust property on behalf of the beneficiaries, who are the individuals or entities designated to benefit from the trust. This transfer effectively splits the ownership of the assets into two parts: legal ownership and beneficial ownership.

Upon the establishment of a trust, the trustee assumes legal ownership of the trust property. This means that the trustee has the authority to manage and make decisions regarding the assets within the trust. However, this control is exercised in accordance with the terms set forth in the trust deed and in the best interest of the beneficiaries. The beneficiaries, on the other hand, retain beneficial ownership, meaning they are entitled to the benefits generated by the trust property, such as income, capital gains, or use of the assets, depending on the specific terms of the trust.

Trusts are versatile structures that can be tailored to meet various needs and objectives. The most common type of trust is one that is created for the benefit of specific beneficiaries. These can include family members, loved ones, or other designated individuals. Such trusts are often used in estate planning to ensure that assets are managed and distributed according to the settlor’s wishes, providing financial security and stability for the beneficiaries.

However, trusts are not limited to benefiting individuals. They can also be established for broader purposes. Charitable trusts are a prime example, where the trust is created to support philanthropic goals. These trusts can fund charitable organizations, educational institutions, or public works. Non-charitable purpose trusts are another type, designed to achieve specific non-charitable objectives, such as maintaining family gravesites or supporting non-profit activities.

The flexibility of trusts allows for significant customization based on the settlor’s intentions. Trusts can be structured to address various scenarios, including:

• Discretionary Trusts: The trustee has the discretion to decide how and when to distribute the trust income or capital to the beneficiaries.
• Fixed Trusts: The distribution of trust assets and income is fixed and predetermined in the trust deed.
• Revocable Trusts: The settlor retains the right to alter or revoke the trust during their lifetime.
• Irrevocable Trusts: Once established, the trust cannot be altered or revoked by the settlor.

   

• Foundation

A foundation is a distinctive legal entity that combines elements of both a trust and a company, making it a versatile tool for wealth management and asset protection. This hybrid nature allows a foundation to leverage the strengths of both structures while minimizing their individual limitations.

One of the defining characteristics of a foundation is its status as a body corporate. Unlike a trust, which is a fiduciary relationship, a foundation possesses its own legal personality. This means that the foundation itself, rather than any individual or group of individuals, owns the property and assets transferred to it. This setup is similar to a company, which owns assets and conducts business in its own name. However, a key difference is that a foundation does not have shareholders or members. Instead, it is an independent entity governed by its own set of constitutional documents, including a charter and regulations.

The management structure of a foundation closely mirrors that of a company. It is typically overseen by a council, which functions similarly to a company’s board of directors. The council is responsible for administering the foundation’s assets and ensuring that its objectives, as outlined in the charter and regulations, are met. These objectives can range from charitable purposes to specific non-charitable goals, providing flexibility in how the foundation operates and achieves its mission.

Despite its corporate characteristics, a foundation shares several similarities with a trust. Like a trust, a foundation is established by a founder who contributes property or assets to it. This founder acts in a role akin to that of a settlor in a trust. The foundation’s property is managed according to the founder’s instructions and for the benefit of designated beneficiaries or to fulfill specified purposes.

Just as a trust must have one or more purposes or beneficiaries, a foundation is required to have clearly defined objects. These objects can be either charitable, non-charitable, or a combination of both. For example, a foundation might be set up to provide scholarships, support scientific research, or maintain a family legacy. This flexibility allows founders to tailor the foundation to their specific intentions and goals.

A unique feature of foundations is their “ownerless” structure. Unlike companies, which are owned by shareholders, foundations have no beneficial owners. This means that once the assets are transferred to the foundation, they no longer belong to the founder or any other individual. Instead, the assets are held by the foundation in perpetuity (or for the duration specified) to fulfill its stated objectives. This ownerless nature can offer significant advantages in terms of asset protection and privacy, as the foundation’s assets are legally separated from the founder’s personal estate.

• Benefits and advantages of the Foundation

As mentioned above, foundation constitutes a legal entity which can be understood as assets endowed by a natural or legal persons, who is/are called the “founder(s)” for specific purposes, whereby said assets are rendered legally independent and are accorded their own legal personality. The fund endowed for certain specific purposes becomes autonomous and acquires the status of a legal person. The autonomous fund is separated from the founder’s personal assets and then forms the assets of an independent legal entity, namely the foundation.

The main advantages of the Foundation include but are not limited to:

• The founder may be an individual, a corporation or a nominee.
• The foundation may be established for an unlimited period of time.
• The assets may consist of any kind of property, real and personal, cash etc… wherever situated including securities of commercial enterprises.
• Vested beneficiaries must be notified of their interest and will be entitled to request information from the bodies of the Foundation.
• Anonymous ownership and control except for disclosure of beneficial ownership in cases of money laundering.
• The public may not gain information on existence or beneficial ownership from the Register or other means.
• The foundation may engage in commercial activities (to a limited extent).
• Minimum Taxation.
• There are no requirements concerning bookkeeping.
• There are no auditing requirements.
• Professional secrecy: lawyers, trustees, banks, investment and asset management companies and their employees are subject to prosecution and prison up to three years, in case of disclosure or breach of secrecy.

Finally, a key feature of a foundation (as compared to a common law trust) is the ability of the founder to retain more control over the foundation.

In contrast, the settlor has a more limited role and, once assets are settled on trust, the duties of trustees are towards the beneficiaries, rather than the settlor.

• Disadvantages of the Trust in civil law countries

Since the Trust is a legal institution established and regulated according to the Common Law, and creates legal relationships regulating transfers of property on good faith basis, the question of its ratification by Civil Law countries, has proven to be a difficult one to answer – and rarely in a positive manner.

The difficulty appears when Civil Law countries – (such as UAE, Lebanon, France, Luxembourg, Russia,…) – attempt to introduce the Common Law principles governing the Trust in their legal systems, and are, in result, faced with many legal and fiscal controversies that necessitated intellectual maneuvering in interpreting and applying said institution, and comparing it to some similar – not identical – Civil Law institutions in order to attempt to limit the incompatibilities between the Trust and Civil Law governing principles.

Said maneuvering, has proven to have resulted in a “destructive” requalification of the institution of Trust.

As a matter of fact, before the ratification of The Hague Convention of July 1st 1985, the French judges (as all civil law judges will still do) facing foreign Trusts, had a duty to retain the characteristic traits of the Trust in question, then to transpose them in a legal frame/institution similar and/or better known to the French law (Civil Law), which had undoubtedly distorted the Trust in question: it is the traditional way of adaptation.

Indeed, the main obstacles for the ratification of the Trust in Civil Law countries are the following:

• The principle of the undividable patrimony (the sum of one’s wealth, assets…):

According to this principle, each individual has only one undividable patrimony which constitutes a general guarantee to the benefit of its creditors. One is not allowed to subtract a part of his assets to this general guarantee. This principle has long refrained the recognition of the Trust in the countries of Civil Law tradition.

And so, the principle of an allocated patrimony (Patrimoine d’Affectation) known to the Trust and of which the assets transferred to the trustee make part and are subtracted from the personal mass of the personal assets of the trustee which can be seized by the creditors of the latter, derogates to the principle of an undividable patrimony.

• The distinction between law and equity:

Since unity of one’s patrimony is fundamental in Civil Law, the distinction between legal ownership and beneficial ownership of an asset – pillar of the Trust – is inconceivable.

Indeed, in Romano-Germanic law (Civil Law), one cannot be owner of assets for the sole sake of management – as in the case of a trustee – without being able to receive the gains from such assets.

• Real title and personal title:

Real titles, which in Civil Law confer to their owner absolute prerogatives on the asset in question, are strictly enumerated in the real estate law.

Based on the dispositions of the Trust, the real title over the assets of the Trust is entrusted to the trustee in law, and to the beneficiary in equity.

The real title conferred to the beneficiary over the assets of the Trust allowing him to “follow” this asset and to claim it from whoever, could not have the required effects (especially if it is a real estate property right) unless the legislation of the civil law country acknowledges such a right.

As for the personal right in Civil Law, it is a right which confers to its owner the right to claim the accomplishment of an obligation. This right is only opposable to the debtor of this obligation and not to everyone.

And so, the personal right conferred to the beneficiary via the Trust is distinguished from the traditional personal right in Civil Law, in the meaning that the former is general and that it assures a certain priority to its holder with the right of tracing on the assets in Trust.

• Simulation and apparent ownership:

It is undeniable, in Civil Law, to say that the person who detains the ownership of a movable or real estate asset based on the state registers is the effective owner of this asset and any contradicting side-letter can only prevail among the parties of said document and cannot be considered as opposable erga-omnes (with regards to all third parties).

And so, the duplication of ownership between the trustee and the beneficiary and the right of tracing (droit de suite) conferred to the latter will put again in cause the well-established principles in Civil Law in the matter, and cannot be rightfully operated in such systems.

So, when a trustee does not mention on the ownership title his quality of trustee and sells the asset of the Trust to a third party, the beneficiary cannot recuperate his rights facing the purchaser in good faith and the right of tracing shall totally be ineffective. Similarly, he shall be a simple creditor of the trustee in case of his bankruptcy.

Finally, in the first system (Trust), the priority is given to the beneficiaries in case of insolvency of the trustee, but in the countries of Civil Law, the mass of creditors is protected.

Therefore, the institution of Trust is far from being easily admitted in Civil Law countries such as the United Arab Emirates, and aside from the foreign legal notions that the Trust necessitates to apply, it is mandatory that a Romano-Germanic judge (Civil Law) places himself in the shoes of the Anglo-Saxon judge (Common Law) in deciding on a conflict relevant to a Trust for this institution to function correctly: a quasi-impossible mission.

• What to choose: Foundation or Trust? And Where?

Based on all of the above, we recommend the incorporation of a Foundation for the Clients who have the majority of their wealth in civil law countries.

As for the jurisdiction where the Foundation shall be incorporated, there are many options.

The most common jurisdictions are: Liechtenstein, Panama, Cayman Islands, Isle of Man…

Moreover, there are some free zones in the UAE that have introduced the Foundations, such as DIFC and ADGM. While these two free zones are based on the common law systems, they amended the regime of the foundations in order to get the advantages of both trusts and foundations.

Zeina Azzi

CSP Director

04/1/2024

 

For personalized guidance regarding Trusts and Foundations, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.

 

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

A Private Company Limited by Guarantee (LTG) is a distinct legal structure primarily designed for organizations that reinvest profits into the company instead of distributing them to shareholders. This framework is particularly favored by non-profit organizations, professional bodies, and membership associations, reflecting a strong commitment to mission-driven objectives.

The LTG model underscores the importance of financial sustainability while striving to make a positive societal impact. Organizations that choose this structure can align their legal and operational frameworks with their purpose-driven values, ensuring that their primary focus remains on achieving their broader goals rather than maximizing shareholder returns.

In the context of the Abu Dhabi Global Market (ADGM), the LTG structure offers unique advantages for entities operating within this jurisdiction. ADGM’s regulatory environment is designed to support a wide range of business activities, including those of non-profit and membership-based organizations. By leveraging the LTG framework, organizations in ADGM can benefit from a robust legal structure that promotes financial stability and supports long-term mission fulfillment.

Exploring the specifics of an LTG provides valuable insights into how legal frameworks can be harmonized with the strategic objectives of purpose-driven organizations. This examination highlights the critical role of LTGs in fostering sustainable growth and societal contributions within both local and global contexts.

Difference between Private Company Limited by Guarantee and Limited by Shares:

If you plan to keep profits for yourself (as a source of personal income), you should set up a company limited by shares. This is the most common type of limited company. However, if you plan to reinvest profits into the business to achieve non-profit objectives, it would be best to form a company limited by guarantee.

Use of LTGs

 Private Companies Limited by Guarantee is used primarily for professional membership and industry associations or organizations that require legal personality, it is adopted for clubs and membership organizations, including students’ unions, residential property management companies, sports associations, co-operatives, other social enterprise, non-governmental organizations, and charities.

Business permitted activities of an LTG in ADGM

Activities of organizations whose members’ interests center on the development and prosperity of enterprises in a particular line of business or trade, including farming, or on the economic growth and climate of a particular geographical area without regard for the line of business.

Activities of organizations whose members’ interests center chiefly on a particular scientific discipline, professional practice or technical field, such as medical associations, legal associations, accounting associations, engineering associations, architects associations etc.

• activities of associations of specialists engaged in cultural activities, such as associations of writers, painters, performers of various kinds, journalists etc.

• dissemination of information, the establishment and supervision of standards of practice, representation before government agencies and public relations of professional organizations.

Activities of organizations furthering a public cause or issue by means of public education:

• citizens’ initiative
• environmental and ecological movements
• organizations supporting community and educational facilities n.e.c.
• organizations for the protection and betterment of special groups, e.g. ethnic and
• minority groups
• associations for patriotic purposes, including war veterans’ associations
• consumer associations
• automobile associations
• associations for the purpose of social acquaintanceship such as rotary clubs, lodges etc. • associations of youth, young persons’ associations, student associations, clubs and fraternities etc. • associations for the pursuit of a cultural or recreational activity or hobby (other than sports or games), e.g. poetry, literature and book clubs, historical clubs, gardening clubs, film and photo clubs, music and art clubs, craft and collectors’ clubs, social clubs, carnival clubs etc.

Choosing between a Private Company Limited by Guarantee and a Private Company Limited by Shares:

The decision between a Private Company Limited by Guarantee (LTG) and a Private Company Limited by Shares (CLS) revolves around the core purpose and profit strategy of the business. If the goal is to distribute profits among shareholders, a CLS is the preferred choice. This structure aligns with businesses focused on providing financial returns to investors based on their ownership stakes.

On the other hand, if the objective is to reinvest profits for non-profit purposes or specific social and community goals, the LTG is more suitable.

The decision-making process involves considering the business nature, its impact on society, and long-term goals. While CLS might attract investors seeking financial returns, LTG is better for entities prioritizing social or community benefits. The choice extends beyond profit considerations to legal and structural implications, as well as potential tax benefits that vary by jurisdiction. Ultimately, it’s a strategic decision aligning the chosen legal structure with the broader mission and vision of the business.

In conclusion, LTG is a flexible legal structure that offers numerous benefits for non-profit organizations, professional bodies, and membership associations. If you are considering setting up such an organization, it is essential to understand the key features and uses of LTG to determine if it is the right choice for you and to seek the advice of a professional company service provider.

Robert Keyrouz

CSP Associate

1/5/2024

For personalized guidance related to Private Companies Limited by Guarantee , please do not hesitate to contact our team by sending an email to assiss@assiss.com

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

Established in 2015, Abu Dhabi Global Market (“ADGM”) is a financial free zone in the capital of the UAE that offers businesses the opportunity to operate within a well-regulated and internationally recognized financial environment. ADGM has its own financial services regulator, the Financial Services Regulatory Authority (“FSRA”). It was established to safeguard the confidentiality of the global financial hub, addresses potential risks and ensures adherence to professional standards. By enforcing guidelines and regulations coherent with ADGM’s framework, financial organizations operate transparently, ensuring the protection of investors’ interests.^[1] The FSRA exercises authority over the authorization and supervision of a range of financial activities, including investment advisory, credit advisory, and insurance advisory services. This illustrates diverse financial entities such as banks, brokers, asset managers, insurers, and more. Notably, Category 4 activities fall within the scope of authorization requirements set by the FSRA. This article will examine the activities permitted under the Category 4 License in ADGM, along with the requirements for obtaining one.

Understanding Category 4 Licensing in the ADGM Framework

Under the ADGM licensing framework, Category 4 allows for the widest range of permitted activities compared to Categories 1 through 3. The Prudential – Investment, Insurance Intermediation, and Banking Rules within the ADGM Legal Framework delineate the activities associated with a business engaged in Category 4 operations as follows:

“An Authorised Person is in Category 4 if:

(a) its Financial Services Permission authorises it to carry on one or more of the

Regulated Activities of Arranging Credit, Arranging Deals in Investments,

Advising on Investments or Credit, Arranging Custody, Insurance

Intermediation, Providing Trust Services (where it is not acting as trustee in

respect of an express trust), Insurance Management, Acting as the

Administrator of a Collective Investment Fund, Operating a Multilateral Trading

Facility or Organised Trading Facility, Operating a Private Financing Platform

or Providing Third Party Services” ^[2]

Arranging deals in investments involves the facilitation of transactions wherein one party seeks to engage in the buying, selling, subscribing for, or underwriting of an investment. This can encompass various financial instruments such as stocks, bonds, or derivatives, and may occur with the individual acting on their own behalf or on behalf of another party as an agent.

Advising on financial products extends beyond mere transaction facilitation to providing informed guidance and recommendations regarding the suitability of specific financial products. This advice is directed towards individuals or entities in their capacity as investors or potential investors, or acting as agents for such parties. The aim is to assist them in making well-informed decisions regarding the purchase, sale, retention, subscription for, or underwriting of particular financial products, considering their unique financial goals, risk tolerance, and investment sector.

When it comes to arranging credit and advising on credit, the scope encompasses activities related to the borrowing of funds through credit facilities. This includes organizing arrangements for another party to obtain credit, whether they are acting as a principal or agent. Additionally, it involves providing advice to individuals or entities considering borrowing or already engaged in borrowing activities, or acting as agents for borrowers.

Building a Competent Team: Key Personnel Requirements for ADGM Category 4 Licensing

The importance of having a well-structured and competent team in place is emphasized in order to secure a Category 4 License. The ADGM Category 4 licensing requirements stipulate the necessity of certain key personnel, including a Senior Executive Officer (who must be a resident in the UAE), a Finance Officer, a Compliance Officer (also required to be a resident in the UAE), and a Money Laundering Reporting Officer (likewise mandated to be a resident in the UAE). However, it’s important to note that the same individual cannot simultaneously hold the positions of Senior Executive Officer and either Compliance Officer or Money Laundering Reporting Officer. While the MLRO, mandated to oversee anti-money laundering efforts, must be a UAE resident and can also serve as a Compliance Officer as these roles are considered compatible responsibilities. These positions play a crucial role in ensuring regulatory compliance and effective management within the company’s operations. ^[3]

Ensuring Regulatory Compliance

Moreover, it is inherent that companies pursuing an ADGM Category 4 license must uphold rigorous regulatory and compliance standards. This naturally involves the establishment of robust policies and procedures aimed at effectively mitigating risks. Additionally, it is imperative for these companies to fully comply with anti-money laundering (AML) and counter-terrorism financing regulations, as part of their commitment to maintaining the integrity of the financial system.

Understanding Base Capital Requirements

Nevertheless, securing an ADGM Category 4 license means that companies must satisfy a specific base capital criteria. Financially, the capital requirement for obtaining an ADGM Category 4 license is USD 10,000. However, there are exceptions to this rule. For instance, if a business intends to operate a private financing platform and hold client assets, the base capital requirement significantly increases to USD 150,000. Similarly, for those involved in providing third-party services, the base capital requirement stands at USD 50,000. These variations reflect the diverse nature of financial activities within Category 4 and ensure that firms are adequately capitalized based on the specific risks associated with their operations.

Navigating activities permitted under the Category 4 License in ADGM requires a comprehensive understanding of the regulatory framework established by the Financial Services Regulatory Authority (FSRA). This will ensure that businesses operating within the ADGM ecosystem adhere to stringent standards while benefiting from the opportunities presented by this global financial hub. By meeting the requirements set forth by the FSRA and ADGM, aligning with regulatory expectations and leveraging the opportunities provided, businesses can establish themselves within a well-regulated environment.

Hind Ayoubi

CSP associate

23-5-2024

For personalized guidance related to Category 4 licenses, please do not hesitate to contact our team by sending an email to assiss@assiss.com

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

 

^[1] Financial Services Regulatory Authority.” Abu Dhabi Global Market, (https://www.adgm.com/financial-services-regulatory-authority).

^[2] ADGM Financial Services Regulatory Authority.” Thomson Reuters, (https://en.adgm.thomsonreuters.com/sites/default/files/net_file_store/ADGM1547_11092_VER13181223.pdf).

^[3] Financial Services Regulatory Authority.” Abu Dhabi Global Market, (https://www.adgm.com/financial-services-regulatory-authority).

Guidelines, and Annual Compliance

The ADGM Foundations Regime stands as an alternative to trusts[1], catering to the needs of individuals, families, and corporations navigating financial planning and structural solutions. This framework unlocks a gateway for High Net Worth Individuals, families, and businesses to access a highly valued opportunity from a globally esteemed international financial hub.

With versatile applications, ADGM Foundations fulfill various purposes, such as wealth management, asset preservation, family succession planning, tax optimization, asset safeguarding, and corporate structuring. Foundations are considered to have a mechanism to consolidate a wide array of family assets into a single centralized entity. Utilizing a Foundation to hold several family assets, including business interests, properties, financial investments, and other valuable holdings, allowing the inauguration of clear legal directives for their transfer during succession.

Effectively, said procedure of consolidation streamlines asset transfer, minimizing complex and costly procedures associated with transferring assets individually. It enables family members to establish their wishes, plans, and By-laws within the foundation, reducing family disputes upon the passing of senior members. Even after the founder’s death, the foundation operates based on its established charter, ensuring continuity.

When it comes to the advantages of foundations, there is quite a range worth noting. Here is a selection of key benefits:

• Governance Enhancement: ADGM Foundations adhere to worldwide best practices and regulatory standards. The Foundation Council operates with statutory obligations similar to those imposed on corporate directors, guaranteeing accountable and transparent decision-making. Oversight by a Guardian, although optional during the Founder’s lifetime, becomes mandatory after the Founder’s passing, strengthening supervision and continuity while adhering to the Foundation’s Charter and By-Laws.
• Legal Personality: Unlike a Trust. Having a legal personality provides Foundations with the flexibility to enter into contracts and arrangements directly, as a company would be able to[2].
• Separate Liability: The Foundation’s separate legal personality warrants a clear division between the Founder and the Foundation itself, thus, safeguarding the Founder’s personal assets from potential claims or liabilities linked to the Foundation, and offering an additional layer of security.
• Perpetual Continuation: Beyond the Founder’s lifespan, an ADGM Foundation continues to exist indefinitely. This enduring nature assures stability and continuity for ongoing arrangements, securing the Foundation’s objectives and legacy for future generations.
• Asset Protection and Succession Planning: ADGM Foundation regulations include firewall provisions aimed at safeguarding beneficiaries’ rights and preserving the Foundation’s assets. These measures shield the Foundation’s assets from bankruptcy, divorce claims, and forced heirship rules, strengthening asset protection and conservation.
• Information regarding individuals not listed in the registrar remains undisclosed to the public, confirming confidentiality. This offers a balance between transparency and confidentiality aligned with ADGM’s objectives and international treaties involving the UAE.

Foundations procure a higher level of certainty that assets will be distributed as per the Founder’s intentions, with the Foundation continuing beyond the Founder’s passing. ADGM Foundations are designed for swift and uncomplicated setup and management, featuring transparent ongoing reporting obligations and competitive pricing.

Moreover, the ADGM Foundations Regime offers multiple highlights that make it an attractive option.
Indeed, Foundation re-domiciliation, allowing movement both into and out of ADGM, is a notable feature. Additionally, it provides the flexibility to amend governance structures after establishment. For those seeking affordability, the regime boasts low initial setup costs, requiring as little as USD 100 to commit as initial assets to the Foundation.

On top of that, the mandatory appointment of a Company Services Provider for Non-exempt Foundations secures compliance. Interestingly, there’s no physical office requirement; non-exempt Foundations need a registered Company Service Provider, while exempt Foundations can use the registered office address of a parent or related entity. Furthermore, all roles within the Foundation can be carried out by individuals or corporations.

As for the establishment process of an ADGM Foundation, it involves a structured sequence of essential steps crucial for both its formation and regulatory compliance.

Firstly, it begins with outlining the Foundation’s objectives, purpose, and governance structure. This includes drafting essential documents such as the Foundation Charter and By-Laws, which set the operational guidelines.

Next, the prepared documentation, including the Foundation’s Charter, By-Laws, and other relevant materials, needs to be submitted to the ADGM Regulatory Authority (“RA”).

Following submission, the ADGM RA thoroughly reviews the application to ensure adherence to the Foundation regulations. Upon successful review and approval, the Foundation gets incorporated, and a Certificate of registration is issued.

Once officially registered, the Foundation can start fulfilling its objectives, managing assets and engaging in activities according to the rules outlined in its Charter and By-Laws.

Riwa Madi

CSP Associate

30/3/2024

For personalized guidance regarding Foundations, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

[1] Foundations, rooted in civil law, differ from common law trusts. Foundations operate akin to a company, with their own legal identity, holding assets for beneficiaries, but without engaging in commercial activities. Unlike trusts where control shifts to trustees, founders retain more control in foundations, while trustees’ duties in trusts are towards beneficiaries, rather than the settlor.

[2] A Foundation in ADGM cannot be used for charitable purposes and cannot conduct commercial activities unless they are ancillary to its primary purpose (but can be used to hold shares in a commercial entity).

Introduction

Abu Dhabi Global Market (“ADGM”) stands as a prominent international financial centre established in accordance with Abu Dhabi Law No. 4 of 2013.

Within ADGM, The Registration Authority (RA) plays a crucial role in overseeing the licensing, registration, and incorporation processes for entities seeking to establish a presence in ADGM.

Roles of ADGM’s Company Service Providers (CSPs)

ADGM introduced the Company Service Provider framework (CSP), on April 12, 2021, with the aim of establishing a strong regulatory environment for company services, it is designed to support the growth of Special Purpose Vehicles (SPVs) and Foundations structures, two highly popular entities in ADGM.

Crucially, the new framework mandates that all new SPVs and Foundations established in ADGM on or after July 12, 2021, must appoint a licensed CSP. This mandatory appointment ensures a level of expertise and oversight in the formation and ongoing management of these entities, which aligns with ADGM’s commitment to high regulatory standards.

CSPs play key roles in facilitating the setup of companies, ensuring regulatory compliance, and managing ongoing communication with the Registrar.

Exemptions from the mandatory appointment of a company service provider
As an exception to the mandatory appointment of a Corporate Service Provider (CSP) mentioned above, several exemptions are available, allowing certain entities to self-manage their regulatory and compliance obligations. These exemptions enable companies to independently handle their incorporation and compliance responsibilities, ensuring flexibility and efficiency in their operations without the mandatory involvement of a CSP.

1. Exemptions under the Companies Regulations (Amendment No. 1) 2023 for SPV

Pursuant to subsection 296 A (3) of the Companies Regulations, (Amendment No. 1) 2023, certain corporate entities are exempt from appointing a Company Service Provider If they fall  under the following categories:

• Individuals exempted under the Commercial Licensing Regulations 2015 (Exemptions) Order 2020;

The following entities fall under this category:

• A corporate entity established in accordance with any law or decree issued by His Highness the Ruler of the Emirate of Abu Dhabi. This encompasses laws such as the ADGM Founding Law.
• A corporate entity established under any Federal Law, excluding Federal Law No. 8 of 1984 concerning Commercial Companies (subject to amendments or re-enactments).
• A corporate entity that is a subsidiary undertaking of a body corporate falling within the aforementioned criteria.
• The International Bank for Reconstruction and Development and the International Development Association, collectively referred to as the “World Bank.”

(b) An authorized person, as defined in the Financial Services and Markets Regulations 2015;

This category includes any legal entity currently registered in ADGM and holding current Financial Services Permit issued by ADGM Financial Services Regulatory Authority

(c) Individuals licensed or regulated by the Central Bank of the United Arab Emirates;

This category comprises legal entities that:

• Hold a currently valid license or authorization issued by the Central Bank of the United Arab Emirates (UAE).
• Adhere to the regulatory requirements stipulated by the Central Bank of the UAE.

(d) A company whose shares are listed for trading on a regulated market in the United Arab Emirates, including the Abu Dhabi Global Market;

(e) A company that has satisfactorily demonstrated to the Registrar its substantial presence in the United Arab Emirates.

This exemption is available for companies that, to the satisfaction of the Registrar, can showcase a satisfactory presence in the United Arab Emirates.

This involves considering factors such as:

• The company’s assets, turnover, and workforce within the United Arab Emirates.
• The company’s governance, policies, and procedures.
• Adherence to any rules established by the Board or guidance issued by the Registrar in this context.
  
  2. Exemptions under the Foundations Regulations (Amendment No. 1) 2023

 Subsection 18(2) of the Foundations Regulations grants exemptions for Foundations from appointing a CSP if they demonstrate substantial resources, experience, and personnel presence in the UAE, along with the implementation of appropriate governance policies and procedures specified by the Board or Registrar’s guidance.

Conclusion:

The exemptions detailed in the Companies Regulations (Amendment No. 1) 2023 and Foundations Regulations (Amendment No. 1) 2023 provide flexibility for certain entities in ADGM. This framework aims to balance regulatory compliance with the specific needs of well-established and reputable entities, fostering a conducive environment for their continued growth and operation within the ADGM.

 

Yasmina Al Amm

CSP Associate

04/1/2024

 

For personalized guidance regarding Exemption from the mandatory appointment of CSP in ADGM, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

A Comprehensive Insight

Abu Dhabi Global Market (“ADGM”) is one of the two financial free zones in the country where financial licenses can be obtained[1]. Similar to the Dubai International Financial Center (“DIFC”), ADGM operates autonomously under its own regulatory regime and provides solid infrastructures for conducting financial activities and setting up financial businesses in the UAE.

Any company desiring to provide financial services from a permanent establishment in ADGM must be regulated by the free zone’s own financial services regulator, the Financial Services Regulatory Authority (“FSRA” or “Regulator”). The powers, functions, and objectives of the FSRA are detailed throughout the Financial Services and Markets Regulations (“FSMR”) which establishes the rules and regulations governing all financial activities allowed in ADGM.

The FSRA grants licenses and regulates the activities of all financial institutions by classifying financial services into various categories: 1, 2, 3A, 3B, 3C, 4, and 5. Each category has its own capital requirement and obligations that must be met in order to obtain a Financial Services Permission (“FSP”) covering the respective regulated activity and enabling licensees (“Authorised Person”) to operate in ADGM. Authorised Persons are assigned to the abovementioned categories according to the criteria set out in the Prudential – Investment, Insurance Intermediation, and Banking Rules (“PRU”):

1. Category 1: This category allows banks to accept deposits and manage a Profit Sharing Investment Accounts (“PSIA”)[2] without restrictions from the investment account holder. The base capital requirement for this category is US$ 10 million.
2. Category 2: Category 2 allows financial businesses to deal in investments as principal[3] and to provide credits. It is the absence of authorisation for the activities specified in Category 1 that are determinative of its belonging to Category 2. The base capital requirement is US$ 2 million.
3. Category 3A: In this category, Authorised Persons are licensed to deal in investments as agents with a base capital requirement of US$ 500,000. It is the absence of authorisation for the activities specified in Category 1 and Category 2 that are determinative of the belonging of the Authorised Person to Category 3A. An Authorised Person carrying out the Regulated Activity of Dealing in Investments as an Agent in a manner that is wholly incidental to the activity of Managing an Investment Fund or Managing Assets, shall be regarded as falling within Category 3C.
4. Category 3B: This category allows businesses to provide custody (but only for a fund) and act as a trustee for an investment trust, and has a base capital requirement of US$ 4 million. It is the absence of authorisation for the activities specified in Categories 1, 2, and 3A that places the Authorised Persons in Category 3B.
5. Category 3C: This category gathers the activities of (i) managing assets, (ii) providing custody (where it does so other than for a fund), (iii) managing a PSIA (received on a restricted basis), (iv) providing trust services (where it is acting as trustee in respect of a least one express trust), (v) managing a collective investment fund, (vi) providing money services and it does not meet the criteria of Categories 1, 2, 3A, 3B, and 5. The base capital requirement is US$ 250,000 except for the activity of managing a collective investment fund, in which case the base capital requirement is:
   1. US$ 150,000 for a public fund or any other type of fund that is available to individual investors; or
   2. US$ 50,000 for Exempt Funds (“EF”) and Qualified Investor Funds (“QIF”)[4].

6. Category 4: Category 4 allows businesses to arrange credit, arrange deals in investments, advise on investments or credit, arrange custody, insurance intermediation, provide trust services (where it is not acting as trustee in respect of an express trust), manage insurance, act as the administrator of a collective investment fund, operate a multilateral trading facility or organised trading facility, operate a private financing platform, or provide third party services, and does not meet the criteria of Categories 1, 2, 3A, 3B, 3C, or 5. Category 4 has a base capital requirement of US$ 10,000.
7. Category 5: This category regulates Islamic Financial business activities which cover the scope of Islamic funds, Islamic securities, and PSIA (unrestricted). The base capital required for the activity is US$ 10 million.

Among these categories, one stands out for further exploration and development within the context of the present article: Category 3C. Businesses falling under this category may include banks, asset managers, investment firms, and other financial institutions whose activities include, among others, managing investment portfolios or engaging in specialised financial activities.

In particular, Category 3C becomes instrumental in activities such as asset management. Asset management refers to pooling and managing high-net-worth clients’ portfolios under a client mandate for the purposes of maximizing their value while maintaining a reasonable level of risk. The assets include equities, real estate, bonds, and other classes of assets depending on the type of the asset management company. Investment bankers and financial advisors working with prominent asset management companies often resort to obtaining the Category 3C Asset Manager License when seeking to set up on their own and continue offering their services as external asset managers. Similarly, companies contemplating to conduct investment research and sharing it with professional clients commonly seek to acquire such a license.

Moreover, fund manager licenses also fall within the scope of Category 3C. ADGM-authorised fund managers may choose to establish and manage funds domiciled in ADGM (“Domestic Funds”) or non-ADGM established funds (“Foreign Funds”).

Likewise, any foreign fund manager, with the appropriate FSRA permission, may manage, promote, and distribute both Domestic and Foreign Funds.

It is worth mentioning that Authorised Persons should be adequately staffed depending on the scale, scope, and nature of the concerned portfolio and that ADGM does not impose any remuneration restrictions on fund managers.

Category 3C also includes Money Services Businesses (“MSB”) that conclude money-related activities such as money remittances, payment processor services, operating payment accounts, and issuing payment instruments and stored value. Authorised Persons aiming to provide such services are subject to strict Know Your Customer (“KYC”), Anti-Money Laundering (“AML”), and Counter Terrorism Finance (“CTF”) requirements in line with international treaties and regulations.

In addition to the rigorous regulatory scrutiny in AML matters, FSRA focuses on providing investors with an adequate level of protection and assurance. Entities operating under Category 3C licenses must adhere to strict client money segregation and disclosure requirements to safeguard the interests of the investors. Consequently, Authorised Persons are required to (i) clearly separate the clients’ funds from their operational funds to avoid any risk of misappropriation or misuse and (ii) inform investors about their financial activities, investment strategies, and any associated risks.

It is through these solid regulations and requirements that ADGM has placed itself as a prominent financial hub in the Middle East particularly in the UAE, gathering both local and international financial institutions and becoming a renowned domicile for funds and financial activities in the region. The various incentives offered by ADGM are attracting businesses seeking to establish a presence in the area and are consequently leading to the growth of Company Service Providers (“CSPs”) within the relevant free zone. CSPs, such as ASSISS, are providing the different stakeholders of the financial sector with professional support and safe foundations to set up in Abu Dhabi and expand on an international level, and are therefore active contributors to the development of the Emirate’s financial institutions.

 

Nour Souaiby

CSP Associate

04/1/2024

 

For personalized guidance regarding ADGM Regulated Financial Activities, please do not hesitate to contact our team by sending an email to: assiss@assiss.com.

 

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

 

[1] Financial licenses can be obtained on the mainland through the Securities and Commodities Authority “SCA”.

[2] As defined in the PRU, a PSIA is an account or portfolio managed: (a) in relation to property of any kind, including the currency of any country or territory, held for or within the account or portfolio; (b) in accordance with Shariaa and held out as such; and (c) under the term of an agreement whereby (i) the investor agrees to share any profit with the manager of the account or portfolio in accordance with a predetermined specified percentage or ratio; and (ii) the investor agrees that he alone will bear any losses in the absence of negligence or breach of contract.

[3] Dealing in investments as principal means buying, selling, subscribing for, or underwriting any investment as principal where firms use their own capital for transactions or asset acquisitions and have direct control over their investments.

[4] It is worth noting that unlike Public Funds, EF and QIF (i) are only available to professional investors, (ii) have a minimum investment threshold of US$ 50,000 and US$ 500,000 respectively (whereas Public Funds do not have any minimum subscription amount), and (iii) are open to offers by way of private placements only. Therefore, EF and QIF attract lower levels of scrutiny and are subject to lower regulations from the FSRA when compared to Public Funds.

Abu Dhabi Global Market (ADGM) has established itself as a prominent international financial centre, attracting businesses and investors from around the world. However, with this success comes an increased responsibility to fight financial crime. Non-compliance with Anti-Money Laundering (AML) regulations in ADGM can have severe consequences for businesses and individuals alike.

What are the consequences?

• ADGM maintains a firm stand against AML violations, imposing significant financial penalties based on the nature of the violation and the scale of the business. These penalties serve as protective measures and aim to deter entities from engaging in money laundering activities and ensure adherence to AML regulations.
• Ensuring the integrity of its financial ecosystem is ADGM’s utmost priority. Non-compliance with AML regulations can lead to severe reputational harm for businesses. In a consistent global economy, a damaged reputation can have far-reaching consequences, impacting client trust and the ability to attract new investors or partners.
• Failure to comply with AML regulations may result in serious legal repercussions, including potential legal actions against businesses and against the individuals managing such businesses. This could involve the initiation of criminal charges and other legal proceedings that might negatively impact the business reputation and potentially result in imprisonment for those involved.                 
• ADGM has the authority to suspend or withdraw licenses for non-compliant entities. This action can effectively prohibit the business from operating within the jurisdiction, leading to substantial financial losses and potential disruptions to ongoing operations.

What steps should be taken to ensure compliance with AML regulations?

• Appointing a Money Laundering Reporting Officer (MLRO): His role shall be to oversee the organization’s AML compliance program and promptly reports suspicious activities to the authorities. This ensures consistent monitoring and timely action to mitigate risks.
• Maintaining comprehensive AML policies and procedures: Companies operating in ADGM should develop and uphold extensive AML policies and procedures, consistently revising and updating them to align with evolving regulatory standards and changing methods of money laundering.
• Training employees and acquainting them with AML regulations and policies: It is important to ensure that employees are well-informed and regularly trained on AML regulations. Ongoing training empowers employees to identify and report suspicious activities effectively, fostering a culture of adherence to compliance throughout the organization.
• Adopting advanced technologies: AML compliance efforts can be significantly strengthened while using advanced technologies such as artificial intelligence and machine learning. These tools enable businesses to analyse extensive datasets, spotting patterns that signal potential efficiency and accuracy in detecting risks associated with money laundering.
• Conducting regular audits: Last but not least, performing proactive assessments assists businesses in pinpointing weaknesses within their AML compliance framework. This enables timely rectification of any deficiencies and fosters ongoing improvement of processes, ensuring sustained compliance in the long-run.

In conclusion, failure to adhere to AML regulations within ADGM carries significant risks for businesses, endangering their financial stability, reputation, and legal status.  By prioritizing strong AML compliance measures, not only can businesses mitigate these risks but it also fortifies the integrity and stability of ADGM’s financial ecosystem. Investing in impactful solutions empower businesses to navigate the ever-evolving AML landscape. This, in turn, ensures their sustainable success in ADGM’s competitive financial market.

Keep in mind that adhering isn’t just a legal obligation, it’s a vital step in building a sustainable and ethical financial future.

“ A company that lacks budget for Anti-Money laundering compliance ought to allocate funds to potential fines”.

For personalized guidance regarding the non, please do not hesitate to contact our team by sending an email to: assiss@assiss.com

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

Introduction

Real Estate Investment Trusts, or REITs, are property funds and are considered a popular investment option that allows individuals to pool their money and invest in income-producing real estate. ADGM, with its regulatory framework and features, continually proves to be a dynamic REIT hub in the MENA region, attracting investors of all jurisdictions.

Here’s how REITs operate in ADGM:

Investment Focus:

ADGM REITs invest primarily in a broad range of income-producing real estate assets, including residential, commercial, hospitality, and healthcare.

They can also invest in income producing real estate-related assets like mortgages and infrastructure projects.

Moreover, a Fund Manager of a REIT must ensure that any investment made in respect of property ‘under development’ (i.e. not including refurbishment, retrofitting and renovation) whether on its own or in a joint venture is undertaken only where the REIT intends to hold the developed property upon completion and where the total purchase price and development cost of the property ‘under development’ do not exceed 30% of the net asset value of the Fund Property of the REIT.

Structure:

REITs in ADGM are established as Investment Trusts and are governed by the ADGM Funds Rulebook, specifically FUNDS 13.5. This rulebook outlines the specific requirements and regulations for, among others, REITs, including investment restrictions, distribution policies, and governance practices.

REITs in ADGM follow the same categorization of Investment Funds, i.e. Public, Exempt and Qualified Investor Funds, and are not subject to the same treatment across said categories.

Incorporation:

As Investment Trusts[1], ADGM REITs are established pursuant to a Trust deed entered into between (i) an Authorised Person[2] who has a Financial Services Permission to Manage a Collective Investment Fund and (ii) an Authorised Person who has a Financial Services Permission to Act as the Trustee of an Investment Trust, who is a body corporate and who is independent of the Fund Manager[3] of that Fund.

The Fund’s Property is typically held by the Trustee of the REIT, on trust for the unitholders, except in cases where other arrangements are made which ensure that the Trustee has continued control over the Property and the Fund Manager is not enabled to have unfettered control over said property.

The Trustee oversees the operation of the REIT.

In the case of REITs established as Public Funds, registration is made following an application for registration made to the regulator jointly by the Fund Manager and the Trustee of that Fund.

Moreover, in the case of REITs established as Public Funds, the Fund Manager and the Trustee must ensure that the Fund is listed on an exchange or is open-ended. This is not a requirement for REITs which are Exempt Funds or Qualified Investor Funds

Additionally REITs in ADGM are required to appoint a Person who is able to provide professional valuation services on the basis of a ‘market value’, who (i) is not related to the Fund Manager, (ii) values each Real Property prior to its acquisition and disposal, and (iii) who is commissioned to produce a valuation report of the Property Fund each year where the net asset value of the Fund following this valuation must be reported.

Distribution Policy:

ADGM REITs are required to distribute to their unitholders at least 80% of their audited annual net income.

Moreover, for REITs that are Public Funds or Exempt Funds and holds their real-property via one or more special purpose vehicle, the Fund Manager must ensure that each said vehicle distributes to the Fund all of its net income as permitted by the laws and regulations of the jurisdiction where said vehicle is established.

Borrowings:

A REIT other than a Qualified Investor Fund may borrow either directly or through its special purpose vehicles an amount not exceeding 65% of the total gross asset value of the Fund.

Caution

Like any financial endeavour, prospective participants or stakeholders in REITs should be fully aware of the regulations, rules, and challenges surrounding that environment.

Engaging with legal and financial experts familiar with ADGM’s environment is recommended before making any strategic decisions.

 

Fouad Obeid

Senior Associate

For personalized guidance related to REITs, please do not hesitate to contact our team by sending an email to assiss@assiss.com

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

 

 

[1] an express trust created solely for collective investment purposes under section 114 of the Financial Services and Markets Regulations.

[2]a Person (other than a Recognised Body) who is authorised under the Financial Services and Markets Regulations to carry on a regulated activity.

[3] an Authorised Person that holds a Financial Services Permission to carry on the management of a Fund.

A less commonly used legal concept with many advantages

Overview

A Protected Cell Company in ADGM (PCC), typically used in the investment funds industry, is a type of a corporate entity, with separate legal personality, governed by the ADGM’s company regulation 2020, modelled on the UK companies Act 2006[1].

Originally introduced in Guernsey[2], this legal concept found its way into many jurisdictions, such as Mauritius, Jersey, Malta, Gibraltar, Ireland, Cayman Islands[3], and many other jurisdictions. In the Middle East, the concept of Protected Cell Companies was introduced in Bahrain in 2016, through the enactment of a Protected Cell Companies Law No. 22 of 2016, that marked a significant development in the area of corporate finance in Bahrain.

What is a PCC?

A PCC is a single legal entity with one registration number, which creates cells, such that the assets and liabilities of each cell are legally separate from those of any other cell. This concept of ‘ring-fencing’ is fundamental to PCCs, thus reducing risks of cross-contamination combined with great flexibility of use. The key principle is that the assets of a cell are only available to the creditors and shareholders of that particular cell.

More precisely, a PCC consists of two organic parts, a non-cellular part (the “Core”), and one or more parts or protected cells called (the “cells”). Once registered, a PCC can create unlimited cell companies. Each cell is assigned to a specific field of activity of the company with each having its own assets and liabilities. In addition, individual cells might have different beneficiaries from the core or from each other’s.

While each cell operates independently from the others and the company’s core[4], the entirety functions as one unified legal entity. Accordingly, a PCC has one board of directors that manages the affairs of the PCC as a whole, and that takes responsibility for transactions within the Core and each of the cells, statutory and regulatory compliance and corporate governance requirements.

A PCC has, except permitted otherwise under its articles, no power to meet any liability attributable to a particular cell of the company from the non-cellular assets of the company, or to meet any liability, whether attributable to a particular cell or not, from the cellular assets of another cell of the company.

Accordingly, while dealing with third parties, a PCC must inform any person with whom it transacts that it is a PCC and must identify or specify the Cell (or Core) in respect of which that person is transacting. In this way, creditors are notified of the limited recourse they have to the assets of the PCC and the relevant Cell (or Core) involved.

Advantages of PCCs include cost savings and efficiency of managing certain risks and administration.

Difference between PCC and ICC

In addition to a PCC, ADGM regulates another type of cell companies, the “Incorporated Cell Companies (ICCs)”.

An ICC is similar to a PCC but adopts a fundamentally different approach to cells. The main difference is that the ‘protected cells’ of a PCC, do not have a legal identity separate from the cell company of which they form part. On the contrary, the ICC incorporates each cell as a separate legal entity without the cell company needing to have any shareholder relationship with the relevant cell. Such cell is called Incorporated Cell (IC). Each IC is a separate company as a matter of law.

While an ICC may seem similar to a regular corporate group, it differs legally in the following ways: 

• an incorporated cell is not a subsidiary of the ICC, and conversely, the ICC does not serve as the parent entity of the incorporated cell.
• the shares in each incorporated cell are not held by the ICC but are instead owned by the owner of the assets allocated to a particular incorporated cell.
• each incorporated cell automatically shares the same secretary and registered office as its corresponding ICC.

Use of PCCs

PCCs were originally created for use in the insurance sector, although today it is also widely used for investment funds and other forms of investments structures and financing such as investment vehicles. PCCs also find significant use in private wealth management and asset allocation.

Furthermore, PCCs are adopted in non-fund structures like private equity, such as “Private Placement Memorandum” (PPM). This allows investors to segregate portfolios and investment strategies within different cells, and consolidate all their assets into one or two cells, eliminating the need to manage numerous small portfolio companies or funds. This enhances risk management and investor protection. Alternatively, investors can exit each cell individually or adjust their potential exposure based on risk appetite or available cash flow.

Setting-up a PCC in ADGM

PCCs can take a form of Public Company Limited by Shares, Private Company Limited by Shares, or Private Company Unlimited with Shares. The name of a PCC must end with the words ‘Protected Cell Company’ or with the abbreviation ‘PCC’.

The cells can be created at the time of incorporation, or post-incorporation by virtue of a special resolution of members. PCCs must assign a distinctive name to each of its cells that distinguishes the cell from any other cell of the company and that ends with the words “Protected Cell” or with the abbreviation “PC”.

Conclusion

The primary advantage of a Protected Cell Company (PCC) lies in its distinctive ability to segregate liabilities between individual cells and between these cells and the core corporate structure. This gives the PCC a clear advantage over traditional investment structures and potentially enables the setting-up of higher-risk products within the same corporate framework, thereby reducing overall expenses.

However, it’s important to note that the assessment of individual cells does not occur independently of the core legal entity, thus limiting the structure’s resilience concerning the segregations of assets and liabilities. In contrast, an Incorporated Cell Company (ICC) demonstrates more advantages in specific scenarios, such as insolvency proceedings, highlighting its potential superiority in ensuring a robust separation of assets and liabilities.

 

Mayssa Abboud

CSP Associate

04/12/2023

 

For personalized guidance regarding the establishment of Protected Cells Companies in ADGM, please do not hesitate to contact our team by sending an email to: assiss@assiss.com

DISCLAIMER: This blog post does not constitute professional advice.  Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.

 

[1] However, Cell companies are not provided for in the Companies Act 2006.

[2] Through the enactment of the Protected Cell Companies Ordinance, 1997 that was later replaced by the Companies (Guernsey) Law, 2008.

[3] Known as “segregated portfolios companies”.

[4] a cell of a PCC may enter into an agreement with its cell company or with another cell of the company that shall be enforceable as if each cell of the company were a body corporate that had a legal identity separate from that of its cell company.