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Global Marketplace Abu Dhabi (GMAD) and the Dubai International Financial Centre (DIFC).

In an in-depth 'Client Alert', King and Spalding's Middle East & Islamic Finance Practice Group have reviewed and compared the DIFC and the proposed GMAD.

The announcement of the appointment of the Chairman of the new Global Marketplace (or Market) Abu Dhabi (GMAD) in August 2013 shows that a new financial free zone within the United Arab Emirates (the UAE) is fast becoming a reality. This note considers the establishment of GMAD and looks back at the history of the UAE's other financial free zone, the Dubai International Financial Centre (DIFC).

GMAD

The first legal step for the establishment of an Abu Dhabi financial free zone was Federal Decree 15 of 2013, which was issued on 11 February 2013. On 1 May 2013 it was further announced by the Executive Council of Abu Dhabi that the President of the UAE, His Highness Sheikh Khalifa bin Zayed Al Nahyan, had issued a law for GMAD to be established on Al Maryah Island.

The purpose of GMAD is to attract financial investments by creating a unique operating environment for businesses. GMAD will promote Abu Dhabi as a leading global market.

The key benefits for operating within GMAD have been outlined as follows:

Elimination of the time gap among global financial markets in the Far East and Europe by operating from 7 am to 11 am UAE time.

Full provision of services for financial institutions, trade institutions and producers, including for goods and raw materials.

Anticipated that GMAD will double the size of trading currencies, commodities and raw material prices being issued, setting trading prices and increasing liquidity within the markets.

An integrated legal system that conforms to financial markets regulation global best practice with a dedicated courts system for litigation.

One hundred per cent (100%) foreign ownership with no taxation.

At the end of August 2013, Ahmed Ali Mohamed Al Sayegh was named the Chairman of GMAD, following a decree by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces. The board of directors was also announced. The management board will be responsible for drafting laws and appointing the GMAD management and administrative team.

Sitting under the management board, GMAD will have three pillars: (i) the Global Marketplace Registration Bureau (the regulator); (ii) the Global Marketplace Financial Services Regulations Bureau (the authority); and (iii) the Global Marketplace Courts. The GMAD Courts will consist of a two-tier legal system, being a Court of First Instance and a Court of Appeal with a GMAD Chief Justice having conduct of the whole. It is anticipated that GMAD will have a wider operating sphere than the current primary financial services free zone within the UAE, being the DIFC, since GMAD will deal with physical commodities and trade in addition to financial services.

It is envisaged there will be a variety of different corporate structures that may be established within GMAD, including companies, branches and representative offices. Licences issued by GMAD to establishments operating within GMAD will cover the full range of regulated financial services and related activities. During the coming months, we anticipate further regulations will be passed in order to cover various different aspects of the operations of GMAD.

Activities for GMAD entities will include:

Financial and banking services, including financial services activities and the provision of financial facilities and secured and unsecured short-term, medium-term and long-term loans.

Investment and private banking businesses, finance companies, wholesale and e-banking, and investment management.

Trading in securities, currencies, commodities, minerals and derivatives (including trading in future or immediate "on spot" contracts, margin trading, sales, purchase and supply of financial options).

Storage, treatment and delivery of goods and metals, whether these goods or metals are represented by Sukuk or through physical delivery and services ancillary to the same.

Monetary and financial brokerage, including prime brokerage.

Market making through offers of buying and selling currencies, commodities, metals, securities, bonds and instruments, and financial derivatives.

Islamic finance and Islamic banking.

Establishment, incorporation, operation, management and marketing of assets and financial products, investment funds, pension and credit funds, mutual funds, hedge funds, investment portfolios of all kinds, asset and trust management in either or both, restricted or unrestricted trusts, and credit representation services and escrow accounts and relevant supporting services.

Custodian activities.

Central clearing, settlement and depository activities.

Financing for projects, providing capital and funding for companies and funding.

Buying, selling and issuing stocks and bonds, sukuk, shares, instruments, permissions, and other securities and financial products of all kinds, in addition to currencies, commodities, metals and derivatives, including futures contracts and options.

Ownership, management and operation of the stock exchanges and financial markets for equities, bonds, currencies, financial instruments, securities, commodities, metals, futures, and options contracts and derivatives of all kinds.

Insurance, reinsurance and insurance brokerage, including property insurance, casualty insurance, life insurance, and other types of insurance and related services.

DIFC

The establishment of the DIFC and its legal system could not have been timelier. By 2009 the Gulf Cooperation Council (GCC) markets had suffered considerable losses. In the wake of these losses, the DIFC has established itself as a highly sophisticated investor-focused environment for international companies that require a GCC base from which to operate. The DIFC has also helped to nurture investor confidence in an otherwise uncertain market through the creation of an internationally recognised and standardised legal system that operates in the English language, caters for the registration of security and provides specialised courts (the "DIFC Courts") for the enforcement of contractual obligations.

Despite being located in the Emirate of Dubai, within the UAE, the DIFC benefits from its own independent legal system, which is administered by the DIFC Authority. The DIFC legal system has been established with both international businesses and investors in mind and provides unparalleled advantages to those companies wishing to operate throughout the GCC region.

The DIFC's legal system does not present any restrictions on foreign ownership, meaning that shareholders may be of any nationality and can be either an individual or a corporate entity. There are also many different types of legal entity that can be established within the DIFC, which provides businesses with flexibility depending on the nature of the business itself as well as its contemplated activities. Practically speaking, it should be noted that there may be limitations on the activities of certain DIFC entities within the wider GCC region, if such an entity has foreign shareholders. However, this should be considered on a case-by-case basis.

For those businesses that would traditionally opt for offshore legal jurisdictions such as the Cayman Islands or the British Virgin Islands, the DIFC can also provide an interesting alternative with further GCC-specific benefits.

Governmental authorities within the GCC generally take the view that a DIFC entity that has GCC shareholders is a GCC company for regulatory purposes. This is of particular benefit in circumstances where a business is looking to make investments within the GCC.

As with some of the more traditional offshore legal systems, the DIFC is also a zero tax environment, which offers a huge incentive to investors. There are no corporation, transfer, capital gains or other taxes in the DIFC, and there are no stamp duty taxes on the transfer of shares.

In terms of contractual enforcement, companies operating within the DIFC generally do so as limited companies so that the liability of the shareholders is limited to the total share value of the company. The DIFC legal system also has the additional benefit of access to a sophisticated regime for both the registration and enforcement of security interests. This offers investors unique comfort in respect of the security of their assets. The very existence of a security register is a significant advantage for parties dealing with the DIFC legal system and creates a level of certainty that is not available to investors in any other free zone within the UAE. The information contained in the register is available to the public so as to ensure that the system is more transparent than the majority of alternative GCC security registers.

The benefits listed above show that, with the correct approach, the DIFC's legal system can potentially provide an attractive option as a place from which to structure both businesses and transactions. International companies are also attracted to the DIFC's legal system, as it provides an English-speaking legal and regulatory framework with a codified enforcement environment that permits direct access to the DIFC Courts.

The DIFC Courts

The DIFC Courts were established by Law No. 12 of 2004 (the "Courts Law"). The Courts Law and the presence of the DIFC Courts have singled out the DIFC as a unique legal phenomenon both internationally and within the GCC itself. The additional advantage of the DIFC Courts ensures that the DIFC stands out among the plethora of other free zones created in the UAE for the purpose of encouraging foreign investment and trade. The growth and continuing maturity of the DIFC legal system, specifically the DIFC Courts, has been perfectly timed to help reestablish confidence in the Emirate of Dubai and to aid recovery within the GCC as a whole.

The publication of DIFC Law No. 16 of 2011 expanded the jurisdiction of the DIFC Courts to cover cases where parties without a direct link to the DIFC may submit to the jurisdiction of the DIFC Courts. DIFC Law No. 16 of 2011 entitles such parties to use a DIFC jurisdiction clause in a contract even where the parties are operating outside of the DIFC.

The advantages of using the DIFC Courts to enforce GCC-based contracts are numerous when compared with other courts within the region. In particular, the DIFC Courts can draw on a body of common law precedents to assist it in the interpretation of various contractual provisions.

A further key advantage of the DIFC Courts is that all proceedings are conducted in English. Court proceedings throughout the GCC are predominantly conducted in the Arabic language as a local law requirement. Within the GCC, parties are generally required to translate contracts into Arabic for evidential admissibility purposes.

Translations in themselves create a very tangible interpretational risk in respect of contractual intention, which can have an adverse effect on the fairness of proceedings in a foreign language jurisdiction. The ability of the DIFC Courts to operate in the English language ensures that the original contractual intention can be more accurately determined. The DIFC offers a sophisticated legal system and an international platform from which businesses can operate and structure their transactions within the GCC. It further offers the unique advantage in the presence of the DIFC Courts, which provides an internationally recognised forum for dispute resolution.

It will be interesting to see whether the GMAD Courts will be set up to function along similar lines to the DIFC Courts.

Conclusion

Abu Dhabi and Dubai are different in terms of their commercial focus, but in a complementary way. This goes back to the principle of complementary activity upon which the UAE has built its success. Abu Dhabi has a large pool of institutional investors, based on its energy revenues. It is home to one of the largest oil companies in the world, Abu Dhabi National Oil Company. The GMAD legislation issued to date indicates that GMAD will offer a focus on two areas that reflect Abu Dhabi itself: physical commodities and wealth management.

Dubai is traditionally a trading Emirate, with an emphasis on maritime activity and import/export. The global footprint of DP World, which operates across six continents, demonstrates this strength. The DIFC has evolved to be a place where deals are brokered, with a focus on private equity and trading activities that cover the world. The existence of two complimentary financial services free zones within the UAE, will allow the UAE to further cement its place as a global player.

We will watch the progress of GMAD with great interest and anticipate DIFC and GMAD each will have a significant role to play in the future of the region.

2013 CPI Financial. All rights reserved.

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Publication:CPI Financial
Geographic Code:7UNIT
Date:Sep 8, 2013
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