Puzzled by the legal jargon? Here’s what to include in the Memorandum of Understanding (MOU) between you and your local sponsor

11 September 2017 Category :
Local sponsor

For foreign entrepreneurs lured by the potential bounty of doing business in the UAE mainland (as opposed to one of the free zones), the landscape can be somewhat bewildering at first. Especially so for the 68% of business starters in the UAE who have never run a company before.

Any new business requires some guidance through the paperwork when starting out, but for companies setting up in the UAE mainland, there is one particularly important document that really should receive your full attention: the Memorandum of Understanding (MOU).

This agreement wields the power to figuratively ‘make or break’ an emerging business.

As with all commercial paperwork, MOUs can be prone to the confusion of jargon and legalese – but there is no need for this. The best MOUs keep things clear, concise and easy to understand. So let’s take a closer look at what this document is and the essential points it ought to include.

What is an MOU and why do you need one?

The benefits of starting a UAE mainland company are abundant but the chief advantages over setting up in a free zone are threefold: you can open up multiple branches; you can trade with other mainland businesses; and you can gain access to government contracts. In short, it is the option that offers a new business the most opportunities and thus the best chance of success.

However, before you can launch a business on the UAE mainland, the law here dictates that you must have a local sponsor who is a UAE national. Partnering with a sponsor creates a limited liability company (LLC) and the process is very straightforward, but the sponsor takes a 51% share in the company and, therefore, the agreement between you needs to be very clearly defined.

Before you can launch a business on the UAE mainland, the law here dictates that you must have a local sponsor who is a UAE national.

That definition is provided by the MOU. While many newcomers may be intimidated by the formality of the document, an MOU actually serves to benefit both parties. It is the text that clearly defines what is expected from the entrepreneur and the sponsor in any given case. That’s why it’s absolutely crucial that you’re thorough in compiling the MOU and don’t leave out anything of importance.

What to include in an MOU

The golden rule is not to overcomplicate the process. Every point that makes it into the MOU must serve a valid purpose, and this must be clearly understood by anyone reading it. It’s also important that nothing should be merely ‘implied’ to the reader.

Everything that you agree upon with your sponsor, however inconsequential it may seem, should be put down on paper.

Here are seven key areas for consideration when drawing up your MOU.

1. Financial rights and obligations of each party: A national sponsor should be remunerated for the essential role that they play in aiding a business to set up on the UAE mainland. After all, without their involvement, the company would not be viable in the first place. However, it’s wise to ensure that all fees are clearly laid out ahead of concluding any formal agreement.

In most cases, the sponsor will be given a percentage of the company profits or a lump sum for their services. There are a few options as to how you might pay this but the overall annual fee is likely to be between AED 73,000 and AED 91,800. The terms of this payment should be fully outlined in the MOU to save any confusion on either part.

2. Sponsor’s role and duties: While for the most part, the local sponsor will have little to do with the everyday running of the business, there will be times when their services are needed. In order for a company to run smoothly, the sponsor should be available to sign documentation and carry out one-off duties whenever required.

Listing these duties within the MOU with absolute clarity will ensure that there is no room for confusion. Once they are set out in a straightforward manner, both the entrepreneur and the sponsor will understand what is expected of them. In turn, this guidance will aid the success of the company.

3. How disputes will be resolved: Although it may be uncommon, disagreements do occasionally occur between foreign entrepreneurs and their local sponsor. This can become very serious if allowed to drag on, so you would be well advised to set down guidelines for dealing with any disputes that may arise, and resolve them as quickly as possible.

For example, there may be a grey area when it comes to the financial agreement – perhaps a sponsor may expect more than the initial fee agreed. In cases such as this, having a framework already in place to help point the way forward is a smart move. The MOU provides the ideal platform for setting down your agreed policy on disputes and can then be quickly referred to in order to resolve the issue as quickly and painlessly as possible.

The MOU provides the ideal platform for setting down your agreed policy on disputes and can then be quickly referred to in order to resolve the issue as quickly and painlessly as possible.

4. Sponsor’s level of involvement: Most local sponsors have little or no involvement in the running of the business and this suits both parties very well. However, Article 91 of the Federal Law states that a sponsor ‘shall have all the rights associated with the description of the partners’. So it’s important to establish an understanding with your sponsor from the word go as to what exactly their level of involvement in running the business will be. Perhaps you want them to play an executive role. If not, make sure it says so in the MOU.

The easiest way to do so is to state that the sponsor has no jurisdiction over the general management of the company. Remember, it’s in the sponsor’s interests to have their role defined just as much as it is in yours. This is perhaps the clearest way to determine the role that each party should take in the business.

5. How to deal with third parties: What if you want to bring in another party? As enterprises expand, a natural progression may be to partner up with third parties. As any deal will inevitably affect both the investor and the sponsor, it should be made clear from the offset what the protocol for this decision should be.

Hence, it’s by no means uncommon to include in the MOU a section on the association of third party partners. This point would lay down how (and perhaps if) the parties could incorporate another business or person into the company. As always, lucidity here is key.

6. How to deal with succession issues: Succession planning is a core part of setting up a business, especially one in which two or more partners are involved. The idea is to ensure that the business can continue to run come what may. In the case of setting up in the UAE mainland, there are two eventualities that you must consider:

The death of your sponsor – should the sponsor die, their share of the business will be automatically transferred to their heir, according to UAE law. In some cases, the heir may not wish to take on the role of a sponsor. What’s more, even if the heir does continue the deal, you need to consider future plans too. Fewer than 15% of family firms stay under the same management after three generations. It is, therefore, crucial to have a process in place to deal with the succession issue in a smooth and direct way.

The sponsor deciding to exit – in the same respect, some entrepreneurs may find that their local sponsor wants an exit strategy. Putting the tools in place to make this a viable option protects the stability of the enterprise. As simplistic as this may sound, it ensures that there is no ambiguity when it comes to the sponsor succession.

7. How to make changes to the agreement: Business is an ever-changing beast and no one quite knows what the future may hold for their enterprise. The MOU needs to include a section detailing the process for making changes to the agreement further down the line. This doesn’t have to be overly complicated, but should set out the steps that are to be followed should either party wish to make amendments.

The MOU needs to include a section detailing the process for making changes to the agreement further down the line.

Clarity is key

As we have explored here, the MOU is crucial to the establishment of any new business in the UAE mainland. Essential though it is, it should not be seen as something that intimidates new business owners out of trying their luck in the region.

The essential ingredient is clarity. When creating a document of this nature, take nothing for granted. Every aspect of what is expected from each party has to be spelt out clearly in the text so there can be no claims of ambiguity later on. With a clear MOU in place, the entrepreneur, the sponsor and the business itself have the protection and security they need to thrive in this fertile business environment.

Virtuzone Mainland is dedicated to helping clients open a company on the UAE mainland, providing advice and assistance with every aspect of the company formation. To set up a consultation, please call us on +971 4 457 8200, or click here.

 

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About the author: Neil Petch, Chairman at VirtuGroup
About the author: Neil Petch, Chairman at VirtuGroup

With a history of business successes, Neil Petch is well known in the UAE and beyond as a visionary entrepreneur with a passion for helping others establish and grow their own businesses. Neil founded Virtuzone in 2009 and quickly established it as the region’s leading company formation expert, before launching VirtuGroup, a holding company that has a wider mandate of supporting startups from establishment; to successful market entry; and all the way through to exit.