The Law: 3 legal concerns of UAE startups and how to solve them

The law and startups – an essential partnership. (Image via
wrike.com)

When it comes to setting up a business in the
UAE, entrepreneurs tend to have a multitude of concerns regarding
the legality of it all.

Which zone to choose, proprietary rights, how to
deal with partners… the list goes on.

In order to mentor startups in the region, in
these areas, Young
Arab Leaders is running a number of seminars under
the theme, Entrepreneur
Journey Series.

Its latest focused on the legal aspects of
launching a company in the UAE, aiming to provide a better
understanding on the legal considerations of registering an
SME.

Sitting in on the panel were Zeenat Beebeejaun,
managing director at Pearl Legal;
Hayden Mollard, managing director at Newhaven Middle
East; and Cameron Crawford, managing partner
at Indigo
Media & Entertainment Lawyers.

Here, we take a look at the three biggest
concerns entrepreneurs brought up during the panel, and how they
can be fixed.

Mainland vs. free zone vs. offshore

All three panelists agreed that one of the main
difficulties UAE entrepreneurs face is where exactly they should
set up their business.

“It really comes down to what your business is
going to be,” explained Mollard. “Depending on who you talk to, you
will get a different viewpoint. But one thing is for sure,
businesses in the free zone cannot do business with companies in
the mainland.”

Beebeejaun (right) elaborated: “If you are in a
free zone and you are looking to sell your product in mainland UAE,
then you will need a distributor or commercial agent to act on your
behalf. Only UAE nationals can act as an agent.”

Asked during the session about ecommerce,
Beebeejaun says that one of the best options is to opt for a space
in a free zone, either JAFZA or DAFZA, as they offer
protection and “good storage options”.

When it comes to offshore, it seems that the
one-standout advantage is global investor confidence.

Crawford says that international venture
capitalists are more likely to look to fund companies that are off
the mainland.

“There’s a difference between truly offshore –
like the Cayman Islands – and free zones that are subject to UAE
law,” he says. “It’s all down to investor confidence – it’s very
hard for a UAE company to raise money from the US or UK – they’re
simply more comfortable investing in offshore
jurisdictions.”

Mollard (left) added: “Offshore companies can also give you
flexibility in your types of shares offered, which is particularly
advantageous for tech companies.

“Offshore companies have two classes of shares:
Class A and ‘Participation’ shares. You’ll find these in the
British Virgin Islands or Cayman Islands, but you cannot do this in
the UAE.”

Going solo or partnering up?

Now that you have chosen your zone, it’s time to
look at putting everything in writing. The majority of
experts
agree that companies should consist of at least two
partners. Although ultimately, there’s no hard and
fast rule and it depends on the nature of the business
itself.

“Lawyers aren’t meant to be there just for massive
situations. It’s important to make sure that they are there from
the start in order to avoid panic litigation.What’s
important, however, is that all of the founders are on the same
page from the very beginning,” Beebeejaun explained.

“Iron out everything you need to have in your
agreement; that includes factors such as equity – the ratio of
shares between the founders, anti-competition clauses – as your
partner might decide to open up their own business later on, plus a
confidentiality and accident clause.” 

Plus, she said, contracts should include an
agreement on who should receive shares should one partner decide to
exit within a year of the formation of the company.

An agreement should also include a business plan, said
Mollard.

“Ensure
your shareholders’ agreement includes a corporate structure. Is
your business going to operate in Dubai only or do you plan to
expand? Include your Stage One, Stage Two…etc.
expansions.”

Company protection

The final major topic of discussion revolved
around protecting a product – whether an idea or existing
solution.

Cameron (right), who worked for Universal Studios on the UAE
filming of Fast & Furious 7 and the
Disney/Lucasfilm Star Wars Episode VII, is very
familiar with just how quickly an idea can be copied.

“Unfortunately, a concept is not protectable by
law,” he says. “If a company steals your idea, it is very difficult
to prove that.”

Beebeejaun adds: “You can only copyright
something that’s tangible, therefore you have to make it very
unique in order to claim its rights.”

But what about protecting ideas during
presentations? After all, ideas and
confidentiality can leak at times.

“The best solution here would be to have the other party sign a
non-disclosure agreement [NDA]. When it comes to intellectual
property rights, you’re only as good as how you enforce it in
court. But an NDA serves as a good deterrent.”