Recent trends – joint ventures in the Middle East

Middle East

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Many international investors enter into the Middle East market through joint ventures (JVs). The reasons for this vary and range from a desire on the part of an international investor to partner with an entity/individual that understands the local/regional market, to foreign ownership restrictions in some Middle Eastern jurisdictions requiring that the shareholding of a local company must include a local/national shareholder.

This article will look at some of the issues that arise in JVs in the Middle East, based on recent experiences/trends we have noticed in the market.

Contractual v corporate JV

When considering the likely structure of a JV a key consideration is whether it should operate through a contractual arrangement between the parties or whether the parties to it will create a new legal entity that they will jointly own, usually in proportion to the contribution each is making (i.e. through a joint venture company (JVC)).

The decision as to whether a contractual arrangement or a JVC (usually a limited liability company for most JVs in the Middle East) is the most appropriate structure is often determined by the nature of the JV and the parties’ intentions for it.

There are pros and cons for contractual arrangements on the one hand and JVCs on the other. The principal advantage of a contractual JV arrangement is that the JV can be tailored to one specific project and wound up relatively quickly after the completion of that project. This can be appealing to new international entrants to a jurisdiction, who may be entering the market because they are tendering for a specific project and prefer not to have the ongoing costs associated with a company (e.g. annual registration fees). Similarly, creating a JVC gives JV partners the possibility of enjoying limited liability and allows for the transfer of any shareholder’s interest in a much more streamlined manner than is often possible with a contractual JV.

Foreign ownership restrictions

Many jurisdictions in the Middle East have company share ownership restrictions. For instance, in the United Arab Emirates (the UAE) a company must be at least 51% owned by UAE nationals. Therefore, any international investor should be aware of any such restrictions prior to entering into a corporate JV in the Middle East. 

In the UAE, many international investors have entered/set up in one of the economic free zones (Free Zones) (where a company can potentially be 100% owned by a foreign person/entity) in order to obtain a controlling shareholding in a JVC. However, setting up in a Free Zone comes with limitations, not least that the JVC is only licensed and allowed to operate within the Free Zone in which it is incorporated and is not licensed to operate within the rest of the UAE, in other Free Zones or in other Middle Eastern jurisdictions.

The press frequently reports that the authorities in certain Middle Eastern countries (including in the UAE and Saudi Arabia) are considering relaxing foreign ownership restrictions to ensure that the region remains attractive for foreign investors (particularly in light of an era of global economic uncertainty and low crude oil prices). If this does occur, it will undoubtedly strengthen the bargaining position of international parties in JV agreements.

Nature of the investment

The form of the capital contribution that the parties make to a JV can impact on the timing and ease of setting up a JVC in the Middle East. Usually, parties have to choose between injecting money through capital (i.e. acquiring shares) or by way of shareholder loans. In our experience, JVCs are usually thinly capitalised in the Middle East and future injections of capital are often by way of shareholder loans. In other jurisdictions in the world the nature of the shareholder capital contribution is driven by tax considerations/consequences of investment. In the Middle East it is easier in practice to invest through loans than in shares, not least because the process for increasing the share capital of a local company can be a drawn-out one, often requiring the parties to arrange appointments with notaries to amend constitutional documents. In addition, where a JVC needs a quick injection of capital, e.g. it is in financial distress, injecting money through loans is quicker and more effective than increasing a JVC's share capital, which can take many months.

Often, parties to a JV in the Middle East contribute a service, intellectual property or a specialist asset to it (particularly those businesses in the technology, media and telecommunications sectors). On an exit, the contributing shareholder will want to ensure that the asset is exclusively retained/returned to it on the winding-up of the JV. This leads to exit-mechanism provisions that ensure that the asset is always returned to the contributing shareholder, but the price paid for that asset is determined by the circumstances that have led to that exit (e.g. if the contributing shareholder has defaulted in its obligations in the JV agreement, it will be penalised by having to pay a premium for the asset that will be returned to it).

Management and control

Ultimately the structure of a JV (i.e. whether it is contractual or a JVC) will determine its governance and management structure. A board of directors often governs the management of a JVC and will have ultimate legal responsibility for the company. The JV agreement often sets out the agreement between the parties as to the appointment/removal of the key management team of the JV, e.g. the CEO and the CFO.

Irrespective of the nature/size/composition of the management team and the board of directors of the JVC, certain matters may be reserved for consideration by the parties in the JV agreement. In order to prevent protracted negotiations between the parties as to what will constitute the list of reserved matters that require shareholders’ approval, it is important for parties to know which matters and rights can only be performed with shareholder approval by law in the relevant jurisdiction (e.g. altering the constitutional documents or winding up the company).


JVC agreements often contain long and complicated exit provisions that deal with the situation where one party wants to exit the JVC and sell its interest to a third party. 

Usually the other JV partner(s) will have a right of pre-emption, i.e. the right to acquire the selling shareholders’ shares prior to a transfer to a third party. For contractual JVs, the parties tend to agree upfront on the term of the JV or include a provision in the contract allowing either party to terminate the contract upon notice.

Although drag-along and tag-along provisions are seen in JVC agreements in the Middle East, there is a concern that such provisions are difficult to enforce and may not be recognised by the local courts. Not least in many jurisdictions in the Middle East (e.g. in onshore UAE and in Saudi Arabia) share transfers usually require all shareholders to be present in front of a notary public in order to register that share transfer. Similarly, convincing a notary public to accept a power of attorney contained in a JV agreement, to enforce a provision of such agreement, can be extremely difficult. 


JVs in the Middle East do have certain nuanced differences to those in other parts of the world. The above highlights a few of the issues that can arise in JVs in the Middle East, based on our firm’s recent experiences. Local foreign ownership restrictions often play a big part in dictating the terms of JV agreements in the Middle East.  A relaxation of these restrictions may allow broader negotiation of the terms of JVs in the future.