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

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How the law and startups can be friends
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.”

Zeenat Beebeejaun

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.

Hayden Mollard

“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 Crawford

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.”

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