Using ADGM SPVs as Holding Companies - 10 Leaves

  • 20-05-2021
What is the ADGM?
 
The Abu Dhabi Global Market is an international financial centre for local, regional and international institutions, established in Abu Dhabi, the capital of the United Arab Emirates, and operational from 2015. It has been voted the ‘Financial Centre of the Year (MENA)” and has continuously brought out innovative solutions for the growing financial services market in the region.

 

ADGM has three independent authorities – the Registration Authority, the Financial Services Regulatory Authority (FSRA) and ADGM Courts. ADGM entities are established under Common Law. Whereas other jurisdictions codify the English common law, the ADGM has adopted it completely in its original form. This is implemented to help facilitate ease of doing business for foreign investors – a first in the region.

 

What is an SPV?

Special Purpose Vehicles, or SPVs, are usually established to isolate financial and legal risk by ring-fencing assets and liabilities. SPVs can be established as subsidiaries, project or joint venture vehicles to ensure that only those assets related to a transaction are exposed to the liabilities associated with that transaction.

Features of an ADGM SPV:

An ADGM SPV offers multiple classes of shares, including fractional shareholding, a first for the region. Coupled with an option to completely customise the Memorandum / Articles, the ADGM SPV provides a viable option for a range of holding and investment structures.

Other salient features include:

  • No attestations for corporate documents – certified copies suffice.
  • No restrictions on nationality of ownership.
  • Minimum requirement of just 1 shareholder and 1 director – can be non-resident.
  • At lease one UAE-resident or GCC-national authorised signatory required.
  • No minimum share capital.
  • No maximum number of shares.

Click here to read a comprehensive guide on ADGM SPVs. 

What is a holding company?

Wikipedia defines a holding company as “a company that owns other companies' outstanding stock.”

In short, a holding company consolidates investments, be it shares in other companies or property, under a common umbrella, for ease of management and reporting. Such companies do not usually carry out a trade or service – they merely manage existing investments. The management team of the holding company also seeks to make new investments, based on certain pre-determined criteria, to expand their existing portfolios.

The ADGM offers both passive and operational holding companies. ADGM SPVs can only act as passive holding companies, and so cannot avail visas or functional office space in the centre. The advantage is that where there is no operational requirement, an ADGM SPV can act as a holding structure for a relatively low cost, and offer flexibility at the same time.

What assets can an ADGM SPV hold?

The SPV in the ADGM can hold any types of securities, including bonds, listed or unlisted shares in downstream entities, stocks, real estate worldwide, cash and commodities, loans, and intangible assets such as Intellectual Property and Patents.

ADGM Passive holding company 10 Leaves

Why hold assets in an ADGM SPV? What are the benefits and uses?

Flexibility of ownership

Shareholding in operational companies:

Holding shares in operational companies in the name of an SPV, instead of in individual names, helps better manage business-related liabilities, and also provide for potential investments in the business. The UAE mainland, for instance, has a 51%/49% share structure for trading entities. These shares are usually held in individual names.

Holding these shares in the name of ADGM SPVs can provide many benefits, including more robust arrangements, under Common Law, for the relationship between the UAE National and the expatriate partners.

Can ADGM SPVs hold property?

Yes! Investors who wish to purchase property, or have already purchased property, can use ADGM SPVs to hold these assets.

We have seen investors using one SPV per property, primarily when such assets are bought for onward sale. Others use ADGM SPVs to consolidate their portfolios by region (in this case, by Emirate), or by type of property (residential, commercial) etc.

How can ADGM SPVs be beneficial to hold shares in startups in the UAE?

Well, Startups in the region face a daunting task. It is not easy to operate a fledgling company in the region, even with all the incentives that are currently in place for entrepreneurs.

Access to capital is limited, given that banks in the UAE do not lend easily to entities that do not have a proven track record. 

Startups then end up having to turn to alternate sources of funding, namely angel investors and venture capitalists.

This ecosystem has been steadily growing since 2016, and initiatives such as the DIFC VC Fund Regime are bringing in new VC Fund managers to the country. 

Most free zones do not yet have very flexible commercial companies regulations. Shareholders are all clubbed into one class of shares, with limited (if any) options to customize the Memorandum and Articles of the company, and options for share pledges and issuance of convertibles such as warrants being virtually non-existent. 

In this situation, even if startups manage to access capital, they require an adequate structure so as to onboard investors, while still keeping control of the operational direction of their company. 

Here is where ADGM SPVs provide a viable alternative.

Startups can be setup in any free zone in the UAE, and can hold the shares in these free zone entities through an ADGM SPV. 

In effect, the operational entity becomes a wholly-owned subsidiary of the SPV in ADGM. The Memorandum of the SPV can be customized to allow for multiple classes of shares, with different voting, dividend and distribution rights.

Investors can be onboarded in a separate class of shares and founders can maintain control of operational aspects of the startup through a distinct founder share class. 

Shares of an ADGM SPV can be pledged, with the pledge being registered in the ADGM Register and share transfers/sales being made conditional to the clearing of this pledge. This arrangement allows for a structured approach to debt funding.

Also, ADGM SPVs are able to issue sophisticated instruments and convertibles including SAFE notes, warrants and the like. This also allows for access to alternate sources of funding. 

Startups, usually the ones that are technology-driven, also need to protect their Intellectual Property, which in many instances, forms the core of their businesses.

The trademark or patents can be registered in the name of the ADGM SPV and specific IP exploitation agreements can allow for the leasing of this IP across operational companies in the UAE, GCC and worldwide as well. 

Most startups also operate on a lean model. Attracting talent can be challenging in these cases, given that most startups are unable to provide market-based salaries to employees. 

Usually, in these scenarios, startups end up putting in place share-vesting plans (also referred to as ESOPs). 

These can also be structured using ADGM SPVs, with share-vesting agreements governing the functioning of the plan.

Do read our dedicated article on the subject here.

Large families:

The GCC has many family businesses, many of which are beginning to transition to the next generation.  Some transitions can be complex, and sensitive, and can be better managed by using ADGM Foundations in conjunction with ADGM SPVs.

In many cases, multiple family businesses are held by multiple members of the family, in varying percentages of shareholding, thus complicating the group structure. Such groups expose themselves to larger liabilities, and confusion in the event of the death or incapacitation of any of the shareholders.

Such families can use ADGM SPVs to streamline their ownership structures, and then consolidate the overall structure under an ADGM Foundation, thus allowing for better management and control.

Joint ownership:

ADGM SPVs can also be used to enter into passive Joint Ventures, where the JV does not require active management. We have seen instances where the ADGM SPV holds the rights to the contract of the JV, thus providing clear separation between the operational entities, the project, and the liability of contract. 

Does the ADGM allow for nominee beneficiaries?

ADGM allows for nominee arrangements and trust agreements. This can be relevant for investors who wish to protect the rights of third parties, or where the stakeholders agree for one or more shareholders to hold the shares on behalf of others. For example, Person R can hold 100% of the shares of an SPV, but Person S can be the 100% beneficial owner of the shares.

What are the benefits of setting up a holding company in the ADGM?

The ADGM SPV is governed by Common Law, and it’s direct applicability in the ADGM provides legal certainty and comfort to foreign investors. SPVs also have access to the ADGM Courts, which provides a mechanism for registration and enforcement of contracts, again under Common Law.

There are no restrictions on foreign ownership in the ADGM, and so ADGM SPVs can issue 100% of it’s shares to foreign nationals.

The ADGM SPV is a low-cost and flexible vehicle. There are no office-space requirements (the services of an ADGM registered agent would suffice), and multiple classes of shares are allowed.

Also, an ADGM SPV has access to the extensive Double Taxation Avoidance Treaty Network that the UAE has in place with most major countries around the globe. In this case, there are additional requirements to fulfil from the Ministry of Finance.

The ADGM is a zero-tax jurisdiction and there are no corporate, withholding or income taxes in the centre. 100% of the profits of an ADGM SPV can be repatriated.

What legal forms are available for SPVs in the ADGM?

An ADGM SPV is usually set up as a Private Company Limited by Shares.  

How can we at 10 Leaves help you?

The ADGM Company Service Provider Regulations come into effect in April 2021.

All ADGM Special Purpose Vehicles* are now required to appoint a Company Service Provider to carry out company secretarial and registered agent services. The ADGM Company Service Provider will be the point of contact between the ADGM Registration Authority and the SPV. 

10 Leaves is a Service Provider in the ADGM and offers the following services to ADGM SPVs:

  • Incorporation Agent – assistance in setting up the SPV.
  • Registered address – providing the registered office.
  • Provision of directors.
  • Provision of company secretaries.
  • Provision of Authorised Signatories.
  • Provision of nominee shareholders. 
  • Provision of accounting services.
  • Customisation of the Articles of Association. 
  • ESR Filings and notifications.
  • Pledge Arrangements and registration.
  • Translations and attestations.
  • Assistance in bank account opening.

In addition to the above, we offer corporate and commercial services through 10 Leaves Legability. These include shareholding agreements, IP agreements, Share vesting plans and agreements and ESOPs.

For startups, we offer structuring solutions, including issuance of warrants, SAFE notes, convertibles and maintenance of cap tables. 

We provide all our services through a proprietary digital frontend, with a secure digital backend, to ensure that you have a seamless experience, unmatched by competition. As a client, you also have access to our industry-leading media solution that incorporates engaging videos, detailed podcasts and informative publications to keep you updated and informed of the latest developments that affect your company on an ongoing basis. 

 

For More Information On ADGM SPVs as Holding Companies, Contact us here 

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