Why SPVs and Foundations in ADGM?
An SPV (Special Purpose Vehicle) and a Foundation are two different legal structures that serve different purposes.
An SPV is a separate legal entity created to serve a specific purpose or project. It is often used to isolate risk and limit the potential liability of the parent company. SPVs are commonly used in structured finance transactions, mergers and acquisitions, real estate investments, and other business transactions. The assets and liabilities of the SPV are separate from those of the parent company, and the SPV can be dissolved once its purpose has been achieved.
On the other hand, an ADGM Foundation-like trust is used for many purposes such as wealth management and preservation, tax planning, family succession planning, corporate structuring, and asset protection. As compared to trust, the founder of the foundation can retain more control over the foundation. It is similar to a trust in common law jurisdictions, but unlike a trust, it has a legal personality and can enter into contracts and hold assets in its own name. Foundations are commonly used in civil law jurisdictions, such as in Liechtenstein and Panama, and can also be established in certain common law jurisdictions, such as in the UAE.
In summary, an SPV is a legal entity created for a specific business purpose, while a Foundation is a legal entity created to manage and protect assets for a specific purpose, such as charitable or philanthropic activities.
In ADGM, an SPV is commonly used in structured finance transactions, mergers and acquisitions, real estate investments, and other business transactions. The ADGM Companies Regulations 2015 provide for the incorporation of SPVs, which are typically used for ring-fencing assets and liabilities and limiting potential liabilities of the parent company. ADGM allows for the incorporation of different types of SPVs, including those for securitization transactions, project finance, and real estate investments.SPVs are commonly used for ring-fencing assets and liabilities and limiting the potential liabilities of the parent company.
ADGM also offers a legal structure for Foundations. The ADGM Foundations Regulations 2017 provide for the establishment of private and public Foundations in ADGM. A Foundation established in ADGM can be used for charitable or non-charitable purposes and can hold assets for the benefit of beneficiaries or for a specific purpose. A Foundation in ADGM has legal personality and can own assets, enter into contracts, and sue and be sued in its own name.
Uses of SPV
- Risk sharing: A parent company can create an SPV to share the risks associated with high-risk projects. If the parent company faces bankruptcy during such projects, the SPV remains unaffected. Similarly, if the SPV faces bankruptcy, it does not impact the parent company since the SPV is created for a specific business purpose.
- Asset transfer: SPVs facilitate the transfer of assets, making them unidentifiable. They can even enable the transfer of non-transferable assets like mines, power plants, and gas plants.
- Financing: SPVs can ring-fence investments, increase debt owed to the parent company, or finance parental or SPV assets without subjecting them to cross-liabilities.
- Real estate investment: SPVs can acquire title to real property, limiting the recourse of mortgage lenders based on the location of the asset.
- Securitization: Companies can use SPVs to securitize loans, reducing funding costs. The SPV purchases assets by issuing debts, providing priority rights to asset-backed security holders for receiving payments.
- Raising capital: SPVs can be used to raise capital at favorable rates, with creditworthiness determined by the SPV’s collateral rather than the parent company’s credit rating.
- Intellectual property: SPVs protect a company’s intellectual property rights from pre-existing licensing deals. They can separate valuable intellectual property into a separate structure with minimal liabilities. SPVs can also raise funds and enter into license agreements with third parties independently of the parent company.
Advantages of Foundations
- Asset management
- Strong administrative features on which the Foundation Council operates on a par with a Board of Directors. The duties of council members are set out in the ADGM Foundation Regulation. The government follows international best practices and sets a regulatory standard for the Foundation Council. These criteria include legal obligations similar to those of directors in the company law.
- Guaranteed by Guardian supervision. The Foundation Council is administered by the Guardian and makes sure that it complies with the charters and by-laws of the Foundation. The appointment of a Guardian after the death of the Founder is mandatory and optional during the Founder’s lifetime.
- Legal personality as opposed to trust. Having a legal personality, as a company can, gives foundations the flexibility to enter directly into contracts and arrangements.
- Separation of responsibilities while upholding control of properties. The Foundation is a separate legal establishment that permits the separation of responsibilities between the Foundation and the Founder.
- Eternal existence after the life of the founder. A foundation is a permanent concept that consents to adjustments to continue and thus offers certainty after the death of the founder.
- Wealth Protection Mechanisms
Personal Law vs ADGM Foundation Regime
In the UAE, Islamic law (Shariah law) governs inheritance, which can pose challenges for businesses that have Muslim shareholders who pass away, as the transfer of their shares to non-Muslims can be complicated. However, the use of an ADGM Foundation can provide a solution to this issue.
When a Muslim shareholder passes away, their shares in the company are subject to the rules of Shariah law regarding inheritance. In many cases, the shares will be passed down to the deceased shareholder’s heirs in accordance with Shariah law. However, if the heirs are non-Muslims, they may not be able to inherit the shares under Shariah law.
To avoid this issue, the ADGM Foundation can be used as a holding entity for the shares. The deceased shareholder’s shares in the company can be transferred to the Foundation, which can then hold the shares for the benefit of the deceased shareholder’s beneficiaries. The Foundation can be established in such a way that it is not subject to Shariah law and can provide a mechanism for the transfer of the shares to non-Muslim beneficiaries.
The Foundation can be established in accordance with the ADGM Foundations Regulations 2017, which provide for the creation of private and public Foundations. The Foundation can be set up to hold assets for the benefit of the deceased shareholder’s beneficiaries, who can be designated as beneficiaries of the Foundation. The Foundation can then distribute the shares to the designated beneficiaries according to the wishes of the deceased shareholder, which can be outlined in the Foundation’s charter or trust deed.
The use of an ADGM Foundation for the transmission of shares from a Muslim to a non-Muslim shareholder partner provides a flexible and customizable solution for businesses that may face inheritance issues due to Shariah law. The Foundation can be established to meet the specific needs and requirements of the business and can provide a clear mechanism for the transfer of shares to non-Muslim beneficiaries.
In the UAE, the transfer of shares between Muslim and non-Muslim partners can be complicated by the rules of Shariah law regarding inheritance. However, the use of an ADGM Foundation can provide a solution to this issue.
In summary, setting up an ADGM Foundation can provide a flexible and customizable solution for the transmission of shares of a Muslim partner to a non-Muslim partner in the event of death. The Foundation can be established to meet the specific needs and requirements of the partners and can provide a mechanism for the transfer of shares in a way that is not subject to the rules of Shariah law.
Consultation on Distributed ledger technology foundations:
The ADGM has recently released a Consultation Paper outlining a proposed legislative framework for foundations utilizing distributed ledger technology (DLT). This framework is designed to accommodate DLT projects that intend to utilize tokens for issuance and trading through various structures such as unincorporated decentralized autonomous organizations (DAOs), foundations, and companies limited by guarantee.
The primary objective of the paper is to develop a new regulatory regime tailored to the unique requirements and characteristics of foundations, aiming to attract DLT projects and developers. The goal is to introduce the Proposed Regulations for Distributed Ledger Technology Foundations in 2023.
