DWTC free zone share class offer ‘sets new industry standard’

• Broader range of share classes available
• Founders’, restricted and tiered share options
• ‘Catalyst for wider business community’

Rising competition to attract international businesses and talent is prompting Gulf free zones to devise sophisticated offerings to set themselves apart. 

Some are strengthening their regulatory toolkits and aligning themselves with global business regimes to appeal to companies seeking transparency, flexibility and the freedom to innovate. 

This month Dubai World Trade Centre (DWTC) became one of the only free zones in the Emirates to permit companies to issue a variety of different share classes, enhancing their financial flexibility. The other two that do this are the common law-governed Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). 

Under the multiple share class framework launched by the Dubai World Trade Centre Authority, companies registered in DWTC can issue a broader range of share classes beyond the traditional ordinary shares by which many companies are structured. 

These might include preference shares, founders’ shares, restricted shares and tiered structures such as class A, B, C or D shares. Each class offers distinct rights, privileges and costs related to dividend entitlements, voting powers, protections in the event of liquidation or other corporate distress, and conditions for transferring, redeeming or converting shares. 

The DWTC Authority said it is “providing companies with the tools to attract investment from stakeholders with diverse risk appetites” and to adopt structures that support their long-term growth plans. 

In particular, the framework could safeguard founders’ long-term visions, support family offices in the midst of succession planning and provide incentives for talent by enabling companies to offer equity-based compensation. 

Ordinary shares will, however, continue to serve as the default class for most companies within the free zone, it added. 

‘A new industry standard’

“DWTC is setting a new industry standard for capital restructuring in the region,”  said Abdalla Al Banna, vice-president of free zone regulatory operations at the DWTC Authority. 

“This framework is not only a milestone for our free zone but a catalyst for the wider business community, reinforcing Dubai’s role as a progressive, globally competitive destination for enterprise and innovation.” 

Lawyers, economists and business advisers in the UAE have praised the move, describing it as an intelligent way of boosting the free zone’s competitiveness and raising its international profile.

DWTC

Abdalla Al Banna, vice-president of free zone regulatory operations, DWTC Authority

“It’s a smart step to try to push themselves ahead of others,” said Scott Cairns, managing director of corporate advisory group Creation Business Consultants. Among other things, the group advises foreign companies setting up in the UAE. 

“You’ve got 60-plus jurisdictions here and choosing between them is challenging. ADGM and DIFC used to be the only places that offered a multiple share class framework, so putting themselves in that ilk and proving they offer a product beyond the standard is a fantastic achievement.” 

Sooner or later, Cairns added, other free zones will catch up and it will become more of a level playing field. “But this move will probably drive a good deal of traffic [DWTC’s] way over the next 12 to 18 months.” 

Appealing for tech and asset managers

The types of business the move will appeal to the most are young and emerging businesses in the technology or related industries, many of which are looking to attract fresh talent and investment and give employees a stake in the business to encourage long-term commitment, Cairns said. 

The DWTC Authority’s “move dovetails nicely with its desire to attract cutting-edge technology, blockchain and other digital companies”. 

Images supplied

Scott Cairns of Creation Business Consultants, left; Azad Zangana of Oxford Economics

The framework may also appeal to the recent wave of asset managers setting up shop in the UAE, said Azad Zangana, head of GCC macroeconomic analysis at consultancy Oxford Economics. 

“This new flexibility being introduced for share classes will help entice more owners and senior executives to be located in DWTC,” he said.

“For example, the changes allow for golden shares, which owners like to use to protect their ownership, and also share options for incentivising executives and staff.”

“The asset management industry in particular likes to use long-term share option schemes to better align the incentives offered for fund managers and analysts with the long-term objectives of clients.”

The DWTC Authority may have seen the huge growth of asset managers and hedge funds setting up in ADGM and DIFC in recent years and wish to compete, Zangana said. 

Differentiated share class offers could be a useful way of raising capital in the current high interest rate environment, because they allow company leaders to retain some control while seeking investment, according to James Swanston, senior Middle East and North Africa economist at consultancy Capital Economics. 

The move is not groundbreaking from a regulatory perspective and it would be relatively easy for other Gulf free zones to follow suit, he added. 

“However, it does put DWTC further down the road of mirroring Western economies to attract foreign investment and global talent, at a time when rivals such as Saudi Arabia are still working out how to strengthen underpinning laws related to foreign ownership and bankruptcy, which the UAE already has in place.”

According to Cairns, it may also be a cheaper way of structuring your business than what many UAE companies do, which is to have a holding company in DIFC or ADGM that enjoys the benefits of the international common-law jurisdiction and its court system, plus operational subsidiaries in other free zones more appropriate to their activities. 

DWTC

DWTC has evolved from supporting an events venue to a range of companies spanning multiple sectors

To encourage take-up, there will need to be an element of educating businesses so they fully understand the options available and the advantages they offer, Cairns said. 

As the framework beds down, people will be watching to see how it is implemented and what levels of take-up there are, according to Melissa Forbes-Miranda, Dubai-based partner in M&A, corporate and commercial at law firm Stephenson Harwood.  

“It’s about the complete package a free zone is offering, not just that it is allowing differentiated shares,” she said.

DWTC is already a prominent respected free zone, one of the emirate’s oldest – and it has evolved from supporting an events venue and associated businesses to a range of companies spanning multiple sectors. 

Working with common law jurisdictions

What would strengthen the offering further, she said, is for DWTC to have its own judiciary system, which would hear shareholder and other disputes that arise for businesses registered in the free zone. 

While this is unlikely, a recent agreement between DIFC and Jafza (Jebel Ali Free Zone Authority) indicates how free zones could work with common-law jurisdictions to deepen their appeal. 

According to a statement from the two in October, the agreement seeks to establish a framework that promotes “dual-zone operations” for Jafza companies.  

Ports and logistics businesses could adopt DIFC’s advanced legal and financial platforms to structure capital, access financial services and plan for long-term legacy, while manufacturing, storing and distributing goods at Jafza, they said. 

This is an interesting alignment but it is unclear how it would work in practice, said Forbes-Miranda. 

DWTC is in a busy period: plans are underway for a major expansion of Dubai Exhibition Centre at Expo City. Last year the free zone’s jurisdiction was extended to the nearby mixed-use development One Za’abeel. 

In this context, the multiple share class framework is the latest piece in DWTC’s strategy for maintaining its competitiveness as it looks to its next chapter of growth. 

Find out more

Click here for more information about Dubai World Trade Centre’s free zone.