Investing In... 2021

Last Updated January 18, 2021

Jordan

Trends and Developments


Authors



Rajai K. W. Dajani & Associates is a pioneering law firm in Amman, Jordan, providing the highest-quality legal services on an international level. The firm was founded in 1990, and has grown as a leading consulting firm that continues to expand and gain comprehensive expertise in all areas of the law. Its team of 14 counsels provide a range of services to industry leaders operating in Jordan and abroad and has the local and international knowledge and expertise that serves as a gateway to Jordanian business and investment. Rajai KW Dajani's areas of expertise cover a range of industry sectors, including privatisation projects, government-related projects, aviation, mergers and acquisitions, general civil and commercial practice specialising mainly in construction contracts, renewable energy, telecommunications, media, e-commerce, international trade, foreign investment, franchise and distributorship, and litigation. The firm adheres to the goal of excellence and maintains a working relationship with top law firms worldwide.

What Is Venture Capital Financing?

Venture capital financing/funding is a form of professional private equity of risk capital and a type of financing and support that investors provide to start-ups or young businesses that are believed to be innovative and to promising companies with exceptional growth potential.

Venture capital financing is deemed to be an important source of backing to fund projects and ideas that cannot be financed by traditional financial institutions. Aside from the monetary aspect of the arrangement, it is also a valued source of guidance and consultation that can be provided in the form of technical, networking or managerial expertise.

Typical Venture Capital Companies Structure

Venture capital (VC) companies, otherwise known as VC funds, are typically structured as limited partnerships governed by partnership agreement covenants, of finite life.

Founders of VC funds – conventionally called general partners (GPs) – manage the fund and make the investment decisions. The investors they target are conventionally called limited partners (LPs), and these can be high net worth individuals, family offices, foundations, big corporations, endowment funds, pension funds or funds of funds; LPs have no direct control over any investment decisions of the fund.

VC Funds in Jordan

The limited partnership corporate form is, in theory, available under the Companies Law No 22 of 1997 (the “Companies Law”). However, certain requirements under the Companies Law – such as the requirement for a general partner in a limited partnership to be a natural person as opposed to a corporate entity – make it unfeasible for the implementation of an investment fund structure in Jordan in the existing form of a limited partnership.

Therefore, investment companies that want to be incorporated using an exclusively local corporate structure have tended to take the form of a private shareholding company where the design of the capital structure, management thereof and many other matters are left for the shareholders to determine contractually in the articles and memorandum of association; effectively, this is preferred over other types of companies by the investors because it accommodates their needs.

The main challenge that faced the investors in implementing the private shareholding company structure was its inflexible tax regime whereby a private shareholding company would have to submit its tax returns and pay taxes on its operating profits. This meant that the investment profits achieved by an investment fund in the context of its normal investment activity would be deemed as taxable operating profits.

Based upon the above, it can be concluded that the typical fund structure until 27 December 2018 was not available under the Companies Law.

As a result, it has been noted that small businesses in Jordan are unable to access financial markets, and establishment of proper investment funds, such as venture capital and private equity funds, were envisaged as the “best” instruments to support starting and struggling enterprises. Accordingly, new amendments to the Jordanian Companies Law No 22 of 1997 were introduced to allow for the incorporation of venture capital companies to attract venture capitalists to the country.

Pursuant to the new amendments, Regulation No 143 of 2018 for Venture Capital Companies was published in the Official Gazette on 27 December 2018 (the “VC Regulation”).

VC Funds under the VC Regulation

The objectives of VC funds should be direct investment or the establishment of funds to contribute and invest in the capital of small and medium-sized unlisted companies with high risk and significant growth potential.

The ownership of the VC fund should not exceed 51% of the share capital of the target company in which the VC fund is investing and the investment amount should not be more than 50% of the VC fund’s paid-up capital.

The name of a VC fund may include the name of one or all of its general partners or any other name that is approved by the Companies Controller (the “Controller”) but must include the words “Venture Capital Company” at the end of the name. A VC fund must ensure that its name is clearly stated in every document, agreement and publication issued or signed by, or on behalf of, the VC fund.

Before the VC fund commences its operation, it should provide the Controller with its address, phone numbers, postal address, names of its partners and their addresses, and any changes on these details within one month after such change has occurred.

Types of Partners in VC Funds

VC funds consist of two types of partners that can be corporate entities as well as natural persons: (i) general partners, and (ii)limited partners.

No partner is allowed to withdraw from the VC fund of his or her own will. However, partners may transfer their shares in the VC fund by executing transfer instruments which should be approved by the general partner and filed with the Companies Control Department (the CCD). In such event, the transferee will be liable for settling the amount of the transferor’s committed and unpaid capital.

General partners

General partners oversee and run the business of the VC fund as they are also authorised to represent the VC fund in all administrative, legal, financial and judicial matters. All actions taken by the general partners in the name of the VC fund are binding towards any third party irrespective of any restriction provided for under the partnership agreement or the VC fund’s articles and memorandum of association. The general partner may specifically delegate part of his or her authorities in writing to a third party for so long as there are no restrictions thereon provided for under the partnership agreement.

If the VC fund has more than one general partner, the decisions will be taken by the majority of the votes of the general partners unless agreed otherwise under the partnership agreement.

General partners have unlimited, joint and several liability for the debts and obligations of the VC fund.

Unless provided otherwise under the partnership agreement, general partners under the VC Regulation are not allowed to compete with the VC fund whether by undertaking any competing business or investing or managing any entity, other than public shareholding companies, that competes with the VC fund whether for his or her own interest or for the interest of any third party.

In order for a natural person to be qualified for holding office as a general partner or a representative of a corporate entity acting as a general partner, said person*:

  • should not be under 25 years of age;
  • should not be convicted of a felony or a misdemeanour prejudicial to honour such as bribery, theft, embezzlement, misappropriation, tax evasion, bad cheques, forgery, false testimony or any other offences against the ethics or the public morals;
  • should not be incapacitated or under undischarged bankruptcy.

The general partner will be disqualified from being appointed as a general partner in the following events:

  • the general partner ceases to own any shares in the VC fund;
  • death or legal incompetence of a general partner, or appointing a guardian or executor on his or her property;
  • the dissolution of a general partner when the partner is a corporate entity;
  • the natural person loses any of the qualifications under the three qualifications listed above*;
  • the events provided for under the partnership agreement.

In the event the general partner is disqualified from his or her position as a general partner and unless a higher percentage is provided for under the partnership agreement, the supermajority of the remaining partners may resolve to admit a new general partner within 60 days. The new general partner will only be liable for the VC fund’s obligations and debts from the date of joining the VC fund.

The decisions of the general partners are deemed confidential and should not be published publicly.

Limited partners

Limited partners are the partners who do not partake in managing the business. The liability of each one of them towards the debts and liabilities of the VC fund is limited to his or her share in the contributed capital.

Limited partners must not take part in the management of the VC fund or represent it or act on its behalf. Otherwise, all such actions will bind the VC fund towards third parties who acted in good faith and the limited partner will be liable with his or her personal property for any inflicted damages.

VC Funds’ Share Capital

The share capital of the VC fund consists of paid-up capital and unpaid committed capital that should be paid up within three years unless the partnership agreement provides otherwise.

The share capital of the VC fund is divided into shares of JOD1 par value each.

The capital contribution of a partner may only take the form of cash; in kind contribution is not acceptable.

The contribution of the limited partner should not be less than JOD100,000 or 25% of the committed share capital, whichever is higher, whereas the contribution of the general partner should not be less than JOD100,000.

VC Fund Formation and Fees

An application for registration shall be submitted to the CCD together with the original copy of the articles and memorandum of association signed by all the partners along with any other documents as may be requested by the Controller.

The VC fund’s articles and memorandum of association must include all matters that regulate the governance, management, decision-making process and operation of the VC fund including the following:       

  • name of the VC fund;
  • headquarter of the VC fund and its address; 
  • duration of the VC fund, if it is limited;
  • names of the partners and the nationality, age and address of each of them;
  • the committed and the paid-up share capital, number of shares and their par value;
  • shareholding of each partner and the amount of the committed and the paid-up contribution;
  • names of the authorised signatories of the general partners;
  • the status of the VC fund in the event of death of any or all of its partners;
  • any other matter the partnership agreement provided to be listed thereunder;
  • any other matter the partners agreed to include or the Controller requested to be listed.

The Controller shall issue his or her decision approving the registration of the VC fund within 15 days from the date of the submission of the registration application. The Controller may reject the said application if there is evidence in the VC fund’s articles and memorandum of association violate the provisions of all legislations in force and if the partners do not take action to rectify the said violation within the period determined by the Controller. The partners may submit an objection to the Minister of Industry and Trade against the rejection decision of the Controller within 30 days from the date of notifying them of the said rejection.

Should the Minister of Industry and Trade decide to reject the objection, the objectors shall have the right to contest his or her decision before the administrative court within 30 days from the date of their notification of the decision.       

If the Controller approves the registration of the VC fund or if the approval was obtained by a decision of the Minister of Industry and Trade, the Controller will issue the VC fund a registration certificate and shall also publish an announcement of the VC fund’s registration in the Official Gazette.

The CCD will charge the VC fund the following fees:

  • JOD1,500 as incorporation fees to be paid upon incorporation;
  • JOD1,000 as annual fees to be paid within 30 days following the commencement of each financial year after incorporation; and
  • other charges provided for under the applicable regulations.

Partnership Agreement

The partnership agreement is an agreement as to the affairs of the VC fund and the conduct of its business. It may provide for different classes of shares with different rights as to dividends distribution and liquidation preference. The partnership agreement has effect as a contract between the limited partnership and each partner, and between the partners themselves, under which the limited partnership and each of the partners (including any subsequent partners) agree to observe and perform the agreement so far as it applies to them.

The Partnership Agreement will not be valid except after execution thereof or from the effective date as specified thereunder.

The Partnership Agreement will be governed by Jordanian laws and Jordanian courts will be the competent courts to adjudicate any dispute that may arise unless the partnership agreement includes an arbitration provision.

The Partnership Agreement may be made in any language but it should be accompanied with an Arabic translation

General partners may submit the original of the partnership agreement or a copy thereof at the CCD and upon submission the partnership agreement will be deemed as an integral part of the fund documents.

Taxation

Having a pass-through tax entity is one of the core elements of a typical VC fund structure. As previously stated, the traditional structure of companies before introducing the latest amendments to the Jordanian Companies Law No 22 of 1997 and enacting the VC Regulation is not considered as pass-through tax entities, as Article 2 of the Income Tax Law No 34 for the year 2014 (the “Income Tax Law”) provided that all entities registered in Jordan are taxable. However, on 2 December 2018, the Income Tax Law was amended by Law No 38 for the year 2018 where a corporate income tax exemption is introduced to venture capital funds.

Reporting and Audited Financial Statements

The VC fund should submit to the Controller during the first six months of the financial year an audited financial statement approved by the supermajority votes of the paid-up shares

The VC fund should keep its documents, financial records, partnership agreement, articles and memorandum of association and any other relevant documents in the offices of the VC fund at its headquarters or electronically.

The general partners are responsible for keeping and maintaining these records, they also need to present accurate accounts that reflect the financial position of the VC fund and its activities whenever requested by the limited partners unless the partnership agreement provides otherwise.

However, the general partner may refrain from attending to the limited partners’ requests should the general partner deem in good faith said information as trade secrets or that the disclosure thereof may be detrimental to the VC fund or should the VC fund be bound by a non-disclosure obligation.

Liquidation

VC funds may be liquidated voluntarily in the following events:

  • upon the expiry of its term unless the supermajority of the partners agrees to extend the life of the VC fund;
  • if the voluntary liquidation is approved by all the general partners or the limited partners holding the supermajority of the paid-up shares;
  • the general partner is disqualified to hold the office of a general partner unless another general partner is appointed;
  • any other events provided for under the partnership agreement.

VC funds may be liquidated compulsorily upon the Controller’s request in the following events:

  • a material breach by the VC fund of the Companies Law, the VC Regulation or the Partnership Agreement;
  • a material loss so the VC fund is not able to pay its debts;
  • the VC fund fails to appoint a general partner;
  • any other reason as will be decided by the Controller.

It should be noted that the Controller may request the competent court before issuing its liquidation decision to halt the liquidation procedures in the event the VC fund rectified its status.

Investment during the COVID-19 Pandemic Period

The COVID-19 pandemic will have a profound and enduring impact on the global economy. Even though lockdown measures have now been relaxed in several countries, financial markets are likely to take a long time to overcome the coronavirus-triggered crisis.

Most existing start-ups face significant challenges due to the COVID-19 crisis, as they face constraints in accessing traditional financing from financial institutions due to the lack of securities. At a time of significant economic uncertainty and with their income affected by lockdown measures and significant drop in demand, start-ups become even more financially vulnerable and need support for their short-term liquidity needs to survive.

On the other hand, the COVID-19 pandemic has shown the urgent need to strengthen the technology infrastructure in countries around the world as technology proved to play a vital role in the global economic recovery from the pandemic.

During the COVID-19 crisis, start-ups have continued to play a critical role for economies. Some innovative young firms have reacted fast and flexibly to the pandemic, and have been critical in helping the government of Jordan to shift towards fully digital work, education, e-payment, w-commerce, gaming and health services, and have provided innovations in medical goods and services.

COVID-19 is accelerating these digitisation efforts, creating opportunities for businesses and investors to both generate profits and have a positive social impact.

A venture capital industry should make use of this era to make available financing for entrepreneurial and start-up projects and to be a significant contributor to economic growth during the COVID-19 pandemic, business development, job creation, and the influx of foreign direct investment.

Rajai K. W. Dajani & Associates

Fourth Floor
Jordan Tower Building
5 Thaqafa Street
Shmeissani
P.O Box 5590
Amman 11183
Jordan

+962 6 5680111

+962 6 5680333

info@dajanilaw.com www.dajanilaw.com
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Trends and Development

Authors



Rajai K. W. Dajani & Associates is a pioneering law firm in Amman, Jordan, providing the highest-quality legal services on an international level. The firm was founded in 1990, and has grown as a leading consulting firm that continues to expand and gain comprehensive expertise in all areas of the law. Its team of 14 counsels provide a range of services to industry leaders operating in Jordan and abroad and has the local and international knowledge and expertise that serves as a gateway to Jordanian business and investment. Rajai KW Dajani's areas of expertise cover a range of industry sectors, including privatisation projects, government-related projects, aviation, mergers and acquisitions, general civil and commercial practice specialising mainly in construction contracts, renewable energy, telecommunications, media, e-commerce, international trade, foreign investment, franchise and distributorship, and litigation. The firm adheres to the goal of excellence and maintains a working relationship with top law firms worldwide.

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