Business Structures and Forms

Published February 23rd, 2000 - 02:00 GMT

General

The Law of Commercial Companies, Decree 28 of 1975, as periodically amended, governs most of the principal types of business entities in Bahrain. This decree contains the law relating to companies, partnerships and branches. In addition to the aforementioned entities, Ministerial Order 25 of 1977 created a specific entity known as the exempt company, an offshore company introduced in order to encourage foreign companies to locate their regional headquarters in Bahrain. To further promote Bahrain’s goal of being the regional financial center, many of the offshore entities are banking units and investment banks. 

In order to establish a joint-stock company, limited liability company, or partnership in Bahrain, at least 51 percent of the capital must be owned by Bahraini nationals. The laws and regulations governing the establishment of offshore exempt companies and offshore banking companies significantly relax the usual restrictions against foreign ownership. 

The terms used in the legislation are difficult to translate precisely. For example, the term "company" is often used to mean both company and partnership and the term "partner" to mean both partner and shareholder. A company or partnership is defined by the Law of Commercial Companies as a contract under which persons undertake to participate in a financial enterprise with a view to profits, each contributing money or services and dividing the profits or losses resulting from the enterprise. 

Bahraini law allows for the establishment of the following types of companies and partnerships: (1) general partnership (a partnership under a collective name); (2) limited partnership; (3) partnership limited by shares; (4) joint stock company; (5) limited liability company; and (6) joint venture. 

Any association which does not assume one of the prescribed forms will not be recognized by law and any persons who enter into a contract in the name of such an unrecognized entity are liable jointly and severally to third parties for resultant obligations. 

 

 

Companies Law

 

Joint Stock Companies

A joint stock company is a pure shareholding company in which all of the members are liable for company debts to the extent of the nominal value of their shares. This type of company can take the form of an exempt joint stock company, a closed joint stock company or a public joint stock company. While the latter type requires a minimum of 51 percent Bahraini ownership, the exempt and closed joint stock companies may be 100 percent foreign owned. All forms of the joint stock company must maintain permanent offices in Bahrain. 

Public stock companies may only be established with permission from the Ministry of Commerce and supported by an Emir decree. Seven founding shareholders are required in order to establish a public stock company. Together they must subscribe for between 7 and 20 percent of the shares of the company. 

An application to register a public stock company must be filed with the Directorate of Commerce and Industry in the Ministry of Commerce and Agriculture along with the company's Memorandum and Articles of Association. Public stock companies are authorized either for a fixed period of time or for the period of time necessary to achieve a specified objective. The Minister of Commerce and Agriculture makes a determination whether to register the company within thirty days of receipt of the application and recommendation of the Directorate of Commerce and Industry. Registration is completed after the approval of the Minister is published in the Official Gazette. Public subscription for shares must begin after the publication in the Official Gazette of the decree incorporating the company. A prospectus must be published prior to the opening of the subscription. The subscription is made through a bank where the proceeds are to be deposited in the name of the company. If the company cannot be established after the subscription period due to being under-subscribed, the founding shareholders are responsible for returning all subscriptions received. 

The public stock company may have a board of directors composed of between three and twelve directors, each nominated for a three-year term. A majority of the directors must be resident Bahrainis. Shares of a public stock company may be transferred freely. Bahraini shareholders, however, can sell their shares only to other Bahraini nationals. 

Closed stock companies are formed in the same manner as public stock companies and may be formed without an Emir decree provided that the founders submit an affidavit affirming that they undertake to have the company Memorandum and Articles of Association comply with the law; that all the shares of the company have been subscribed for by the founders and the value of the shares has been deposited in an authorized bank; that shares paid in kind have been evaluated in accordance with the law and are fully paid up; and that the founders have established the necessary management for the company. Five founding shareholders are required to establish a closed stock company. 

 

 

Limited Liability Companies

The limited liability company, a shareholding company whose shares are not open to public subscription, is one of the most common forms of doing business by foreign investors. The company must have at least two and no more than fifty shareholders who are liable for the debts of the company only to the extent of their respective interest in the capital. At least one shareholder must be a Bahraini national, and the total shareholdings by Bahrainis may not be less than fifty-one percent. The words "With Limited Liability" must follow the name of the company. The limited liability company must have a limited life span not exceeding twenty-five years, which may be extended by a unanimous approval of the shareholders. The company must be managed by one or more managers who need not be partners. There is no legal requirement for a board of directors unless the number of partners exceeds two. A percentage of the company’s profits must be allocated on an annual basis for depreciation and a certain rate of the net profits thereafter must be allocated to a legal reserve until such reserve equals 25 percent of the company's capital. Limited liability companies may not engage in banking, insurance or brokerage activities. 

 

 

Partnerships

 

General Partnerships
A general partnership must be comprised of two or more Bahraini nationals; foreign investors can participate in partnerships, but Bahraini national participation must be at least 51 percent. In a partnership, the liability of the partners is unlimited, and they are jointly and severally liable with respect to the partnership's obligations to the entire extent of their assets. The name of the partnership must consist of the name of one or more of the partners adding thereto the words "Bahraini Partnership" or an indication that a partnership exists. 

 

Limited Partnerships
A limited partnership is comprised of at least one general partner and one limited partner. The extent of a limited partner's liability for the partnership's commitments is restricted to the amount of capital invested by the limited partner in the partnership. A limited partner may not participate in the management of the business and if this is done, the limited partner will be jointly and severally liable for the partnership's liabilities in the same way as the general partners. All general partners must be Bahraini nationals and at least 51 percent of the capital must be owned by Bahraini partners. 

 

Partnerships Limited by Shares
A partnership limited by shares consists of at least one general partner and at least ten shareholders. Management is the responsibility of the general partners and they are liable, to the extent of their entire assets, for the debts and commitments of the partnership. The shareholding partners are not responsible for the debts of the partnership, except to the extent of the value of their shares in the partnership. Shareholding partners may not interfere in the management of the partnership, and if they do so, they are personally liable for losses caused as a result thereof. 

 

Joint Ventures
A joint venture, also known as an association in participation, is a company that does not enjoy a separate legal personality. Joint ventures are formed by the conclusion of a Memorandum of Association specifying the rights and obligations of the partners and the division of profits and losses. Joint ventures are not subject to any prescribed formalities. 

A joint venture affects only the legal relations between the partners, however, it does not acquire legal status recognizable vis a vis its relationship with third parties. Third parties have a right of legal recourse against the partners with which they deal and the partners may thereafter proceed against each other for contribution. 

 

 

Legal Structures for Non-Bahrainis

 

General

Commercial life in Bahrain can be broadly divided into the offshore and onshore sectors. In the offshore sector, which consists of exempt companies and offshore banking units, the rules regarding foreign participation are quite liberal. In the onshore sector, the rules governing each type of business entity impose certain limitations on foreign participation; all the partners of a general partnership must be Bahraini and foreign participation in other forms is limited to 49 percent. There are, however, certain exceptions to this rule. 

The Commercial Companies Law allows for the establishment of 100 percent foreign owned companies under the following terms: (1) the purpose of the company is to establish an industrial enterprise in the country; (2) a majority of the company's capital is to be invested in an industrial development project; or (3) the company's objective is to use this establishment as a primary center for the investment of funds related to the distribution of its goods and/or services. If the wholly foreign owned company takes the form of a joint stock company, it must be a closed joint stock company.  

Certain exceptions to the partnership rules allow some service sector partnerships, such as accounting, architectural and engineering firms to engage in partnership relations between Bahrainis and foreigners. In the event that there is only one foreign partner, the Bahraini partners must be entitled to at least 51 percent of the capital and operational earnings, and, if there are several foreign partners, to at least 30 percent thereof. 

 

Exempt Companies

Exempt companies are joint stock companies that have been exempted from some or all of the requirements of the Law of Commercial Companies by the Minster of Commerce and Agriculture. An exempt company must register and situate its main office in Bahrain, but is set up to conduct its activities outside of Bahrain. This type of company may operate for a maximum twenty-five year period. The exempt company's activities must be conducted outside Bahrain. No more than 20 percent of the capital of an exempt company may be owned by Bahraini nationals without the permission of the Minister. An exempt company takes the form of a joint stock company. The phrase “Bahraini Exempt Joint Stock Company” and an indication of the entity’s capital must follow the company’s name. The company's activities may not include insurance, banking or brokerage. It is exempt from the requirements of local Bahraini participation in ownership applicable to most Bahraini companies. Without the consent of the Ministry of Commerce and Agriculture, an exempt company is not allowed to conduct any business or to undertake any commercial activities within Bahrain.  

Exempt companies must have at least two members, and the maximum number of members is unlimited. Exempt companies are managed by a board of directors of no less than two and not more than ten directors. A percentage of profits of the exempt company must be allocated each year for depreciation and 10 percent of the net profits thereafter must be allocated to form a compulsory reserve until the amount of such reserve equals 25 percent of the capital. 

The Directorate of Commerce and Companies' Affairs of the Ministry of Commerce and Agriculture has complete discretion to accept or to reject an application for the registration of an exempt company. It may exercise this discretion in accordance with its views as to the contribution that the proposed company will make to the economy of Bahrain and to Bahrain's reputation as an offshore center for business activity. Upon its incorporation, the exempt company is required to deposit a portion of its capital with the Bahrain Monetary Agency in order to guarantee any liabilities which might be outstanding upon the company's dissolution and may be paid only to the liquidator of the company. 

 

Foreign Company Branch

The Law of Commercial Companies provides that companies established outside Bahrain may open branches or offices in Bahrain provided that the approval of the Minister of Commerce and Agriculture is obtained and a local sponsor is appointed. The Minister will not grant approval unless he is satisfied that the parent company is financially sound and will assume full responsibility for liabilities of the branch. The sponsor must be a Bahraini merchant, either a company or an individual. The Companies Law exempts branch offices of foreign companies from having a Bahraini sponsor if these offices use Bahrain as a regional center or as a representative office for their business activities. 

 

Commercial Agency

The Commercial Agency Law of 1992 regulates the establishment of commercial agencies in Bahrain. In accordance with this law, overseas companies can distribute or sell their products and commodities in Bahrain through agents who may be either Bahraini nationals or majority-owned Bahraini companies. The Bahraini Commerce Ministry has been attempting since 1995 to implement the 1992 law in a more transparent manner and is preparing further reform legislation. 

There are two types of commercial agency: commission agency and commercial representation. A commission agency is a contract under which an agent acts in his own name for the account of the principal in return for a certain consideration. The agent carries out the commercial activities independently and, consequently, customers have no right of recourse against the principal. 

A commercial representation corresponds to the ordinary agency relationship according to which the acts of the representative bind the principal with respect to third parties. The agency relationship is usually governed by a contract of service or employment. 

An agency contract should, inter alia, contain the names and nationalities of the principal and agent, the rights and obligations of both parties, the amount of profit or commission to be paid, the agent's area of business activity, the term of the agency, etc. According to the Agency Law, agents are required to renew agreements with their principals once every two years. The law requires that agents assume responsibility for providing all customers the spare parts and tools necessary to maintain and to repair any machinery and equipment sold by the agency. 

All commercial agency agreements must be registered with the Commercial Registry of the Directorate of Commerce and Companies' Affairs in the Ministry of Commerce and Agriculture. Under the Agency Law, the Council of Ministers may limit the number and type of agency agreements which an agent may register. Any unregistered commercial agency shall not be recognized. 

A principal may appoint only one agent within the area of activity for which he is appointed. The agent is entitled to commissions for all transactions concluded in his area of activity irrespective of whether they are the result of the agent's endeavors, unless otherwise agreed upon by the parties. The Agency Law permits persons other than the authorized agent to import goods by paying the local agent a 5 percent commission. 

Either party cannot terminate agency agreements which are concluded for an indefinite period unless the other party commits a breach of contract without justifiable cause. If the agency is terminated by the principal prematurely or for any reason beyond the agent's control, the agent shall be entitled to compensation from the principal equivalent to any losses incurred and for loss of profits. If the agent terminates the agency agreement prematurely or without justifiable cause, the principal is entitled to compensation for any losses incurred as a result thereof. 

 

Bankruptcy and Liquidation

As of 1996, Bahrain had passed no laws relating to insolvency, the bankruptcy of individuals, and the rights of creditors in cases of insolvency or provisions for the compulsory winding-up of companies. 

Bahraini Courts have been persuaded to turn to the legislation of other countries in cases where a judgment debtor was unable to pay the judgment debt. In other situations, under court supervision, creditors have been persuaded to appoint a receiver or a liquidator to collect the assets of a debtor (whether an individual or a company). 

Provisions regarding the distribution of proceeds of sale of a debtor’s movable or immovable property are contained in the Civil and Commercial Procedures Law of 1971. The only type of secured creditors are employees in respect to salary accrued, due and unpaid. Remaining assets are distributed on a pro rata basis to all unsecured creditors. It is provided that if the proceeds of sale are insufficient to satisfy a creditor who has seized and sold property of the debtor and no agreement to the contrary has been made between the seizer of the property and the other creditors, the proceeds of the sale will be divided amongst them pro rata to their respective debts. Bahraini law’s recognition of the prior rights of mortgages is an example of an agreement to the contrary. 

Furthermore, Bahraini law has occasionally appointed an official receiver to take custody of sequestered property or property in dispute. A receiver must keep, manage and return the property to the person who establishes a right to it and must submit an account of the proceeds of his management of the property. The disputing parties must agree to the appointment of the receiver. 

The Commercial Companies Law of 1975 contains provisions relating to the liquidations and winding-up of companies and the dissolution of partnerships and other entities. 

In general this law relates to the winding-up and dissolution of solvent entities although there are provisions relating to the winding-up of companies which are unable to proceed with conducting business as a result of all or a substantial part of their assets having been lost or destroyed, or as a result of incurring substantial losses. A partnership may be dissolved when one of the partners is declared bankrupt or insolvent. 

Detailed rules regulate the appointment of liquidators and the liquidation process. Liquidators are obliged to notify creditors of the commencement of the liquidation and to invite them to submit their claims. Liquidators may also advertise for creditors if the identity and domicile of the creditors are not known. 

The law provides that the costs and expenses of the liquidation will take priority over the debts owed to the company’s creditors. Following the payment in full of all debts owed to creditors, the remaining assets of the company are divided among the company’s shareholders pro rata to their respective holdings. 

The Commercial Companies Law does not provide for fraudulent preference and voidable transfers of assets made prior to liquidation by a company. 

© 2000 Mena Report (www.menareport.com)

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