American Investors & Middle East Private Equity

Private Equity Legal Issues

The current economic climate has forced American investors to reassess their general investment strategies in the Middle East private equity market (MEPE). Legal protections are becoming more pronounced due to the tightening of credit. Vested parties are conducting critical due diligence, assessing both the creditworthiness of the debtor parties and Return on Investment (ROI).

In this capacity, legal conditions have become more nuanced than ever. Investors want iron-clad financing contracts, which are affecting the increased use of vendor financing and earn outs. Vendor financing refers to a loan from one company to another which is used to buy goods from the company providing the loan. The benefits to the vendor include increased sales and earned interest, while the risk involves potential payment delay or default. Earn outs, by way of example, involves the acquiror company paying 60–80% of the purchase price up front, with the remaining 20–40% structured as an earn-out and paid out over time as the acquired company achieves certain levels of sales or profitability.

In both vendor financing and earn outs, financial sponsors are seeking to increase value-added investments in tight debt markets. One solution may involve larger equity checks and the use of mezzanine financing, although both will result in higher transaction costs and decreased leveraged returns.

Incorporating legally accurate and umambiguous definitions and provisions is therefore highly encouraged, particularly when defining the parameters of measuring future financial performance. This will minimize disputes, present and future costs, while preserving strict contracting.

Improving Corporate Governance.

Corporate governance refers to a set of processes, customs, policies, and institutions affecting the way a company is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

Applying the concepts behind corporate governance to the Middle East private equity market, companies and institutions serving as investors must continue to provide meaningful minority protections, enhanced risk management systems and timely and reliable information flows. In this financially volatile climate, private equity must manage working capital and cash flows, while focusing on the operating results of portfolio companies.

Financial sponsors will therefore pay greater attention on contractual rights to facilitate leadership and oversight, thus ensuring prompt financial reporting.

However, investors should be cautioned that insolvency laws in the Middle East are poorly understood and rarely tested. The learning curve remains steep, with sponsors and investors continuously seeking guidance on various alternative scenarios. The widen breadth of such analysis may impact the structuring and documentation of deals. The investor will need to pay strict attention to contract rights regarding exits, deadlocks, dispute resolution and rescue funding.

Increasing Value-Added Legal Services

Value added advisory legal services in these difficult times are highly recommended due to the need for thorough documentation and advice regarding new private equity structures. The Middle East has seen a sharp increase of legal services over the past decade due to the increasingly sophisticated private equity client base. International best practices and industry standards have been adapted to a region characterized by family ownership, minority investments, carve outs and foreign ownership restrictions.

This year has presented a new set of legal challenges for private equity. While deal pipelines and investment risk may have weakened, private equity should gradually emerge into a formidable force for Middle East financing, particularly in sectors that are relatively recession resistant such as healthcare and education. Depressed sectors such as hospitality and real estate may allow for bargains. As long as price volatility and credit tightening continues, private equity players should continue to retain legal services as an integral component of their business strategy.


By, Sheheryar T. Sardar, Esq.
Sardar Law Firm LLC
New York, New York

What Social Media Companies Should Know About the Contract

By Sheheryar Sardar, Esq.,

Sardar Law Firm LLC

New York, New York

Social media has grown exponentially in the last decade, with enterprising companies creating uncontested market space in the online and digital industries. Whether its new search engines or unique services offered to niche markets within the browsing population, social media has transcended all ages, incomes and geographic regions. Due to the fast-paced nature of social media, ambitious entrepreneurs often overlook the need for contracts for their business. While staying ahead of the competition is paramount, creating and maintaining contracts will only enhance your edge.

Before you even start a company, or else plan on developing professional relationships with external agencies, prospective partners and employees, it is critical to understand the laws of contract. When there is a dispute, and often there is at least one during the development phase, all parties will look to the contract. As such, having a lawyer on board from the outset will always be an advantage for your business. Here is a brief list of issues to consider:

• Non-Compete Clauses: you want to protect your business by impeding your partners’ or employees’ rights to directly compete with your business if they leave. This would be framed within a specific time period, limited to a geographic area, but is very important because they possess inside knowledge of your competitive advantage.
• Non-Solicitation Clauses: you don’t want your partners or employees soliciting your colleagues or your customers away from your business.
• Non-Disclosure Agreements: NDAs are no unreasonable, so long as the language in the contract is clear on protecting your right to confidentiality.
• Moonlighting and Loyalty: This may or may not be necessary, depending on the nature of your business. A lawyer could assess its need once you discuss your goals.
• Ownership of Intellectual Property: You may want to protect any processes, templates, systems, or methods created by an employee by retaining any IP rights over them. A contract on the outset will provide necessary protections so that work product created under your business does not ultimately go to a competitor.
• Use, Licensing, Technology Transfer: Social media companies will likely need to outsource its products or services through other digital or online mechanisms, usually other companies. Often, partnerships are created to facilitate such business development. In this context, having contracts to protect the use and licensing of your work product, so that it doesn’t leak or be misused, will make your transitions to the next stage much more efficient. Similarly, if you are interested in commercially exploiting your methods, processes or inventions (Technology Transfer), you will need contracts to protect your financial interests.

Spending a little time on developing a legal structure through contracts, while slightly time-consuming, is a real investment in your social media business. Your business will make or break based on the contract, often when you must make strategic decisions for the success of your business. Retaining a contract lawyer will only enhance the probability of that success.

Kerry-Lugar-Berman Bill

President Obama signed the Enhanced Partnership with Pakistan Act of 2009, also known as the Kerry-Lugar-Berman bill. This bill grants Pakistan $1.5 billion annually for five years and comes along with stringent conditions on how to distribute and invest this money. You can find more information on how this bill has been received by Pakistanis here.

Here is the Summary of the Congressional Intent:

Summary of Congressional Intent

The Enhanced Partnership with Pakistan Act of 2009 (the “Act”) establishes a legislative foundation for a strengthened partnership between the United States and Pakistan, based on a shared commitment to improving the living conditions of the people of Pakistan through strengthening democracy and the rule of law, sustainable economic development, and combating terrorism and extremism. It is the intent of Congress to strengthen the long-term people-to-people relationship between the United States and Pakistan by investing directly in the needs of the Pakistani people. This legislation is intended to fortify a lasting partnership with Pakistan based on mutual trust.

The overall level of economic assistance authorized annually by this legislation is tripled over FY 2008 U.S. funding levels, with the bulk of aid intended for projects such as schools, roads, medical clinics, and infrastructure development. The funds directly authorized by this Act – $1.5 billion in economic and development assistance annually for five years, with a similar amount envisioned for a subsequent five years – place no conditions on the Government of Pakistan. The only requirements are accountability measures placed on the United States executive branch to ensure that the aid directly benefits the Pakistani people.

This Act fully recognizes and respects the independence of Pakistan as a sovereign nation. The purpose of this Act is to forge a closer collaborative relationship between Pakistan and the United States, not to dictate the national policy or impinge on the sovereignty of Pakistan in any way. Any interpretation of this Act which suggests that the United States does not fully recognize and respect the sovereignty of Pakistan would be directly contrary to Congressional intent.

The certifications in the Act regarding certain limited forms of security assistance are consistent with previous Congressional legislation regarding security assistance to Pakistan and other nations. In all cases, they align with the aims of, and serve to reinforce the publicly-articulated positions of, the democratically-elected Government of Pakistan, and Pakistani military leaders, to combat extremists and militants.