THE AL RAJHI SHUFFLE: INVESTORS IN QATAR FACE MAJOR HURDLES TO FINDING OR CLAIMING THEIR ASSETS

By Rod Walker

When it comes to structuring – or re-structuring - a company, it is always prudent to anticipate potential legal liabilities and complications down the road. It is, however, considerably out of the ordinary to frame an entire company exclusively around the need to avoid future litigation or arbitration.

Of course, if you are already mired in litigation or if you engage in business practices that are likely to lead to it, then it’s the obvious route. And that is something the Al Rajhi family, one the foremost business dynasties in the GCC, clearly understands.

In fact, the strategy the family has used in Qatar to move real estate assets out of the view and reach of investors with claims upon them, is a mirror image of tactics used in Dubai and Abu Dhabi.

In Dubai, it was used to expropriate a 25 per cent stake in real estate company, Tameer Holdings from Mr. Omar Ayesh. In Abu Dhabi, it was used to prevent hundred of creditors from winning the return of their deposits on incomplete real estate projects. (See previous articles)
  

LOOKING FOR LEGAL LOOPHOLES IN QATAR

In early 2014, the Al Rajhis initiated an overhaul of the corporate structure of the Land International Investment and Real Estate Development Company, based in Qatar. The company, an affiliate of the sprawling Al Rajhi Group, had ambitious plans – and financing from a bank consortium – for 14 towers in  “The Pearl-Qatar.”

Significantly, however, at the time the changes were made to the structure of The Land, seven of the 14 towers were embroiled in litigation or arbitration. A confidential legal plan obtained by the Foundation for Business Standards provides a rare glimpse into the way such transactions are undertaken. And how they are deliberately designed to take advantage of  the gaps in the existing laws and regulations covering limited liability companies.
  

HEDGE FUND LEGAL ACTION AGAINST THE AL RAJHIS

It is not only small, individual investors who are hurt by such machinations: In Qatar, one of the large claimants was Bridgehouse Capital, an Anglo-American hedge fund based in London. Bridgehouse had invested US$300 million in the Pearl development, yet remained frustrated in its protracted stefforts to claim restitution.

In a March 2014 email exchange with lawyer Danny Rifaat, a founding partner with Al Misnad & Rifaat in Qatar, Donald Jordan of Bridgehouse wrote: “Your clients have deliberately hidden certain facts…such as they accepted deposits of $145 million and signed contracts related to certain plots on the Pearl…those contracts were terminated in July 2013.”

He concludes about the Al Rajhi’s conduct: “The most generous assessment is breach of contract.”

Negotiation of a resolution was further complicated by the fact that a Bridgehouse employee, Philip Barton, had accepted a penthouse from the Al Rajhis as an incentive for making the initial investment in the development.

When Mr. Barton  Declined the offer of a US$20-million settlement and pursue arnbitration for the full $US300 million Bridgehouse had invested, he was threatened by a senior executive in the Al Rajhi organization..

In an email sent on March 6, 2014, Aasma Kahn, chief legal officer for Al Rajhi Holdings wrote: “Please note that Phil accepted a penthouse for free. He is a cheat and/or bribe taker…I wonder how Bridge investors would feel if they knew Phil personally benefitted…”

Both Abdullah and Ahmed Al Rajhi were recipients of Ms. Kahn’s email, along with Mansour Karboush, CEO of Al Rajhi Holdings.
  

A DEFENSIVE LEGAL STRATEGY

The escalation of the legal wrangling between Bridgehouse and the Al Rajhis is just one of the reasons why the family’s legal advisors devised a plan to insulate the towers and their development schedules from one another.

According to that plan “The main aim of the restructure is to create segregation through legal structuring to prevent the individual liabilities of each development (caused by multiple customer litigations) from impacting the entire business operations.”

So what did the plan entail?

Essentially, it created three separate holding companies, each personally controlled by one of the five Al Rajhi brothers. Ownership of the towers developed by The Land was to be allocated between them with an eye to “stagger the launch of projects by six months to one year.”

According to the documents, “The alternating launch structure will minimize delay in a single project impacting the next project or tying it up in litigation.”
  

THE THREAT OF “PIERCING THE CORPORATE VEIL”

The legal strategy for the Qatar development is also highly focused on mitigating the threat of “piercing the corporate veil,” something that allows courts to set aside limited liability protection when a third party is pursuing assets for set of very specific reasons.

In other words, the Al Rajhis were intent on re-structuring The Land so that if Quatari courts were to allow claimants, like Bridgehouse, to push past the constraints of limited liability, “it would not impact the other brothers thereby maximizing stability.”, It would, however, leave the original company – which sold the properties – with no remaining assets.

The plan documents note: “Whilst there are a number of situations where the corporate veil can be pierced in Qatar, the situations are very specific and therefore it is possible to mitigate the parent’s potential exposure.”
  

IDENTIFYING THE PATTERN

The tactics used by the Al Rajhi team in Qatar are almost identical to those used in Dubai with Tameer Holdings and Abu Dhabi with Al Reem Island. As in Qatar, elaborate legal schemes were implemented in both jurisdictions to prevent those with legal claims to assets from gaining access to them.

That reality, however expedient in the short term, poses some longer-term issues: After a protracted period of instability in the real estate sector following the global financial crisis, each of the Emirates has placed strong emphasis on foreign direct investment to sustain the renewal process.

In particular, Dubai has aggressively promoted the reform of its legal system to inspire confidence in investors who are accustomed to a world-class standard of transparency, accountability, speed of resolution and legal recourse.

By allowing the Al Rajhis – and their tactics – to remain unchallenged, it sends a conflicting message to the world beyond the GCC. Given the number and diversity of opportunities for international capital in 2015, it remains to be seen if the failure to enforce new legal codes in a meaningful way, will ultimately undermine the intended benefits of the much-publicized reforms.

The Foundation for Global Business Standards has a mandate to reinforce positive change by casting a light on cases where legal reform is de-coupled from enforcement and clarity.

To that end, the Foundation intends to publish more stories about business practices in the Middle East, with a view to informing investors about potential risks and working to improve business standards worldwide, in cooperation with major research institutions and universities.