This country-specific Q&A provides an overview to M&A laws and regulations that may occur in the UAE.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The M&A market is regulated by UAE Federal Law No. 2 of 2015, concerning Commercial Companies, and its ancillary legislation (the “Companies Law”). On 23 September 2018, the UAE issued Federal Law No. 19 of 2018, concerning foreign direct investment (the “FDI Law”). This FDI law provides the framework for foreign shareholders to own 100% of onshore companies in certain sectors.
Listed companies are regulated by the mandatory Corporate Governance Code and other circulars and regulations issued by the Securities and Commodities Authority ("SCA"). Companies incorporated in the Dubai International Finance Centre ("DIFC") free zone are regulated by the Dubai Financial Services Authority ("DFSA"), whose regulatory mandate covers financial services and any activity undertaken by DIFC entities, while there are other relevant regulations which affect other Free Zone companies and their establishment and operation.
In addition to not applying to offshore companies, the Companies Law does not apply to the following companies, provided that a special provision to that effect is included in the company’s memorandum and articles of association:
(a) companies that are excluded by a Federal Cabinet resolution or special federal law;
(b) companies wholly owned by the Federal government, a local government or any other companies wholly owned by such companies; and
(c) energy or infrastructure companies in which the Federal government or a local government directly or indirectly holds 25% of capital.
Relevant rules may also impact M&A activity in certain sectors – for example, Ministry of Health regulations, and relevant regulations in particular Emirates, will affect activity in the healthcare sector and Central Bank regulations will affect activity in the banking sector.
What is the current state of the market?
The M&A market in the United Arab Emirates and the broader Middle East and Africa region was steady in 2018 following a depressed initial quarter. M&A activity increased 14% during the fourth quarter of 2017, the fastest rate of growth in six quarters, but activity in the first quarter of 2018 decreased by 21.8%*. However, overall in the first half of 2018, regional M&A deal values increased by 62% year-on-year and the UAE was the most attractive target country to overseas investors, with a total of 34 inbound deals valued at $6.6 billion. In the third quarter of 2018, the deal value in the region increased 105% ($10 billion in Q3 2018 from $4.9 billion during the same time last year and cross-border deal value increased to $9 billion from $1.5 billion in Q3 2017) despite the number of deals having dropped by 3%. By the end of 2018, the UAE had a total of 59 inbound deals valued at $7.7 billion. As we start 2019, it is anticipated that such deal flow will continue apace, reflecting increased investor confidence arising from the FDI Law.
*Source: Ernst & Young first-quarter 2018 M&A report
Which market sectors have been particularly active recently?
The strongest growth in deal announcements in 2018 was from the UAE’s healthcare, materials and consumer and retail sectors. The top-performing sectors for M&A in 2017 in the region included: financial services, with 16 deals at a value of $4.5 billion; industrial and chemicals, with 13 deals at a value of over $3.9 billion; and telecommunications with 7 deals at a value of over $3.2 billion.
In the first quarter of 2018, the top five target sectors in MENA by deal value were oil and gas at $1.4b, chemicals at $0.5b, diversified industrial products at $0.3b, real estate at $0.3b and consumer products at $0.3b.
In the first half of 2018, the energy & power sector was the most attractive target sector in respect of inbound investment in the region with a total of 15 deals at a value of $7.4 billion. In 2018, there was a significant amount of consolidation in the Middle East in the financial services sector – a feature likely to continue into 2019, with further planned mergers in the banking sector having already been announced.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
The adoption of the FDI law in the UAE is likely to be the key driver for deal flow in the country, in particular as the implementing regulations are adopted and as deal flow brings with it greater understanding of the investment regime.
In addition, it is anticipated that increased investor interest around the Expo 2020 event is likely to be a major factor influencing potential inbound investment, while the continued focus on diversification of the economy away from an oil based market will continue to create investment opportunities – both for UAE and international investors.
What are the key means of effecting the acquisition of a publicly traded company?
There are currently no UAE laws in place which regulate the takeover of public companies, and acquisitions of interests in public companies tend to be effected by block purchases of listed securities. Acquisitions in the DIFC of NASDAQ listed companies would fall under the regulatory regime of the DFSA, but with very few listings on NASDAQ, this regime is little used.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
In the UAE, there is no centralized company register. However, it may be possible to obtain basic corporate information (the trade licence or industrial licence) from the Department of Economic Development website of the emirate in which the company is registered, provided you know the name of the company. The company’s trade licence will show who the company’s shareholders are and for some emirates it will show the general manager and directors of the company.
Moreover, Al Etihad Credit Bureau ("AECB"), a federal government company which operates a credit reporting system across the UAE, will be able to provide credit reports on companies provided that the original Emirates ID card of the company’s owner or authorized signatory is submitted along with the trade licence and articles of association of the company.
Since there is a lack of publically available information on companies in the UAE, the target company’s cooperation is relied upon in order complete the due diligence. The parties tend to enter into strict confidentially agreements for the target company to share information.
Under UAE law, the following actions are not permitted:
(a) the provision of false information, statements or data that could affect the market value of securities and an investor’s decision on whether to invest; and
(b) the exploration of undisclosed information to achieve personal benefit that could affect the price of securities.
With regards to target companies in the DIFC that are listed on NASDAQ Dubai, if a bidder, the target or any persons acting on behalf of a bidder or the target deals with securities during the bid period, this must be disclosed to the DFSA.
There are currently no obligations to disclose information to any potential acquirer.
To what level of detail is due diligence customarily undertaken?
As in other comparable jurisdictions, the buyer should consider what level of due diligence is required based on the target’s business and the transaction’s circumstances. In the UAE, it is particularly important to verify the ownership of the target given that until recently, 51% of any onshore company, i.e. UAE companies incorporated outside a UAE free zone, must be owned by a UAE national or wholly owned UAE entity. Even though the FDI Law now allows 100% foreign ownership, this law is only applicable to companies in specific sectors.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Typically, the board of directors and the shareholders are the key decision-making organs of any target company. The Companies Law sets forth certain matters that require shareholder approval, such as the merger or dissolution of the company. Furthermore, the shareholders’ agreement may include matters reserved for the shareholders (i.e. requiring shareholder approval).
What are the duties of the directors and controlling shareholders of a target company?
Directors have broad authorities to manage the operations of the company, in line with the powers and authorities set forth in the company’s constitutional documents.
The specific duties of directors of a target company in a M&A context will be dictated by the authorities granted to them by the shareholders. Overall, directors are responsible for protecting the target company and acting in its best interests.
As for the duties of controlling shareholders in a M&A transaction, this will be as per the constitutional documents of the company or the shareholders agreement. Duties include signing off the transactional documents (which could be delegated to the directors) and passing the requisite shareholder resolutions.
Do employees/other stakeholders have any specific approval, consultation or other rights?
No specific obligation to consult with employees on an M&A exists in the UAE.
As is the practice in most jurisdictions, on a share sale, an employee’s contract remains in place and unchanged, except where the parties agree otherwise, as there is no change to the employer. Should the employer wish to terminate the employment contract, the employer would have to follow normal procedures by serving a contractual notice period and paying contractual and statutory entitlements.
There is no statutory provision for the automatic transfer of employees on a business sale. Usually, the seller agrees to terminate employees’ employment contracts by giving the contractual notice period required, or a payment in lieu of notice, and paying their contractual and statutory entitlements. The buyer then agrees to re-hire the employees, usually on the same terms and conditions, subject to any necessary changes for group arrangements. Arrangements must also be made to cancel the immigration sponsorship of the employee by the seller and to install the buyer as the new immigration sponsor.
An employee’s employment contract cannot be terminated where he or she is on maternity or annual leave or off work for health reasons. However, an employer may terminate an employee’s employment contract if he or she is unable to resume work after 90 days of sick leave.
Only certain UAE nationals and Gulf Corporation Council nationals working in the UAE are eligible for state pensions. Other employees are instead entitled to an end of service gratuity. A private pension scheme may be offered as an alternative to an end of service gratuity provided that it is no less beneficial, but such schemes are not widely used in the UAE. The end of service gratuity payment is calculated with reference to the employee’s length of service and the last basic pay received before termination.
As there are no regulations in the UAE providing for the automatic transfer of employees pursuant to a business transfer or reorganisation, the movement of employees following an acquisition must be effected by a process of termination and re-hire. On termination of employment, the accrued entitlements – including end of service gratuity, payment in lieu of accrued untaken holiday and contractual notice – become due. In practice, these entitlements may be rolled over into the new employment with the new employing entity by way of an express agreement with each employee to be transferred unless the employee insists on being paid the accrued entitlements.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality, whether for regulatory (e.g. relevant ministry approval) or contractual (e.g. lender consent) reasons, is an accepted market practice.
What steps can an acquirer of a target company take to secure deal exclusivity?
An exclusivity period is commonly included in the confidentiality agreement or similar preliminary transaction documentation, which compels the seller to refrain from engaging other potential buyers. It is also common to add a liability clause under which the buyer may hold the seller liable for breaching the exclusivity clause. Such liability clauses are commonly drafted as a liquidated damage provision. Under UAE law, liquidated damage clauses are treated differently than in western jurisdictions. In particular, the amount of damages agreed on may be adjusted by the courts to reflect the actual amount of damages incurred by a party to the relevant contract.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Deal protection may be strengthened by a requirement for the buyer to pay a refundable deposit into an escrow account when a non-binding offer is given. The deposit will be either refunded to the buyer if the seller does not proceed with the transaction or paid to the seller if the buyer does not make a binding offer at the end of the due diligence stage.
Which forms of consideration are most commonly used?
UAE laws contains no requirements concerning the form of consideration. Cash is the most common form of consideration used in acquisitions in the United Arab Emirates, although consideration in shares of a listed acquiror or any other form of consideration is acceptable. In the DIFC, there are general requirements that consideration must be cash or a cash alternative. In a public acquisition, share-for-share exchange is a common form of consideration under the statutory merger process.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Publicly listed companies which are listed in the DFM or ADX should comply with the regulations of the SCA, while companies listed on NASDAQ Dubai are required to comply with the regulations of the DFSA. Disclosures are required under SCA rules if the ownership of a shareholder reaches 5% or more of the securities of a listed company on the DFM/ADX, and thereafter upon each 1% increment. Takeover rules and approvals apply if a shareholder’s ownership, together with any of its related parties, exceeds 50% or more of a listed company’s share capital. Any shareholder, together with any of its related parties, holding 30% or more of the share capital of a listed company that wishes to acquire any additional shares must submit a tender offer to SCA, which has the right to reject the tender offer if it is deemed to affect the interest of the market or the national economy. The Takeover Rules Module of the DFSA Rulebook requires a person who acquires 30% or more of a listed company’s voting rights to make a mandatory takeover bid for the whole company.
At what stage of negotiation is public disclosure required or customary?
There are no specific rules in the UAE around public disclosure of negotiations. Listed companies are obliged to disclose any material developments that could potentially impact the share price. However, disclosure is not required to matters under negotiation so long as the company informs the relevant stock exchange of developments and provides a list of individuals holding insider information.
The relevant exchange and SCA may under certain circumstances require request the company to make an announcement in relation to negotiations.
Is there any maximum time period for negotiations or due diligence?
There are no prescribed time periods for negotiations or due diligence.
Are there any circumstances where a minimum price may be set for the shares in a target company?
There are currently no such circumstances.
Is it possible for target companies to provide financial assistance?
Article 222 of the Companies Law makes it unlawful for a joint stock company (or any subsidiary company of that company) whose shares are being acquired to give financial assistance for the purpose of that acquisition. Article 104 of the Companies Law states that all provisions relating to joint-stock companies will apply to private limited liability companies unless there are express provisions to the contrary and there is no such provision. However, on April 28 2016, the Ministry of Economy issued Ministerial Resolution 272/2016 which clarifies that article 222 of the Companies Law does not apply to limited liability companies.
Which governing law is customarily used on acquisitions?
Most UAE companies incorporated outside a UAE free zone (i.e. ‘onshore’ companies) are regulated by the Federal Law concerning Commercial Companies (2/2015). Part 7 of the law sets out the rules for transformations, mergers and acquisitions.
There is also significant corporate activity within the numerous free zones established throughout the United Arab Emirates. The laws of the relevant free zones apply to companies established therein (ie, ‘offshore’ companies). However, the Companies Law also applies to offshore companies insofar as it is not varied by the relevant free zone rules and to the extent that offshore companies may undertake activities onshore.
Notwithstanding that UAE will apply to the process for effecting all acquisition transactions of UAE companies, parties are allowed to choose their preferred governing law for any agreements pertaining to an acquisition. As such, the governing law for a share purchase agreement may be, for example, English Law, although the law which governs the process of effecting any share transfer pursuant to such agreement will be UAE Law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
In the event of a tender offer, a tender offer document must be prepared which will be circulated to all shareholders and, as a general rule, any document which is issued must be made available to all shareholders equally.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Formalities for transferring the shares of an onshore company includes signing a share transfer form in a format prescribed by the Notary Public. Subsequently the company will be required to amend the commercial or trade licence to show the new shareholders.
In the UAE, the government issued Federal Decree-Law concerning Value Added Tax (8/2017), which introduced VAT with effect from 1 January 2018 at a rate of 5%. Businesses with turnover in excess of Dh375,000 (approximately $100,000) are required to register.
A transfer fee of 0.5% of transfer value capped at Dh15,000 (approximately $4,000) is payable to the notary on the transfer of shares in UAE companies. A transfer fee of between 1% to 4%, depending on the emirate and the nature of the interest being transferred, is generally levied on the transfer of real estate in the United Arab Emirates.
Are hostile acquisitions a common feature?
Although hostile takeovers are possible under law, there have not been any such takeovers undertaken. As indicted above, until September 2018, UAE foreign ownership restrictions prohibited foreign companies from acquiring majority ownership and control of an onshore company, so a hostile bid by a foreign entity, until recently, was impossible, as it could not comply with mandatory takeover rules. The FDI Law now allows 100% ownership in specific sectors, however this law is still very new and hostile acquisitions have not taken place. A UAE company could launch a hostile bid against a UAE public company, both of which are wholly or majority owned by UAE entities. However, this is unlikely in practice given the UAE business culture in which many public companies are government or family owned.
What protections do directors of a target company have against a hostile approach?
If a target company were subject to a hostile takeover, it could approach the regulatory authorities with a view to blocking the takeover or requiring the bidder to increase its offer price. However, as indicated above, there is currently no historic practice of hostile takeovers to provide a practice as to the actions required of directors.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
In relation to onshore companies: In 2015, a SCA Board Decision was passed, adding a provision which states that any person or group of connected persons acquiring 50% or more of the share capital of a public company must submit an offer to all shareholders of the company in accordance with the controls, conditions and procedures determined by the SCA.
In relation to companies resisted in DIFC: the DFSA Takeover Rules include a mandatory bid rule which will be triggered if 30% or more of the voting shares of the target company are acquired by any person. The DFSA states that a mandatory offer must be conditional only upon the bidder having received acceptances in respect of shares carrying more than 50% of the voting rights. The minimum acceptance condition in any offer is more than 50% of the voting rights.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
There are no statutory minority shareholder rights under UAE law, and their only protection lies under the company’s Articles.
Is a mechanism available to compulsorily acquire minority stakes?
See paragraph 25 above.