By: Marcel Trost
Mergers & Acquisitions have enjoyed much success in the UAE, especially over the past years which can be evidenced by a substantial increase in the transactional values in M&A deals across most industries. Mergers & Acquisitions in the region are spreading across sectors such as hospitality, retail, education and even healthcare. This is further propelled by the enactment of business-friendly legislation in the country and introduction of varied dispute resolution mechanisms.
I. General Overview
Corporate entities in the UAE can be established in the mainland or in one of the various freezones. With the abundance of specialized freezones in the UAE and their distinct advantages, they remain very attractive for outside investors. However, it is mostly mainland companies that are commonly involved in M&A deals. Mainland companies in the UAE are regulated by Federal Law No. 2 of 2015 (Commercial Companies Law) which also contains rules for transformations, mergers, and acquisitions of companies. The Commercial Companies Law, however, does not apply for companies wholly owned by UAE federal or local governments, companies excluded from the application of the Commercial Companies Law by resolution of the federal cabinet and energy or infrastructure companies in which the federal or a local government directly or indirectly holds 25% of the capital.
Free-zone companies are governed by the relevant legislative provisions accorded to them as per free-zone regulations. For freezone companies the Commercial Companies Law will only apply for matters which are not covered by the free-zone regulations. Further to the general legal framework, industry-specific regulatory mechanisms can also affect M&A transactions, in particular for healthcare, banking and stock listed companies.
II. Mergers vs. Acquisitions
A merger enables different companies to combine forces and fuse together to become one. After completion of the merger all contractual relationships, businesses, assets and liabilities, as well as the employees will come together under the remaining merged company. Mergers in the UAE are governed by articles 283 et seq. of the Commercial Companies Law. Despite the existence of a UAE merger regime under the Commercial Companies Law, this regime has not been tested frequently in the past.
Acquisitions on the other hand are far more common in the UAE. An acquisition is the purchase of the business of a company by another company. Acquisitions can be done either by the purchase of the assets (Asset Deal) or the shares in a company (Share Deal). In the UAE the assets of a company (e.g. plot of land, production site etc.) are often directly linked to the activities the company can carry out under its license. As a result, some assets are not suitable for a transfer, or the transfer can only be undertaken by going through a problematic re-licensing process. In practice, companies are often left with no choice to acquire the shares in a targeted company despite only being interested in its assets. Consequently, acquisitions in the UAE are usually done by way of share transfer, not asset transfer.
III. Required Documents
For any acquisition, the principal document will be the share or asset purchase agreement. Some general terms contained in this agreements are;
the agreement to sell and purchase the shares or assets, consideration and any adjustments, completion details, warranties and indemnities in relation to the business and the shares or assets being acquired, confidentiality and, potentially, non-compete obligations and governing law and jurisdictions.
Further documents which are often required in M&A deals include:
IV. Practical Guidelines
There are some key considerations companies should pay attention to before entering into any M&A transactions. In contrary to western markets, being able to find general background information on the target company can be quite challenging. Public registers containing useful information have often not been established or information held there is not available to public.
Consequently, buyers usually have to rely on information provided by the seller. A further practical issue investors have to consider is the requirement of local shareholding in a mainland company and preemption rights of the shareholders in the target company. Despite some practical issues, the UAE offers an attractive market and a friendly business environment to consider M&A transactions.
It is therefore expected that M&A activity will continue to increase.