Public Mergers and Acquisitions in The United Arab Emirates

Introduction

“Nothing is lost, nothing is created, everything is transformed,” said Antoine Lavasier, a 18th-century French mathematician, chemist, and philosopher. Although he was referring to anything but the mergers and acquisitions’ legal framework in the United Arab Emirates (UAE), the least we can say is that such a statement is, to a certain extent, applicable to these transactions.

In the field of corporate finance, mergers and acquisitions (M&A) are a series of transactions to transfer or combine the ownership of businesses and other organizations (including governmental organizations). Such transaction can enable businesses and other entities to expand, change the nature of their industry, or alter their competitive position. From a legal perspective, a merger is the legal consolidation of two entities into one, whereas an acquisition takes place when one entity acquires assets of another organization. It is pertinent to note that the terms of “merger” and “acquisition” are usually used interchangeably, since both transactions consist in the consolidation of assets and liabilities under a single and newly formed entity. A notable difference, however, might be that an acquisition usually has the effect of placing one party's business under the indirect ownership of the shareholders of the other party, while a merger gives each entity a portion of ownership and control of the newly formed entity enterprise.

M&A deals in mainland UAE, in general, are similar to those in other jurisdictions. Tenders and hostile or rival takeovers, however, are relatively less frequent. Most public M&A deals are organized as exclusive agreements with individual investors or buyers. Nevertheless, there have been some notable transactions that were organized as tender process, such as the investment by BlackRock and other investors in the oil pipeline business of ADNOC. Over the past few months and years, the UAE has also experienced a sizable number of mergers by absorption, most notably the acquisition of Abu Dhabi National Energy Company by Abu Dhabi Power Corporation. Although they have historically been less popular and still play a minor role in the Middle East, UAE corporates and sellers have begun to recognize the positive effects these structures may have on business operations. However, in the UAE hostile takeovers are still rare, notably because of how the public companies are in this country, and more generally in this part of the world. Such aspects will be explained within this article; and we will specifically focus on M&A involving public companies. 

 

Legal Framework and Regulatory Authorities

1. Laws

In the UAE, three main laws govern the regime of M&A on the federal level:

• Federal Law 2 of 2015 on Commercial Companies;
• Federal Law 5 of 1985 on Civil Transaction;
• Federal Law 18 of 1993 on Commercial Transactions; and
• Securities and Commodities Authority’s Resolution Number 18/RM of 2017

 

2. Regulation Authorities

1. The Abu Dhabi Securities Exchange

By virtue of the provisions of Local Law Number 3 of 2000, which came into effect on November 15, 2000, the Abu Dhabi Securities Exchange (ADX) was founded as a legal institution with autonomous status, independent finance, and independent management. The Law also grants ADX the executive and oversight authority it needs to carry out its duties. According to law Number 8 of 2020, ADX was changed from a "Public Entity" to a "Public Joint Stock Company" on 17 March 2020. ADX is a part of ADQ, one of the biggest holding corporations in the area with a diverse portfolio of significant businesses in important areas of Abu Dhabi's diversified economy. Among the securities that can be traded on the ADX market are shares of publicly traded firms, bonds from governments or corporations, exchange-traded funds, and any other financial instruments deemed suitable by the UAE Securities and Commodities Authority (SCA). ADX is the second most important market in the Gulf and wider Arab region, and it aligns with the tenets of the UAE's "Towards the Next 50" program to provide solid financial performance with varied sources of income. The national plan outlines the UAE's strategic development plan, which aspires to create a sustainable, diversified, and high-value economy that will help the world transition to a new sustainable development paradigm. In a nutshell, the missions of ADX are the following:

• Give people the chance to invest their money and savings in securities to boost the country's economy. 
• Monitor transactions for soundness and accuracy and guarantee that supply and demand interact to affect prices. 
• Protect investors by creating ethical standards for dealing with other investors. 
• Implement strict controls over securities transactions to guarantee fairness and proper conduct. 
• Promote investing awareness by undertaking research to make sure that savings are placed in profitable industries. 
• Promote economic and financial stability and create trading strategies to improve the stability and liquidity of pricing for all securities listed on the market.

 

2. The Dubai Financial Market

The Dubai Financial Market (DFM) has quickly grown into one of the region's top financial markets in a short amount of time. Its ongoing efforts and strategic initiatives have strengthened Dubai's position as a center of excellence in this region of the world and improved its top position as a potent capital market hub that embraces global best practices to meet the changing needs of its investors both locally and globally. The DFM began operations on March 26th, 2000, after being established as a public organization with a separate legal identity under Decree 14/2000 issued by the Government of Dubai. The Executive Council of Dubai resolved to convert the DFM into a public shareholding company on December 27th, 2005, with a capitalization of AED 8 billion divided into 8 billion shares. 20% of the capital, or 1.6 billion shares, were issued through an initial public offering (IPO). The public offering was well received, with subscriptions totaling AED 201 billion, exceeding all expectations. The Dubai Financial Market Company went public on the market with the trading symbol DFM on 7 March 2007. DFM functions as a secondary market for the trading of securities issued by publicly traded corporations, bonds issued by federal or local governments, local public institutions, mutual funds, as well as other financial instruments from domestic or international markets that have been approved by DFM.

The DFM is the first financial market in the Middle East to have offered its shares through an IPO, reflecting the leading position the Emirate of Dubai has held in the sale of shares of governmental organizations in the area. It is pertinent to note that DFM functions in accordance with Sharia (Muslim Law) principles.

The UAE Securities and Commodities Authority (SCA), which has the power to impose rules and regulations with which the DFM must conform, oversees and regulates DFM. In order to safeguard investors and offer the best trading environment, the DFM actively collaborates with the SCA on projects like the creation of delivery vs. payment (DvP) and margin trading.

The Dubai Financial Market and Nasdaq Dubai combined operations in 2010 to forge a powerful force in the area's capital markets. By using a single Investor Number (NIN), investors can trade smoothly between the two exchanges and have a wider variety of asset classes and quicker access to DFM and Nasdaq Dubai listed securities thanks to the consolidation. Both exchanges are nevertheless subject to independent regulation, with Nasdaq Dubai being overseen by the Dubai Financial Services Authority and DFM by the SCA. 

 

The Process of Public M&A

1. The Case of Hostile Bids

Hostile takeovers are legal in the UAE, although still uncommon, partly because of the shareholding arrangements in publicly traded UAE corporations. Compared to other jurisdictions, shareholdings in public firms in the UAE are less fractious. As a result, the hostile bidder would need to focus more on talking to important stakeholders while undertaking any hostile takeover. Additionally, in the UAE, the federal or governments at Emirate level frequently own sizable stakes in publicly traded businesses. The UAE governments typically stabilize the shares in UAE enterprises they are invested in by avoiding hostile takeovers, even though these do not necessarily amount to majority or controlling involvement.

Finally, restrictions on foreign shareholdings still exist despite some efforts to liberalize the UAE's foreign investment policy. Due to the applicable prohibitions on foreign ownership, hostile takeovers by foreign bidders may not be feasible. As a result, in some cases, only UAE citizens can carry out hostile takeovers successfully. As a result, hostile offers or takeovers are often avoided by UAE investors.

 

2. Due Diligence

In the UAE, there is extremely little publicly available information about listed companies, hence extensive due diligence is typically needed. Additionally, there is an expectation in the UAE that the bidder will perform thorough due diligence and depend less on assurances and guarantees. Therefore, bidders should be ready to do a more thorough due diligence than in other jurisdictions when considering a merger with or acquisition of a UAE target. The target will also have to participate considerably more actively in the due diligence process due to the dearth of information that is readily accessible to the public. Onshore UAE rules do not mandate equal treatment of bids in relation to the disclosure of information if numerous bidders are involved. Therefore, bidders cannot anticipate a target providing them with information that other bidders have requested. Pre-transaction agreements could impose this responsibility on the target. The DIFC public M&A regulation does, however, include some obligations for equal treatment (for example, in transactions involving NASDAQ Dubai-listed companies, DIFC law requires that any information provided to one bidder or potential bidder must, on request, be shared with other bidders or any bona fide potential bidder).

Insofar confidentiality is concerned, UAE regulations only set out general legal requirements for protecting pre-bid confidentiality. Usually, the parties will come to an agreement between each other that specifies more extensive requirements (for instance, by using a non-disclosure agreement or a legally-binding memorandum of understanding).

Additionally, there is no requirement to reveal information about M&A negotiations. There is no formal necessity for topics under negotiation to be disclosed, although listed firms are required to do so for any significant events that affect their share price. Nevertheless, the affected company is required to disclose a list of individuals with insider information and to stay abreast of any pertinent changes on the stock exchange where it is listed. When they believe disclosure to be pertinent or when information has been leaked, the relevant stock exchange and the SCA may additionally require a firm to disclose information on M&A negotiations.

Additionally, in accordance with the SCA Takeover Rules, if a bidder is in negotiations with a target shareholder who owns at least 30% of the target's share capital and the target is the subject of rumours, there are unusual price movements, or unusual volumes of the target's securities are traded, the bidder's intention to make an offer must be disclosed.

 

3. Announcement 

A target listed on the ADX or the DFM is required by the SCA Takeover Regulation to notify their market of any potential bid when any of the following scenarios occur:

• when the bidder's purpose to make the offer is known to the target;
• when there are rumors of an acquisition because the target's stock price has experienced extraordinary changes or there has been an unusually high amount of trading in the target's securities;
• the moment the bidder declares that it will make the target an offer; 
• Additionally, if there are rumors of an acquisition, there are unusual price fluctuations for the target stock, or there is an unusual volume of trading in the target's shares or securities, any (legal or natural) person holding at least 30% of the target's share capital must disclose their intention to make an offer.

 

Restrictions

1. Merger Control

Any transaction that results in an economic concentration in the UAE with a market share of at least 40% in the pertinent market must be reported to the competition committee of the UAE Ministry of Economy, in accordance with the UAE merger control regime. The committee uses a test based on market impact. As a result, assuming the parties involved fulfill the necessary thresholds, transactions between foreign parties are covered by the UAE's merger control framework.

However, merger control practices in the UAE continue to be rather challenging to evaluate and forecast because to the absence of published judgements from the UAE Competition Committee. As a result, it is difficult to predict general trends and administrative practices, thus advise regarding merger control measures must be based on the expertise of local UAE counsel.

Additionally, the competition committee’s current methods suffer from a lack of sophistication. For instance, when defining the relevant market, the Competition Committee frequently seeks assistance from well-known corporate lawyers or relies on a previous ruling by the anti-trust authorities in other jurisdictions. The competition committee frequently asks for data and records that aren't typically thought to be pertinent to merger control filings. The competition committee administrative procedures can be time-taking. 

 

2. Regulated Industries

For transactions in particular areas, regulatory permission from industry-specific authorities may be necessary. For instance, before engaging in any transaction that would result in the bank or financial institution purchasing at least 5% of the shares in any listed firm, the bank or financial institution must receive approval from the UAE Central Bank. Furthermore, the UAE Central Bank could need to give its consent before any acquisition of a financial institution under its regulation. The UAE Insurance Authority must give its consent before an insurance company can be acquired. The Ministry of Health may need to approve transactions in the healthcare industry. Additionally, since the Federal Law 14/2018 on the Central Bank and Organization of Financial Institutions and Activities went into effect in September 2018, all M&A deals aimed at Islamic financial institutions will need to be approved by the newly constituted Higher Sharia Authority.

 

3. Foreign Ownership

Over the past few years, the UAE's onshore foreign investment regime has been somewhat liberalized. The tight limit of 49% foreign shareholding in onshore enterprises has been relaxed, in particular. Only UAE citizens and residents of the other GCC nations were permitted to possess more than 49% of firms that were registered onshore in the UAE prior to the reform of the UAE's foreign direct investment (FDI) system. Government consent was required in order to increase foreign shareholding, and it was rarely given. The UAE's lawmakers started easing limits on foreign ownership in 2019. At first, the rules were not apparent. Initial statutory rules merely stated that foreign shareholdings beyond 49% might be allowed under specific conditions. As a result, authorities in the local Emirates applied various standards. However, all authorities used the new FDI regime in a restricted manner. However, later rules and directives have brought about some clarifications. As long as the business is not engaged in any of the industries listed on the negative list attached to the UAE FDI law, which includes oil exploration, banking and finance, insurance, water and electricity services, postal services, telecommunications, printing and publishing, commercial agency and distributor services, as well as land and air transport, increased foreign shareholding is permitted under the current FDI regime. In accordance with UAE Cabinet Resolution 16/2020, up to 100% shareholding is allowed in the more than 120 industries and manufacturing, service, and industrial sectors that are listed on the positive list. Additionally, a corporation must adhere to the statutory requirements for increased foreign ownership, which include higher minimum share capital, minimum Emirati employment quotas, and knowledge transfer requirements, in order to grow foreign participation above 49%.

Additional limitations also apply to public companies. For instance, all of the board members and the chairman of onshore UAE public businesses must be citizens of the country. Additionally, although though many large corporations have increased their foreign ownership limitations to entice foreign investment, many public firms with UAE incorporation still maintain restrictions on foreign shareholding due to the terms of their charter agreements. Additional restrictions on foreign ownership may apply to businesses involved in specific regulated activities; for instance, in the insurance industry, foreign ownership is restricted to a maximum of 25%.

Other GCC member states have such restrictions. Therefore, when transactions are aimed at ADX, DFM, or NASDAQ Dubai-listed firms with domiciles in other GCC member states, the foreign ownership limits of those other GCC member states come into play. By way of comparison between mainland UAE and other jurisdictions within the country, the Dubai International Financial Centre does not implement restrictions on foreign ownership for businesses incorporated there. However, for businesses listed on NASDAQ Dubai, the aforementioned factors might also apply if the listed entity's charter provisions ban foreign ownership.

 

Recent and Notable M&A Activities

The Abu Dhabi National Oil Company (ADNOC) raised almost USD10 billion by selling a stake in its oil refinery and pipeline companies, while DP World acquired Topaz Energy and Marine, making the UAE market the site of the most significant transactions in the region's energy industry in 2019. (see below, Oil and gas). In addition to these historic transactions, the UAE continued to be the region's most active M&A market in terms of foreign investment in 2019. The volume of transactions involving foreign investors buying (stakes in) UAE-based companies increased by 28% in 2019 compared to 2018. Furthermore, the UAE was the primary target of nearly 78% of foreign purchases made in GCC member states, indicating that the region's foreign investment was predominantly directed there.

 

1. Oil and Gas Sector

The purchase of a stake in ADNOC's oil refinery division by Italy's Eni and Austria's MV was the largest transaction in the UAE oil and gas sector in 2019. Eni and MV purchased a stake in the company and invested a total of USD5.8 billion in it to create a new trading partnership between the three firms. In a different transaction, ADNOC sold a stake in its oil pipeline business to generate USD 4.9 billion from investors, including KKR & Co., BlackRock, the GIC (Singapore's sovereign wealth fund), and the Abu Dhabi Retirement Pensions and Benefits Fund. ADNOC also disclosed a prospective sale of a stake in its natural gas pipeline business in the fourth quarter of 2019, with an anticipated volume of USD5 billion. As a result, it is expected that the UAE's oil and gas industry will continue to experience strong growth in 2020. We still don't know how the 2019 new coronavirus disease (COVID-19) will affect these agreements. While the UAE's M&A market in 2019 was dominated by the oil and gas industry, which accounted for nearly one-third of the market, there were also significant deals in other industries.

 

2. Financial Sector 

Due to the overbaking of several Middle Eastern countries, industry consolidation attempts continue to be a major driver of financial sector deals. Although Bahrain, which has 382 financial institutions serving a population of only 1.7 million, has a less fragmented financial system than the UAE, which has 50 banks, does have a relatively small domestic market of just over 10 million people. The merger of Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank to create the ADCB Group, which is valued at USD115 billion, was the most significant deal in the UAE banking sector in 2019. Dubai Islamic Bank successfully acquired Noor Bank in a share swap in January 2020. Dubai Islamic Bank issued 651,159,198 additional shares as part of this agreement, which were listed on the Dubai Financial Market. Dubai Islamic Bank now has total assets of USD 74,900,000,000  (US dollars `seventy-four billion nine hundred million ), making it one of the largest Islamic banks in the world as a result of the acquisition of Noor Bank.

 

3. Technology Sector

Over the past few months, one transaction has dominated the Middle East's technology market: Uber's acquisition of Careem, a regional rival ride-hailing service located in the United Arab Emirates. This deal was the largest technology transaction the region had ever seen, with a value of USD 3,000,000,000 (us dollars three billion) and The USD 1,400,000,000 (us dollars `one billion four hundred million) IPO of Dubai-based payment company Network International on the London Stock Exchange was another noteworthy deal. The largest UK technology listing since 2015 was this IPO.

 

Advantages and Disadvantages Of M&A

 

1. Advantages

1. The fastest way to achieve growth

M&A is the only corporate activity that can increase your company's top line as quickly as any other. This is why the largest corporations in the world openly employ M&A as a strategy for expansion, especially when it appears like growth in their core operations is coming to a grinding halt. Growth is consequently the most frequent motivation for M&A and supports the majority of the other reasons.

2. Possibility to enter new markets

Similar to how growth occurs, buying an established company in a new industry might be the best method to get into it. This holds true for practically every sector. Most of the cultural, regulatory, and business problems that might befall businesses entering new markets without using greenfield initiatives are avoided by merging with or purchasing a company in an appealing area.

3. Possibility to change companies’ business model

M&A can be utilized to change a business. The company Nokia is a good example. It was once a paper mill but in the 1920s it added a cable works. In the 1970s, this cable works firm and a producer of televisions merged, giving birth to Nokia's cell phone division. In order to reposition itself (again) as a network provider, Nokia purchased Alcatel-Lucent in 2013 when the cell phone devices division was sold to Microsoft.

4. Increase in market share

When two businesses that operate in the same sector or offer comparable products or services join forces, the resulting business might benefit from a larger market share by utilizing the resources that both parties contribute to the business partnership.

5. Increase of financial resources

The combined financial resources of all companies involved in a merger or acquisition raise the new company's overall financial capacity. There can be new investment opportunities available, or the business might be able to reach more customers thanks to increased marketing spending or inventory capacity.

6. Enhanced distribution capacities

A company's geographic reach could be increased through a merger or acquisition, enhancing its capacity for greater distribution of goods and services.

 

2. Disadvantages

1. Increase in legal costs and other expenses associated with the M&A

The legal business transaction of merging two businesses frequently involves the participation of various important professionals. Financial experts that can help with the assets and other financial aspects usually need to be brought in, as well as lawyers who specialize in this kind of business. Legal fees for mergers and acquisitions may be expensive. The company acquiring the other would be liable for paying a quantity of money for that company and its assets, in addition to paying the professionals helping with the logistics of the merger or acquisition. That expense can be seen negatively by a company.

2. Possibility of increase of products and services price

M&A increases market share and lessens competition. As a result, the new business might establish a monopoly and raise the pricing of its goods and services.

3. Risks of unemployment

A firm may decide to get rid of the other company's underperforming assets in an aggressive merger. It might lead to workers losing their jobs.

4. Prevention of economies of scale

Gaining synergies may be challenging when the companies have few characteristics. A larger corporation might also struggle to inspire workers and exert the same level of control. Consequently, the startup business might not be able to reach economies of scale.

 

Conclusion

The forecast for M&A in the UAE is favourable, particularly for deals involving overseas investors. The UAE economy is experiencing a broad-based rebound and a wave of inward investment and M&A activity as a result of the significant revamp and liberalization of the foreign ownership regime and the visa and long-term resident programmes accessible to foreign investors and entrepreneurs. Additionally, the major actions that the UAE government has done to facilitate business establishment and operation (including cost reduction) would, most probably significantly boost investor and corporate confidence. In the near future, we anticipate this tendency to continue. The UAE government needs to address concerns including acquisition and tender proposals involving public companies, which in particular create some uncertainty.  Through a collection of enabling regulations that address the merger process, the UAE system provides simple but effective processes that have enabled statutory mergers to be implemented, and the same should only increase in the future.