28 May 2022
A share acquisition is the most popular method of acquiring a private firm. Due to a lack of legal precedent and formality, asset purchases are less typical in the UAE. Corporation, income, and capital gains taxes are frequently considered in structuring similar transactions in other regions; however, this is not the case in the UAE. Furthermore, the feasibility of shifting assets in the UAE is more problematic, owing to the requirement of tripartite agreements for asset transfers. (they do not automatically transfer by operation of the business of the company).
A statutory merger, which facilitates the transfer of assets by operation of law, can also be used to buy a private corporation. Due to a lack of precedents and lengthy procedural requirements in connection to creditor objections, this was not frequent practice. However, this is no longer the case; mergers are becoming more prevalent as the desire for integrating firms in the same industry grows.
The main benefit of a share acquisition is that the target firm (and its operations) remain unchanged before and after the transaction, with only the ownership of the shares changing hands. The fundamental assets and liabilities of the company, which remain with the target company, do not need to be transferred. Unless they contain change of control provisions that are triggered by the sale, business contracts are largely unaffected and remain in force with the target company. This eliminates the need for them to be assigned individually under tripartite agreements, which would allow counterparties to renegotiate them. Depending on the nature of the target company's business, share transfers will be subject to government and regulatory authorization. The only disadvantage of buying stock is that all of the company's assets and obligations remain with it (unless specifically carved out in the relevant sale and purchase documentation). A buyer can choose the assets and, as a result, the liabilities it desires with an asset purchase. This can assist in avoiding unknown obligations. Unless there are a small number of assets, however, assigning each one can take a long time and effort.
A typical share acquisition transaction begins with the target firm being subjected to due diligence. After this is completed and the buyer is satisfied from a commercial risk standpoint, the transaction documents are prepared and negotiated. This entails signing a long-form share purchase agreement that contains pre-closing conditions and procedures. In most cases, the warranties, indemnities, and restrictive covenants are negotiated back and forth between the buyer and seller. If necessary, other business transaction paperwork are also drafted at this time. The shareholders sign a share transfer instrument as part of the closing process. The documentation is signed, and the procedure of transferring the title with the authorities commences once the companies have received the necessary government and regulatory permissions. The authorities update the company's license or commercial register with the appropriate department of economic development. The use of an escrow service is typically required to keep the purchase payment in escrow until the authorities' records are updated.
Because the transfer of title occurs once the register of members of the target is updated, and registration of the transfer with the relevant free zone authorities is a post-completion formality in certain free zones, the closing can usually take place simultaneously with the execution of the transaction documentation. The length of time it takes to complete a normal transaction is largely determined by the parties involved. Where the target is not involved in industries that require further regulatory approval, administrative procedures are restricted to the aforementioned process, which takes little time. Both activities can be completed on short notice. When international investors are involved, the legalization of documents provided by foreign authorities takes longer. If you need any legal assistance reach out to the well-qualified lawyers at Fotis international law firm