Are mergers and acquisitions the new way to survive the turmoil being faced by the economy? Businesses have faced huge losses and are finding ways to survive the pandemic without having to shut their doors to operations. Big corporations are in search of new avenues to expand as the valuations have taken a hit. This has led to the smaller corporations being merged or taken over.
There are two main types of entities involved in private acquisitions –
1. The corporations established in the UAE outside the free-zone area (‘mainland corporations’)
2. The corporations established in the free-zone areas (‘free-zone corporations’)
The restriction on shareholding by non-UAE nationals is a matter of concern while deciding the type of entity for investing. In the free-zone corporations, there is no such restriction, whereas, for the mainland corporation, the UAE national is required to hold at least 51% of the shareholding. Certain sectors for mainland corporations shall be open to 100% foreign ownership were outlined in a press release issued by the Government in 2019. However, this law is not yet operational and its implications are yet to be assessed.
The most common methods to acquire a private company are Share purchase and Asset purchase methods. A company can also be acquired through the traditional Court governed procedure of a merger. Considering the cost and time involved, the Share purchase and Asset purchase methods have been widely used in the UAE.
In the Share purchase method, the company continues existing as it is and the control alone is transferred to the investor. Under the Asset purchase method, the investor is at the liberty to select and acquire assets of his choice, leaving behind the unwarranted liabilities.
The preliminary contracts executed between the parties before the sale agreement include the following:
1. Non-disclosure agreement
2. Letters of intent
3. Exclusivity agreement
The share sale agreement is executed by the parties on successful completion of due diligence undertaken by the buyer. Share sale agreement include various covenants and warranties to be relied upon by both parties.
The substantive clauses in the share sale agreement include the following among other clauses:
1. consideration,
2. details of the shares being transferred,
3. pre-conditions and conditions for the deal,
4. warranties & indemnities,
5. confidentiality,
6. governing law,
7. termination
The consideration can be settled by way of payment in cash or by way of issue of shares. The Commercial Companies Law prohibits public and private joint-stock companies or their subsidiaries from providing financial assistance to any individual or company to purchase shares (including bonds or Sukuk) in the company. However, this prohibition does not apply to limited liability companies. Financial assistance includes gifts, loans, donations, securities and guarantees.
With the share sale agreement, various other documents are prepared for formalising the deal viz., a disclosure letter, share transfer document, board or shareholders’ resolution, signing powers of attorney, service agreements for employees, and other requisite contracts.
Appropriate regulatory approvals are also to be taken in case of any sector-specific company being acquired.
