gif World Islamic Finance Review
MERGES & ACQUISITIONS IN THE MIDDLE EAST: Balancing Risks, Reaping Rewards
Author: Arti Sangar, Partner, Diaz Reus & Targ, LLP, Dubai
Arti Sangar, Partner, Diaz Reus & Targ, LLP, Dubia
Arti Sangar is a partner at Diaz Reus & Targ, LLP where she heads the firm’s Dubai office, located in the Dubai International Finance Centre. She con- centrates her practice in the area of mergers and acquisitions and project finance. Miami-based Diaz Reus is a full-service international law firm. The firm maintains offices in Orlando, Florida, Shanghai, Mexico City, Frankfurt, Caracas (Venezuela), Bogota (Colombia), Buenos Airesand Sao Paulo/Belo Horizonte (Brazil).
Fuelled by tremendous growth potential and an increasingly pro- gressive regulatory environment, the Middle East is fast becoming a hotbed of merger and acquisi- tion activity. Today, for example, the UAE is experiencing an up- surge in cross-border merger and acquisition activity. As a result, dealmakers throughout the Gulf Cooperation Council, including Bahrain, Saudi Arabia, Oman, Qa- tar, and Kuwait, should be ready to strike while the proverbial iron is hot. As dealmakers survey the wealth of opportunities available in the region, they should be alert to certain trends particular to the Middle East. This article offers a brief overview of key issues to keep in mind as deals unfold.
Due diligence: Comprehensive due diligence is critical to a suc- cessful deal. It is worth keeping in mind, however, that companies in the Middle East are generally not required to disclose as much in- formation as their counterparts in the U.S. and Europe. Indeed, deal teams may be surprised to learn that UAE laws do not require as much disclosure as other jurisdic- tions. However, this is changing. Although there is little history of corporate disclosure in the Mid- dle East, some countries are tak- ing steps to improve transparency and communication with foreign investors.
Foreign ownership restrictions: Certain jurisdictions require a local partner with an ownership stake. For example, with the ex- ception of branch and represent- ative offices, every company es- tablished in the UAE must have at least one partner who is an Emi- rati national, who owns at least 51 percent of share capital. If the business involves a real-estate brokerage, 100 percent national ownership is required. Notably, these requirements are waived for companies established in free
58 Global Islamic Finance April 2012
zones like the Dubai Internation- al Financial Centre. A company can establish its operations here without incurring the time and expense of locating and vetting a local partner.
Deal structure: Careful thought must be given to the drafting of agreements. Any plan to assign control and profits must be thor- oughly reviewed. This is espe- cially important since different countries within the region may impose penalties for agreements that violate local laws. Investors must also have a well-planned exit strategy. It is common to have a formal agreement for significant transactions of any type, includ- ing acquisitions of shares in pri- vate companies. There is typically an initial agreement between the buyer and the shareholders, such as a memorandum of understand- ing, followed by a more complete share purchase agreement and a shareholders’ agreement. There is also likely to be a confidentiality agreement and possibly an exclu- sivity agreement.
Regulatory compliance: Before considering an acquisition in the Middle East, investors must de- termine if it is permitted by law. In most Middle Eastern countries, merger and acquisition deals can occur only with the prior ap- proval of the relevant government authorities. Thus, acquisitions should always be conditioned upon securing official consent and the flow of funds should re- flect this requirement. Escrow arrangements are therefore frequently the preferred option for managing the movement of funds. There are other regulatory issues to consider, such as key documents requiring court nota- risation. Once the documents are signed, they may need to be sub- mitted to the appropriate author- ity to register the transaction. Par- ties based outside the jurisdiction
will need to obtain the necessary powers of attorney in advance. In most cases, companies operating in the Middle East will require a trade license permitting them to carry out their specific business. In the case of an acquisition, the transfer of an existing license should be executed.
Financing: The gradual relaxa- tion of world credit markets will further drive merger and acquisi- tion activity in the Middle East but investors will need to find other sources of funds as Western mar- kets continue to restrict lending. Islamic financing offers one such option. Yet, investors may still face some challenges, including a lack of global consensus over the application of Shariah laws and higher transaction costs than those for conventional finance ve- hicles.
Employee Consultation: There are no requirements for a company’s board to inform or consult its em- ployees prior to a merger or ac- quisition. However, consideration should be given to requirements under UAE labour law relating to minimum notice periods, holidays and end of service gratuities. The merger and acquisition mar- ket in the Middle East is no longer in its infancy and the region’s continued development will offer significant opportunities to inves- tors. It is vital that any merger and acquisition strategy accounts for challenges that may arise as a result of local business laws and practices. Sufficient time and resources must be dedicated to ensuring that any cross-border venture is secure, legal, and prof- itable. Foreign investors looking to take equity stake in the Middle East should carefully consider the structure of a proposed deal from the outset, and then carry out a carefully planned, timed, and well-executed strategy.
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