The UAE merger regime
Mohamed Khodeir
Al Tamimi & Company
Dubai
Mohamed Khodeir (Bio)
This article examines a key form of transaction offering growth and liquidity options. Without doubt, mergers are becoming more crucial in the UAE, post the global financial crises as companies seek to improve their critical mass and liquidity. A key strategy available for companies is the merger. Here we examine the UAE merger regime under the UAE Commercial Companies Law, Federal Law 8 of 1984, as amended, (the CCL).
Background
Several empirical studies indicate that the value of companies tends to increase following a merger, although this outcome can be subject to many variables. Measuring the improvement in value is not a matter that can be assessed at the time of announcing a merger or completion of the same. The process involves a long term, post-merger study to assess the overall position of the merger targets in terms of value, and the progress of business post-merger.
Financial analysis is beyond the scope of this article, however it's crucial to understand the arguments for and against mergers from a financial and market perspective.
UAE merger regime
Merger agreement
The merger agreement can be characterised as an 'exchange agreement' for the purposes of Articles 607-611 of the UAE Civil Transactions Code (the CTC). Such an agreement is very similar to a sale agreement, regulated under Articles 489-510 of the Civil Transactions Code, yet the key distinction is that the consideration under exchange agreements is not cash but shares.
The Companies Law merger regime
Mergers of companies are mainly regulated under Articles 276-280 of the CCL, which create an avenue for mergers between companies. Two alternative blueprints for mergers are embedded in Article 276 of the CCL. First, a merger can take place through "acquisition consolidation", where one of the two companies becomes the target of a merger and is dissolved, and its shareholders are provided a stake in the surviving company by means of a capital increase allocation. Put simply, the shareholders of the dissolving company will exchange their old shares for new shares in the enhanced capital of the surviving company.
Secondly Article 276 permits a merger by means of integration i.e. by merging two or more companies to establish a new company (where all shareholders of the underlying companies become shareholders in the new company).
The merger debate is, in some respects, similar to the debate over the UAE insolvency and bankruptcy regime, during which commentators claimed that the UAE had no legal regime. Likewise, many corporate law practitioners have suggested that the UAE lacks a merger regime.
The UAE does have a merger regime under the CCL. However, this regime has not been tested aggressively in practice. The largest merger seen in the UAE recently, did not rely on the CCL merger provisions, rather designated special process. The absence of UAE mergers may be attributed to many factors such as the differing dynamics of the UAE economy, lack of market precedents, and the recently established UAE capital markets being evolving markets. Therefore, proposing to apply complex merger models employed in markets like the UK and the US would be impractical.
Local considerations require thorough assessment before utilising methods in other jurisdictions, which differ in their legal environments. One vivid distinction between foreign and GCC regimes is the difference between civil code and common law systems. The underlying agreements are the main source of law regulating the parties' relations under common law systems, while the civil code provides extensive gap fillers for legal relationships.
Process milestones
The CCL addresses the process of a merger, by requiring shareholders' resolutions for a merger. The CCL outlines the process for evaluating the assets of the defunct company, which is absorbed in the surviving one, where the merger is one by means of an acquisition.
The valuation process also involves a valuation to conclude a swap-ratio formula assessing how many shares of the entity being absorbed, are equivalent to shares in the rights issue of the surviving entity. The same would apply to assess the swap-ratio formula for how many shares the entity, which will be absorbed into a new entity, will equate in the new entity's shares. The latter is a more simplified process considering it involves a new entity that does not yet have a particular market or book value.
Article 280 of the CCL allows creditors with outstanding debts, to object to the merger within three months from its registration on the commercial register, after which the merger becomes final and binding, if all objections are settled, and the succession of rights and liabilities passes onto the surviving entity.
Analysing these concise provisions of the CCL, it is noted that such provisions include the key components required to implement a corporate merger process. A merger process can be tailored by companies and their advisors in close coordination with relevant authorities, notwithstanding the lack of case studies and practices. However, if companies approach the authorities with a merger model that is complex and doesn't recognise the local regime it will likely not succeed. It is a simpler and more elegant solution to design a merger transaction, which fits the merger regime, in addition to a few components taken from best international practice. Such a progressive combination should be undertaken without stretching the process extensively, to avoid a complex, unrealistic structure that would not be enforceable locally.
Conclusion
The UAE authorities are open to realistic and practical solutions for local mergers, yet attempting to apply overly complex designs would not be the recommended approach.
Though there is space for expansion and devilment of existing rules, the UAE regime has basic, but effective, machinery enabling corporate mergers to be implemented via a set of enabling provisions covering the merger process. There is a case for market players to look first to this simple but effective machinery, before attempting to replicate exotic merger structures designed to fit common law legal systems and foreign tax regimes.