John Cunha of ASAR - Al Ruwayeh & Partners assesses the regulatory landscape for mergers and acquisitions in Kuwait
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Kuwait Capital Markets Law, Law 7 of 2010 (the CML), and its by-laws (CML Bylaws, and together with the CML, the CML Rules), are the primary governing legislation for public M&A in Kuwait.
The Kuwait Capital Markets Authority (the CMA) is the primary regulator in Kuwait which supervises all public M&A activity in Kuwait.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The CMA has statutory powers to regulate and supervise all formal takeover and mandatory takeover offers in Kuwait. The CMA may impose sanctions, restrain directions, report a party to another regulator, and refer matters to the public prosecuting authority in Kuwait.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Hostile bids are uncommon in Kuwait. Generally speaking, a takeover of a Kuwait Stock Exchange (KSE) listed company may be effected by way of a voluntary takeover offer (VTO) or a mandatory takeover offer (MTO) under the CML Rules. An MTO must be launched by a bidder once it has – directly or indirectly – accrued more than 30% of the voting shares of a target listed in the KSE.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice of a structure varies and would generally be determined by the bidder. The structuring decision would be influenced by the type of consideration the bidder is offering and the level of acceptance the bidder is seeking to obtain. In a cross-border transaction, special structuring considerations may arise based on the tax and regulatory regime of the relevant jurisdictions.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Under a VTO transaction scenario, a bidder will have up to 180 days from the date of announcing its VTO, to submit an application and offer document to the CMA for approval. Shareholders' approval will also be required from both the bidder and the target. Once the relevant CMA and shareholders approvals have been obtained, all offers must be open for acceptance for at least 30 days after the deal's announcement by the transaction manager for accumulation during the concerned acceptance period.
In an MTO scenario, once the bidder has obtained the relevant approval from the CMA (no shareholder approval is required), all offers must be open for acceptance for at least 30 days from the date of announcement by the transaction manager for accumulation during the concerned acceptance period.
Competing offers will adopt a timetable as prescribed by the CMA.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
Assuming an MTO scenario, the MTO must be an unconditional cash offer and may not be less than the higher of the following: (i) the weighted average of the daily price per share of the target on the KSE for the six-month period preceding the date of announcement of the launch of the MTO by the bidder as calculated by the KSE; or (ii) the highest price paid per share by the bidder or any of its subsidiaries or allied parties during the six-month period preceding the date of announcement of the launch of the MTO by the bidder as calculated by the KSE.
Assuming a VTO scenario, the consideration may take the form of a mixture of cash and shares. Although the CML Rules are silent on this point, there is no express restriction in offering shares in a non-Kuwaiti company as part of the consideration under a VTO. The CML Rules do not prescribe any minimum level of consideration under a VTO.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
It is not possible for a bidder to compulsorily purchase the shares of any remaining minority shareholders under Kuwait legislation. There are no squeeze-out rules under the laws of Kuwait.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Under CML Rules, all shareholders must be treated equally by the offeror. Both the offeror and the target must procure a report produced by an independent CMA-approved investment adviser who must present their opinion to shareholders. Should an offeror purchase shares at a price above the offer price, it must increase its offer to no less than the highest price paid for such shares. In addition, if the offeror succeeds through an acquisition of shares in owning more than 30% of the target's voting shares, the CML Rules provide that the offeror must, within 30 days of the date of acquiring the 30% shareholding, make a mandatory offer for the remaining shares in the target.
Law 25 of 2012 (Companies Law) offers additional protection to minority shareholders when corporate actions violate the company's charter, Kuwaiti law or are deemed to be intended to damage the relevant company. Depending on the violation, an affected shareholder may claim compensation or request the nullification of the action.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
All offer documents must contain a description of how the offer is to be financed and the source of said financing, and the lenders or arrangers must be named.
An offer must not be subject to conditions that can only be satisfied at the discretion, and in the subjective judgment, of the bidder or the target company, or where the satisfaction of such conditions is within the control of the bidder or the target company. Only VTO takeover offers may be subject to certain conditions required by the bidder.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Other than the standard brokerage fees which would be payable, there are no transfer duties payable on the sale of shares in a company that is incorporated in Kuwait or listed on the KSE. Moreover, capital gains resulting from the trading of listed shares are not subject to Kuwait income tax.
3.2 Are there special considerations in cross-border deals?
A foreign corporate investor that owns shares would be subject to tax on dividends at a rate of 15%.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Hostile bids are uncommon in Kuwait, and Kuwaiti law is silent on the treatment of these bids.
4.2 How do targets use anti-takeover defences?
Please see our comments in 4.1.
4.3 Is a target required to provide due diligence information to a potential bidder?
The CML Rules provide that copies of the following documents must be made available for viewing until the end of the bid period: (i) advice of the target's company board of directors on the bid; (ii) the articles of association and memorandum of association of the bidder and the target company, or any other similar documents; (iii) all audited financial statements of the bidder and the target company for the past three financial years (if available); (iv) any report, notice, statement or document presented or referred to in the bid; (v) any document evidencing an irrevocable commitment to accept the bid; (vi) any documents with regards to the financial arrangements in connection with the bid; and (vii) any other documents which the CMA may request.
In addition, the board of directors of a bidder and target company must provide their respective shareholders with information and advice to enable them to reach a sound decision on whether to accept or reject a bid at least 15 working days before a shareholders' general assembly is held. Moreover, the bidder, the target company or their respective advisers may not present information to some shareholders without making the same available to all shareholders while the bid is being made or studied.
4.4 How do bidders overcome anti-takeover defences?
Please see our comments in 4.1.
4.5 Are there many examples of successful hostile acquisitions?
Please see our comments in 4.1. There are limited precedents of takeovers in Kuwait under the CML Rules.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
It is not common for the board of a target company to have a formal agreement between the bidder and the target; it is more common for the bidder and the selling shareholders to have an agreement.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no specific rules in Kuwait dealing with break fees and parties are free to agree specific arrangements to this effect. That being said, it is worth noting that indemnification provisions would be subject to the general principles set out in the Kuwait Civil Code (namely, the court's right to reduce the indemnity in certain circumstances).
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
Under article 3 of the Competition Law Regulations (Regulations) of the Kuwait Competition Law (Law 10 of 2007) natural or legal persons wishing to acquire assets, equities, usufructs or establish unions, mergers or conglomerates or merge the management of two persons or more leading to controlling or increasing the existing control over the relevant market, are required to submit a notice to the chairman of the Competition Protection Board (the CPB). Please note that the Competition Law defines control as the position through which a person or a group of persons, who work with each other directly or indirectly, would have the ability to dominate the market by possessing more than 35% of the volume of the intended market.
6.2 When will transactions falling below those thresholds be investigated?
Assuming that the thresholds highlighted in 6.1 are not breached, then no investigations should be triggered.
6.3 Is an antitrust notification filing mandatory or voluntary?
Please see our comments in 6.1.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Filings must be submitted to the CPB at least 60 days before the date agreed for the transaction to take effect. Failure to do this will result in a fine ranging between KD2,000 ($6,700) and KD10,000. However, if the parties are also found to be engaged in monopolistic or anti-competition practices, then more severe penalties may be imposed. For example, paying a fine not exceeding KD100,000 or the amount of ill-gotten gains, confiscating of commodities and suspending business operations for three years.
6.5 How long are the antitrust review periods?
Please see our comments in 6.4.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Please see our comments in 6.4.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Additional regulatory considerations will depend on the sector to which the target belongs. For example, the Kuwait Banking Law (Law 32 of 1968 as amended) for banks under the jurisdiction of the Central Bank of Kuwait.
A foreign investor may acquire up to 100% of the shares of a joint stock company listed on the KSE subject to complying with the KSE's and the CMA's rules. However, these regulators (and others) have discretionary powers and may, for reasons of national security or public policy, influence or restrict the completion of business combinations.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
Kuwait Penal Law 31 of 1970 (Penal Law), as amended, prohibits bribery of Kuwait government officers and lists the penalties that may be imposed for violating the relevant provisions.
The anti-bribery provisions of the Penal Law are violated if a person promises to give or gives a public officer any gift or grant as a reward for performing or abstaining from performing any of his duties. The prohibition is not restricted to offering money; the provisions of the Penal Law may also be violated if a person offers favours, gifts or hospitality to a public officer with the intention of exerting influence over the public officer in the performance of their duties. A violation of the Penal Law occurs even if the public officer does not accept the gift or favour offered to them by the briber or even if the gift or favour is requested by the public officer.
7.2 What are the potential sanctions and how stringently have they been enforced?
There can be severe criminal sanctions for violating the Penal Law and include imprisonment of up to 10 years in addition to a fine equal to double the amount that was given or promised to be given to the public officer.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
The Companies Law provides that each existing shareholder of a public joint stock company has a pre-emptive right to subscribe for their proportion of any new issuance of shares by the company. The Companies Law does not outline a clear mechanism for the waiver of such rights which are personal to a shareholder.
8.2 What are the key recent M&A developments in your jurisdiction?
In 2013 and early 2014, the Kuwait market noticed an increase in small to medium sized acquisitions, largely involving local and regional investors, including private equity firms. There has also been an increased interest in larger acquisitions of listed companies, mainly led by international private equity investors.
A number of Kuwait listed companies are considering delisting from the KSE, perhaps due to the cost of compliance with the CML Rules and the Companies Law. It is anticipated that new CML Rules and the Companies Law will attract new investors to Kuwait resulting in an increase in takeovers.
Finally, there was a recent announcement in the local media that amendments to the CML Rules are expected to come into force in the next few months.
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ASAR - Al Ruwayeh & Partners
About the author
John Cunha is a partner at ASAR- Al Ruwayeh & Partners, and has been with the firm since April 2006, practising in the areas of banking and finance, capital markets M&A. He holds a law degree from the University of the Free State, South Africa (1999) and an MBA (2002) from the University of the Free State, South Africa (in collaboration with De Paul University in Chicago, USA). He also holds a Master of Laws degree (international trade law) (LLM) from the University of Stellenbosch, South Africa.
Cunha was admitted to the South African bar in 2000 and was admitted as a solicitor of the Senior Courts of England and Wales in 2007. He is fluent in English, Afrikaans, and Portuguese.