Ramy Torbey of Aziz Torbey Law Firm assesses the regulatory landscape for mergers and acquisitions in Lebanon
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A is regulated by the Lebanese Commercial Law (articles 210 to 213 of Legislative Decree 304 of December 24 1942 and its modifications), the Lebanese Code of Money and Credit (articles 132/b-d and 133/b-d) and Decree 7667 of December 16 1995 regarding the implementation of the by-laws of the Beirut Stock Exchange (BSE). In addition to Law 308 of April 3 2001 regarding the issuance and trade of stocks and bonds and acquisition of real estate by banks, as well as the provisions of Law 192 of January 4 1993 and its amendments regarding the facilitating bank mergers.
The regulatory bodies are the Central Council of the Lebanese Central Bank and the Capital Markets Authority (CMA) which set all regulations concerning purchases of shares in public companies, and those concerning the execution of acquisition and merger bids.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The CMA and especially its control unit which regulates the capital markets and its sanctions committee, (which examines violation cases transmitted by the board as specified in its rules of operation), are the authorities enforcing takeover regulations.
In addition, the Central Council of the Lebanese Central Bank, after consultation with the Banking Control Commission, regulates all takeovers in the banking and financial services sector, ensures that all regulated entities comply with all applicable laws and regulations and has all discretionary powers to approve or reject any takeover within the banking and financial services sector.
Also, the BSE Committee is responsible for managing, regulating, and developing the markets, protecting the interests of the investors trading at the stock exchange, monitoring the activities of the issuing companies and providing information to the issuers and traders at the stock exchange on an equal footing. The decisions of this committee may be contested before the Civil Chamber of the Court of Appeal in Beirut. The concerned party should file their objection within 15 days as of the date they are notified of the decision. Otherwise, their rights will be forfeited.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Lebanese law does not mention structural differences between friendly and hostile acquisitions. An acquisition is structured as a tender offer by the bidder and regulated by article 161 of Decree 7667/1995, which states that:
Any investor or group of investors wishing to own more than 10% of the voting rights in a company quoted in the official or secondary market, or wishing to acquire the absolute or specified majority in this company, should present a draft for a tender public offer or bartering via a financial broker.
Any subscription or transaction in the Lebanese banks' shares is subject to prior approval of the Central Council of the Lebanese Central Bank as follows: (i) if the subscriber acquires more than five percent of the bank's shares or from the voting rights related to these shares, whichever is greater; (ii) if the subscriber owns at the time of the subscription five percent or more of the bank's shares or from the voting rights related to these shares whichever is greater.
Any merger that includes a bank or a financial institution will be contingent upon the approval of the Central Council of the Lebanese Central Bank.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
Whether a cross-border or national deal, the acquisition is structured as a tender offer.
In the case of banks, the deals are governed by the Central Council of the Lebanese Central Bank.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Regarding listed companies, the bidding transaction should not take less than ten stock exchange sessions and is not subject to any limit in terms of completion time. However, the duration should not be delayed in a form of authority abuse.
Regarding banks, the Central Council should take, after consultation with the Banking Control Commission, a provisional decision on approving or rejecting the merger within 60 days of receiving the approval request and the attachments specified by the Law. In case of approval, the Central Council will specify the conditions, deadlines and guarantees required for its final decision. The Central Council will take a final decision on the merger within 30 days of the submission date of documents that prove the fulfillment of conditions and guarantees required by the Council. If, after the 60 day and 30 day deadlines, the Central Council has not taken a final decision on the matter, this shall be construed as an implicit decision of rejecting the merger request as submitted.
Regarding the duration of the opening for competing bids, it could be inferred that it lies within the time frame of the offer period.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
There are no restrictions mentioned regarding initial offer price limit. However, article 168 of Decree 7667/1995 states:
In the event an investor or another group of investors presents a counter-proposal, this counter-proposal cannot be considered unless the counter-price exceeds the price of the current offer by more than 5%.
Regarding the form, article 161 of Decree 7667 /1995 states that '[…] should present a draft for a tender public offer or bartering via a financial broker'. Accordingly, it is clear that the legislator did not impose any limitations upon the form (cash or shares) subject to discussion as long as the securities are subjects of transaction in BSE.
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?
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?
Regarding listed companies, article 165 of Decree 7667/1995 mandates the completion of publishing procedures that include details regarding the operation.
The Central Council of the Lebanese Central Bank takes the decision of approving or rejecting the transaction and guarantees the rights of shareholders and stakeholders.
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?
Based on article 162 of Decree 7667/1995, it is inferable that the bidder has the right to condition his offers. In fact, the details of the conditions are required to be submitted along with the documents mentioned in this article. However, a document stating a commitment not to refrain from the terms of the proposal is also required.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Regarding banks, article 7 of Law 192 of January 4 1993 states that:
During the year that follows the year in which the Central Council took its final decision on approving the merger, the Council may exempt the merging bank from income tax for an amount equivalent to taxes due on a portion of its profits, provided this portion does not exceed the cost of the merging operation and a ceiling of two billion Lebanese pounds. This exemption shall be subject to the approval of the Central Bank and the Banking Control Commission, provided the competent Departments of the Ministry of Finance verify that the value of those exemptions will be immediately added to the capital of the bank that results from the merger. In case this capital increase does not occur within six months from the date of the Central Council's approval, the exemptions shall be automatically repealed. The merged bank(s) shall also be exempted from the tax stipulated in Article 45 of the Income Tax Code, in case of approval of the revaluation of its (their) fixed assets.
In addition, article 8 of Law 192 of January 4 1993 states that:
All formalities and procedures required by the merging operation, including the issuance of new shares, shall be exempted from stamp duties, transfer and notary public fees, and from all registration fees with public administrations.
3.2 Are there special considerations in cross-border deals?
Cross-border deals depend on the nationality of the parties, which specifies the taxation system it applies to. Certain countries have double tax avoidance treaties signed with Lebanon giving some foreigners certain advantages.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Frustrating actions taken by the Board of Directors (BoD) to demotivate takeovers require the prior approval of the shareholders' general assembly, which limits the options of anti-takeover defences. However, the BoD could come up with a higher bidder that keeps the company in their realm. The bidder could be a friendly acquirer, one of them or even the whole board. Precautious options, like the golden parachute, could be taken by the company on a contractual basis.
The acquirer will have to obtain regulatory approvals for its acquisition if the target is regulated by the banking law.
4.2 How do targets use anti-takeover defences?
Since the decisions leading to the demotivation of the bidder are not applicable without shareholders' general assembly, usually the directors come up with the funder of a higher bid.
4.3 Is a target required to provide due diligence information to a potential bidder?
4.4 How do bidders overcome anti-takeover defences?
Mainly by soliciting the intervention of a higher bidder.
4.5 Are there many examples of successful hostile acquisitions?
As most companies in Lebanon are family businesses, hostile takeovers have never taken place due to the limited number of shareholders and the fact that bonds between them are seldom purely financial.
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?
No legal method can be completely interlope-proof, since the basics of stock market exchange in Lebanon rely on the highest bidders' advantage. However, the friendly bidder may acquire a pledge from the BoD not to seek a higher bidder, in addition to case by case solutions.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
As Lebanon adopts the free market strategy, it can be seen that the legislator discourages any deal protection tactics.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
Though the Lebanese Criminal Law (articles 685 and 686) mention clear and strict sanctions for any attempt to form a trust or any similar monopolising scheme, it has not mentioned a certain threshold for notification.
6.2 When will transactions falling below those thresholds be investigated?
Any violation of the Lebanese Law would be directly investigated by the general prosecution, once reported, disregarding the monetary value of the infringement.
6.3 Is an antitrust notification filing mandatory or voluntary?
Based on the Code of Criminal Procedures, each and every citizen is bound to report any violation of the law which they witness or is aware of.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
The law does not mention a clear deadline for filing. However, unreasonable delays would cause suspicion.
6.5 How long are the antitrust review periods?
The prosecutor is not limited to a certain time frame.
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?
Failure to notify deals that do not have local competition effect is a criminal offence. Therefore, the general prosecution could investigate at any level basis any clue either presented directly to them or personally obtained.
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?
In addition to the above-mentioned obstacles, the Lebanese legislator issued anti money-laundering and counter-terrorist financing regulations as well as several decrees governing protected industries and foreign employment regulations.
In addition, acquisition by foreign individuals or companies or Lebanese companies acquired by foreign individuals to real estate in Lebanon should not exceed the limit of 3000 m2 per person.
For institutions falling under the authority of the Lebanese Central Bank, special regulations guide employment in such institutions.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The Lebanese Criminal Law is the main anti-corruption legislation.
7.2 What are the potential sanctions and how stringently have they been enforced?
Any private individual or legal entity responsible for corruption may be subject to imprisonment from three months to three years. Private individuals may also be subject to the deprivation of certain civil rights.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Payments with a value of more than the equivalent of $10,000 in Lebanese pounds are subject to anti-money laundering regulations, and may be affected by measures against financing of terrorism. There are no other material issues that might affect a public M&A transaction.
8.2 What are the key recent M&A developments in your jurisdiction?
The last large M&A transaction in Lebanon took place in 2010, and was the acquisition of a majority stake in a non-listed Lebanese alpha bank for an approximately $750 million. Due to the political situation in Lebanon, there has not been any material M&A activity recently.
First published by our sister publication IFLR magazine. Take your free trial today.
Aziz Torbey Law Firm
About the author
Ramy Torbey is primarily focused on mergers and acquisitions, banking and corporate finance, business registration, taxation, international transactions and information technology agreements. Recent transactions he was involved include the acquisition of a controlling stake in a Lebanese bank for more $500 million and the acquisition and restructuring of an oil derivatives plant.
Torbey has published articles about legal subjects including securities, hedge funds, corporate finance, information technology and alternative dispute resolution (ADR). He has given lectures and training on various topics in Beirut, Geneva and Rome. He served as the Lebanese legal expert for a European Commission ADR project in the Middle East and North Africa, implemented by an international consortium led by the ADR Center in Italy from 2005 until 2008.
Torbey speaks Arabic, French, English and Italian.