Steven Brown and Paul Day of ASAR - Al Ruwayeh & Partners assess the M&A regulatory framework in Bahrain
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
We are not expecting any new legislation or regulation on M&A in Bahrain. A number of public M&A transactions have been publicised in local newspapers, including consolidation in the hotel industry. There has also been an uptick in potential acquisitions following the decrease in oil prices. It is likely that some investors have been affected either by the decreased liquidity in the Bahrain market (with falling oil prices) or the risk profile of the country (in light of the recent double downgrade of sovereign debt) and are looking for an exit. Meanwhile, less risk-averse investors will see the opportunities of Bahrain against the lowering acquisition prices arising from these economic drivers.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
We anticipate a number of public M&A deals will complete during 2016. More deals are likely in the banking sector as Bahrain rolls out Basel III regulations.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Takeover, Mergers and Acquisitions Module (TMA Regulation) of Volume 6 of the Rulebook (Rulebook 6) issued by the Central Bank of Bahrain (CBB) is the primary governing regulation for public M&A in Bahrain. It applies where there is an acquisition or consolidation of control of:
a Bahrain-domiciled publicly listed company; or
an overseas company whose primary listing of equity securities is on a Bahrain exchange.
The Capital Markets Supervision Directorate at the CBB administers Rulebook 6, including the TMA Regulation.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The CBB enforces the TMA Regulation by imposing penalties for non-compliance and by issuing restriction or prohibition orders under Decree No. 64 of 2006 (the CBB Law). Violation of the relevant regulations may also trigger criminal or civil liabilities.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
There are two principal ways to effect a takeover of a Bahraini public company: (i) a friendly or hostile contractual takeover offer by the bidder for the shares of the target; or (ii) a merger of the target by consolidation or absorption into the bidder or a subsidiary or associate of the bidder.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
The bidder would determine the choice of structure, although the election for a merger or reverse merger would require joint agreement and entry into a merger agreement with the target. 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 the case of a cross-border transaction, special structuring considerations may arise based on the tax and regulatory regime of the implicated jurisdictions. Bahrain lacks a regulatory framework to complete a cross-border merger.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
All takeover offers must be open for acceptance for at least 15 days after becoming or being declared unconditional. The acceptance condition must be satisfied within 60 days from posting the offer document. All other conditions must be fulfilled within 15 days of the first closing date or the date on which the offer becomes or is declared unconditional as to acceptances, whichever is later. A merger will typically implicate a shorter timeframe for completion. Competing offers adopt the timetable of the new bidder.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
Except with the consent of the CBB, a cash offer is required where the bidder has bought for cash during the offer period or within three months before its commencement, an interest in shares of any class under offer in the target carrying 10% or more of the voting rights of that class or if in the view of the CBB there are circumstances that render such a course of action necessary.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
The TMA Regulation prohibits an offer from being declared unconditional as to acceptances unless the bidder has acquired over 50% of the voting rights in the target. A bidder must squeeze out minority shareholdings if it holds or controls 95% or more of the target's voting share capital within three months from the date of acquisition of the 95% stake. There would be no squeeze-out right, nor a squeeze-out obligation, below acquisition of a 95% stake.
A merger must be approved by at least 75% of the shares present at the relevant extraordinary general meeting for both merging entities.
3.6 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?
Yes, a general principle exists that the bidder must treat all holders of each class of securities of the target in a fair and equitable manner.
A partial offer would require the approval of the CBB. The CBB would not usually issue this unless the contemplated post-offer stake would fall between 30 and 50% shareholding in the target. In the absence of an approved partial offer, where a person acquires an interest in shares carrying 30% or more of the voting rights, or where a holder of 30% shareholding acquires additionally more than one percent of the target's shareholding, this would trigger an obligation to make a general offer to acquire the remainder of the shares, known as a mandatory offer, in the absence of a whitewash resolution of the independent shareholders of the target.
Lastly, there exists a best price/all holders rule whereby if the bidder buys voting shares in the target at above the offer price (being the then current value of the offer during the offer period) during the offer period or within three months before commencement of the offer period, it must increase its offer to not less than the highest price paid for any shares so acquired.
3.7 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?
A voluntary offer must not be made subject to conditions whose fulfillment depends on the subjective interpretation or judgement by the bidder, or lies in the bidder's hands. Once a firm intention to make an offer is formally announced, the bidder is committed to proceed. Scope to withdraw by invoking the conditions to the offer is limited. To the extent that the bidder intends to attach conditions other than normal conditions the CBB must be previously consulted.
As a general rule with limited exceptions, financing for an offer must be fully committed when the announcement of the firm intention to make an offer is made.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
Bahraini entities other than those engaged in the fields of extraction and/or refining of hydrocarbons in Bahrain are not subject to income tax. There are no dividend taxes and no special tax considerations involved in a public M&A transaction.
4.2 Are there special considerations in cross-border deals?
There should not be local tax implications. Foreign tax considerations, for example relating to withholding on dividend payments, may be implicated.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Once a bona fide offer has been communicated to the board of the target, or the board of the target has reason to believe that a bona fide offer may be imminent, no action which could result in an offer being frustrated, or in the shareholders of the target being denied an opportunity to decide on the merits of an offer, may be taken by the board of the target in relation to the affairs of the company without the approval of a whitewash resolution by the shareholders of the target.
5.2 How do targets use anti-takeover defences?
Without a whitewash resolution by the shareholders of the target, the primary anti-takeover defences available to the board of the target would be: denial of due diligence access; solicitation of competing offers; and/or board's encouragement of shareholders not to accept the offer.
In the case of a merger, the non-cooperation of the target's board could prevent the merger from completing. In such instances the hostile bidder would have to launch a contractual takeover offer.
5.3 Is a target required to provide due diligence information to a potential bidder?
5.4 How do bidders overcome anti-takeover defences?
There are no instruments to force the target's board to recommend an offer. Nevertheless, the non-cooperation of the target board may result in the bidder being unable to offer a better pricing or to make an offer at all. This may be deemed a breach of fiduciary duties of the target's board vis-à-vis the target's shareholders. The bidder may thus encourage the target's shareholders (who have plenary power) to restrict the board from exercising anti-takeover defences.
5.5 Are there many examples of successful hostile acquisitions?
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Whereas any inducement fee or offer-related arrangement between the bidder and target must be publicly disclosed, there is no general prohibition on such arrangements. However, the possibility of entering into an arrangement such as a break-up fee agreement without a whitewash resolution by the target shareholders remains questionable.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Under the TMA Regulation, the target board cannot deny any competing bidder the same access that has been granted to the friendly bidder. As far as break fees and lock-up agreements are concerned, the same could implicate violations ofthe target board's duty against frustrating action.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
No general merger control notification exists in Bahrain. There is, however, a general requirement that a merger must not result in monopolising an economic activity, a commodity or product.
7.2 When will transactions falling below those thresholds be investigated?
7.3 Is an antitrust notification filing mandatory or voluntary?
7.4 What are the deadlines for filing, and what are the penalties for not filing?
7.5 How long are the antitrust review periods?
7.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
7.7 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?
Specialist merger control regimes exist in respect of certain industries. For example, the acquisition of control over a financial institution licensed by the CBB must be previously authorised by the CBB. The state may also restrict ownership of some entities in the interest of national security.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
Amiri Decree No. 15/1976 (Penal Code) as amended by Law No. 01/2013.
8.2 What are the potential sanctions and how stringently have they been enforced?
A maximum sentence of 10 years is imposed on any person accepting or requesting a bribe in exchange for performing or omitting to perform (or to cause the performance or omission of performance of) a task/duty related to the person's work, duties, or position and/or negatively affecting the owner of a business or company. A briber may be subject to a similar penalty even if the bribe was rejected. Fines may also be levied at the court's discretion.
Bahrain has expressed an intention to strengthen enforcement of anti-bribery legislation.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
The structuring of a securities exchange offer by means of issuing new shares of the bidder requires the waiver by the shareholders of the bidder of priority rights to subscribe for the new shares. The law does not outline clear mechanics for the waiver of such rights which are personal to the shareholder.
The high squeeze-out threshold (95%), coupled with the lack of a codified squeeze-out procedure and investors' limited inclination to trading, would likely undermine an attempt to reach 100% ownership of the target. In such cases, a merger with the target may be the only workable solution for obtaining 100% ownership.
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ASAR - Al Ruwayeh & Partners
About the author
Steven Brown is a senior associate and the managing attorney at the Bahrain office of ASAR Al Ruwayeh & Partners and has been with the firm in Bahrain since June 2010. He has over six years of corporate law experience, including substantial experience in banking and finance, M&A and regulatory matters in Bahrain. At ASAR, he specialises in M&A, banking and finance, as well as employment law.
ASAR - Al Ruwayeh & Partners
About the author
Paul Day is a partner at ASAR Al Ruwayeh & Partners and works primarily in the corporate and commercial field. He has extensive experience in commercial transactions and has negotiated and acted as lead counsel on numerous international joint ventures. He represents a broad range of prominent foreign clients in the establishment of a local presence and on legal and practical considerations relevant to foreign companies with operations in the Gulf region.