John Cunha of ASAR - Al Ruwayeh & Partners assesses the M&A regulatory framework in Kuwait
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
Recent developments include the promulgation of amendments to the Kuwait Capital Markets Law (the CML) and the Kuwait Capital Markets Authority's (CMA) issuance of new executive bylaws to the CML (the CML Bylaws, and together with the CML, the CML Rules). In February, Kuwait also issued a new Companies Law. There has been an increase in small to medium-sized acquisitions, largely involving local and regional investors including private equity firms. There has also been increased interest in larger acquisitions of listed companies, from international private equity investors.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
We anticipate a steady increase in public M&A activity in Kuwait over the next 12 months. So far this year, two large public M&A deals have been progressing. The outlook for public M&A in Kuwait received added impetus from the recent promulgation of the new CML Bylaws.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The CML Rules (particularly Book 9 (mergers and acquisitions) of the CML Bylaws), is the primary legislation governing public M&A in Kuwait. The CML Rules apply where there is an acquisition or consolidation of control of:
(i) a Kuwait incorporated company listed on the Kuwait Stock Exchange (KSE); or
(ii) a non-Kuwait incorporated company with a primary listing on the KSE.
The status of the target company determines whether or not the relevant CML Rules apply.
The CMA is the primary regulator for public M&A activity in Kuwait.
The CML Rules provide a statutory framework for public M&A in Kuwait where there is:
(i) a takeover offer for 100% of the share capital of a company listed on the KSE; and
(ii) a mandatory takeover offer which must be made to remaining shareholders when the offeror acquires more than 30% of the voting rights in a KSE listed company.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The CMA has statutory powers to regulate all formal takeover and mandatory takeover offers in Kuwait.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
Hostile bids are rare in Kuwait. A takeover of a KSE-listed company may be effected by way of a voluntary takeover offer (VTO) or a mandatory takeover offer (MTO) under the CML Rules. Pursuant to the CML Rules, an MTO must be launched by a bidder once the bidder has come into possession of more than 30% of the voting shares of a target company listed on the KSE. A stake may be acquired in a target company listed on the KSE, by way of a block trade auction process where more than five percent of the voting shares of a target company may be acquired.
3.2 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 the case of a cross-border transaction, special structuring considerations may arise based on the tax and regulatory regime of the relevant jurisdictions.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Generally, VTO transactions take longer than MTO transactions. This is because, in a VTO transaction, a bidder will have up to 180 days from the date of announcing its VTO, to submit a VTO application and a VTO offering document to the CMA for its approval. In addition, shareholders' approval must be obtained from both the shareholders of the bidder and the target in a VTO transaction. Once the relevant approvals have been obtained, all offers must be open for acceptance for at least 30 calendar days from the date of announcement by the VTO transaction manager that shares in the target may be tendered for acceptance to the VTO transaction manager for accumulation during the concerned acceptance period.
In a MTO, once the relevant approval for the bidder to proceed has been obtained, all offers must be open for acceptance for at least 30 calendar days from the date of announcement by the MTO transaction manager that shares in the target may be tendered for acceptance to the MTO transaction manager for accumulation during the concerned acceptance period.
Competing offers may be submitted anytime after publication of the same, but before five business days from the date of closing of the accumulation period of any ongoing VTO transaction.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
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 months preceding the date of announcing 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 months preceding the date of announcing 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/or shares. 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.
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?
It is not possible for a bidder to compulsorily purchase the shares of any remaining minority shareholders under the current Kuwait legislation. There are no squeeze out rules under the laws of Kuwait.
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?
The CML Rules provide that the offeror must treat all shareholders of a listed company equally. Both the offeror and the target must procure a report produced by an independent CMA-approved investment advisor who must provide his opinion on the offer and present the same to shareholders.
If an offeror buys shares at a price above the offer price, it must increase its offer to no less that 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 offeror must, within 30 days from the date of acquiring the 30% shareholding, make a mandatory offer for the remaining shares in the target.
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?
All offer documents must contain a description of how the offer is to be financed and the source of the financing. The principal lenders or arrangers of the financing must be named. An offer must not be subject to conditions that can only be satisfied at the discretion, and in the subjective judgement, of the bidder or the target company, or where their satisfaction is within the control of the bidder or the target company.
Only VTO takeover offers may be subject to conditions required by the bidder. However, in the case of an MTO takeover offer, no conditions may be imposed by the bidder.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
Other than the standard brokerage fees, there are no transfer duties payable on the sale of shares in a company incorporated in Kuwait and/or listed on the KSE. Moreover, capital gains resulting from the trading of listed shares are not subject to Kuwait income tax.
4.2 Are there special considerations in cross-border deals?
In practice, tax is imposed on non-Kuwaiti corporate bodies only, which are 'carrying on business in Kuwait'. Corporate bodies incorporated within Gulf Cooperation Council (GCC) countries and wholly-owned by GCC nationals are treated as Kuwaiti corporate bodies for the purposes of Kuwait tax law and are not subjected to income tax. Individuals, both Kuwaiti and non-Kuwaiti, are not subject to Kuwait income taxes.
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?
Hostile bids are rare in Kuwait, and Kuwaiti law is silent on the treatment of such bids.
The board of directors of a company is mandated to make decisions in the best interests of the company. Therefore, the target's board would treat any hostile bid as it would any MTO as provided for under the Instructions of the CMA on Procedures for Mandatory Acquisition Transactions.
5.2 How do targets use anti-takeover defences?
5.3 Is a target required to provide due diligence information to a potential bidder?
Copies of the following documents must be made available for viewing until the end of the bid period:
(i) the 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 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 regard to the financial arrangements in connection with the bid; and
(vii) any other documents which the CMA may request.
The board of directors of a bidder and target company must also provide their shareholders with information and advice to enable them to reach a decision on whether to accept a bid at least 15 working days before a shareholders' general assembly is held. Moreover, the bidder, the target company and/or their advisors may not present information to some shareholders without making the same available to all shareholders whilst the bid is being made or studied.
5.4 How do bidders overcome anti-takeover defences?
5.5 Are there many examples of successful hostile acquisitions?
There are limited precedents for takeovers in Kuwait under the CML Rules.
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?
It is rare for the board of a target company to have a formal agreement between the bidder and the target. It is more common for there to be a formal agreement between the bidder and the selling shareholder(s).
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
It is not uncommon to have a formal agreement between the bidder and the selling shareholders. These agreements would take the form of a typical English law document.
The terms of the agreement are generally left to the discretion of the parties. There are no specific rules in Kuwait dealing with break fees and parties are free to agree specific arrangements to this effect.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
Pursuant to Article 3 of the Competition Law Regulations to the Kuwait Competition Law (the Competition Law), 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 (CPB). 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. The Competition Law is largely untested.
7.2 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.
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?
The Competition Law Regulations provide that the relevant filings must be submitted to the CPB at least 60 days before the date fixed for the beginning or increasing the control. Parties who fail to provide the required notice shall pay a fine ranging between 2,000 and 10,000 Kuwaiti Dinars (approximately $6650 and $33,000). However, if the parties are also found to be engaged in monopolistic practices and actions harmful to competition, more severe penalties may be imposed.
7.5 How long are the anti-trust review periods?
7.6 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?
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?
Additional regulatory considerations will depend on the sector to which the target belongs.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
Parties must comply with the Kuwait Penal Law No. 31 of 1970 (the Penal Law). This prohibits bribery of Kuwait government officers and lists the penalties that may be imposed for violating the relevant provisions.
8.2 What are the potential sanctions and how stringently have they been enforced?
There can be severe criminal sanctions for violating the Penal Law and the Anti-Corruption Law. These include imprisonment of up to 10 years in addition to a fine equal to double the amount given, or promised to be given, to the public officer.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Under the Companies Law, each existing shareholder of a public joint stock company has a pre-emptive right to subscribe for their pro rata share of any new issuance of shares by the company.
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ASAR - Al Ruwayeh & Partners
About the author
John Cunha is a partner at ASAR. He has been with the firm since April 2006. He practices in the areas of banking and finance, capital markets and M&A. He received a law degree from the University of the Free State, South Africa in 1999. In 2002 he was aawarded a Master in business administration degree (MBA) from the University of the Free State, South Africa (in collaboration with De Paul University in Chicago, US). He also holds a master of laws degree (international trade law) (LL.M) from the University of Stellenbosch, South Africa. He 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. His practice languages are English, Afrikaans, and Portuguese.