Ezekiel Tuma and Christopher Walugembe of ASAR - Al Ruwayeh & Partners in Kuwait City look at the country’s new stock exchange listing rules
The Kuwait Capital Markets Authority (CMA) recently issued new rules to regulate the listing and delisting of companies on the Kuwait Stock Exchange (KSE) and listing of companies listed on the KSE on foreign stock exchanges by its Decision No. 23 of 2014 (the New Rules). The New Rules came into force on April 30 2014 and revoked the listing rules which had been issued by Decision No. 3 of 2011 (the Old Rules).
Although the New Rules maintain certain provisions that were part of the Old Rules, they introduced several key changes some of which are intended to ease the requirements for listing companies on the KSE and others are for clarification purposes. In some respects, however, additional restrictions and requirements have been introduced.
We highlight certain of the key changes introduced by the New Rules below.
New provisions on public shareholding companies
With respect to companies formed as public shareholding companies, the Old Rules included a requirement that they list during their second financial year. The New Rules re-iterate this position, and also set out the pre-requisites for such companies to list.
Reduction in shareholder equity requirements
The New Rules have reduced the percentage of shareholder’s equity required for a Kuwaiti closed joint stock company to be listed on the main market from 115% to 110% of the company’s weighted average paid up capital for the preceding two financial years. The same reduction has been applied to non-Kuwaiti companies seeking to be listed on the main market.
Reduction in profitability requirements
The New Rules have relaxed the profitability requirements for listing by reducing the net profits requirement for a closed joint stock company seeking to list on the main market from 7.5% to 5% of the company’s paid up capital for two years preceding the application for listing.
Under the Old Rules a company was required to raise 200 shareholders prior to gaining approval to list on the main market. However, as a significant change, under the New Rules, the CMA may approve listing of a closed shareholding company on the main market, on condition that the applicant raises a minimum of 200 shareholders within two months. If the minimum number required is not raised within this period, the CMA’s approval is rendered null and void. This is a welcome development, which now allows applicants to list and then undertake an initial public offer. The same principle applies to the parallel market, only that the number of shareholders required is 100, an increase from 50 under the Old Rules.
Additional requirements for listing introduced
In addition to other requirements, the New Rules require that the applicant must appoint a compliance officer in charge of liaising with the public and the regulatory authorities as well as a listing consultant. The applicant must also have complied with the corporate governance rules for listed companies issued by the CMA. The corporate governance guidelines were issued in June 2013 and incorporate comprehensive provisions on corporate governance.
Retention of shares of major shareholders
With regard to lock up periods applicable to major shareholders, the Old Rules required retention of 25% of the company’s capital held by key shareholders for a period of 2 years following listing. Under the New Rules, as applicable to closed joint stock companies seeking to list, a gradual release of locked up shares is provided for. The company is required to retain, through the clearing agency of the KSE, shares representing at least 25% of the company’s capital held by key shareholders (who are defined as shareholders owning at least 5% of the company’s capital) identified by the board of directors during the first year of listing. Such percentage may be reduced to 15% in the second year of the company’s listing. These requirements do not apply to mandatory take-overs and do not apply after the second year of the company’s listing.
Increase in percentages that may be listed in a foreign stock exchange
The New Rules have increased the percentage of shares that a company listed on the KSE may list on a foreign stock exchange from 30% to 40% of the company’s capital. This change appears to have been aimed at encouraging more joint listings by locally listed companies.
Under the New Rules, any listed company may apply for voluntary de-listing. This varies from the position under the Old Rules, which expressly excluded public joint stock companies from seeking voluntary de-listing. In our view, this change was necessitated by the recently promulgated Kuwait Companies Law (Decree 25 of 2012 as amended), which re-classified all listed companies as public joint stock companies.
Additionally, in the event that the shareholders of a listed company approve a voluntary delisting, the New Rules permit the board of directors to present a bid from the company’s shareholders or third parties to acquire the company’s shares before the company is de-listed.
The Old Rules included a sweeping ground for involuntary de-listing i.e. the listed company no longer satisfying any of the listing conditions. The New Rules have tightened this provision by referencing specific provisions, the breach of which could lead to involuntary de-listing. This development minimises the risks of companies inadvertently coming within the scope of de-listing due to non-compliance with the initial listing conditions on an on-going basis.
Remedial measures if a company’s capital is reduced
The New Rules introduce new provisions applicable to listed companies whose capital falls below the minimum capital required under the New Rules (e.g. KD10 million for companies listed on the main market) to submit a written report to the CMA setting out the reasons for such reduction with a proposed timetable to address the reduction within one financial year from the date of the reduction or receipt of a notice from the regulatory authorities, whichever is earlier. Consequences of un-remedied capital reductions include delisting or transfer to the parallel market.
ASAR - Al Ruwayeh & Partners
About the author
Ezekiel Tuma is a partner at ASAR Al Ruwayeh and Partners and has been with the firm since March 2008. Ezekiel practices in the areas of mergers and acquisitions, private equity, capital markets, corporate law, banking and finance, project finance, restructuring and insolvency, oil and gas. Ezekiel holds a Bachelor of Laws Degree (LL.B) awarded by Makerere University Kampala, Uganda in 1997. He also holds a Master of Laws Degree (First Class) (Commercial), (LL.M) awarded by the University of Cambridge, United Kingdom in 2000. Ezekiel was admitted to the Ugandan bar in 1999 and is a member of the International Bar Association.
ASAR - Al Ruwayeh & Partners
About the author
Christopher Walugembe is an associate at ASAR Al Ruwayeh and Partners and has been with the firm since February 2010. Christopher primarily practices in the areas of mergers and acquisitions, commercial and corporate law and franchising. Christopher obtained a Bachelor of Laws Degree (L.L.B) from Makerere University, Kampala, Uganda in 2004 and obtained a Master of Laws Degree (First Class) (Corporate and Commercial Law) (L.L.M) from the University of Cambridge, United Kingdom in 2006. Christopher was admitted to the Ugandan Bar in 2007 and is a member of the East African Law Society.