Acquisition Finance 2024 Comparisons

Acquisition finance transactions in the UAE have historically depended heavily on debt being provided from UAE-based banks. This was because such banks were more familiar with the regulatory and legal environment in the UAE, and as entities licensed by the UAE Central Bank were able to hold share security of all types of entities incorporated in the UAE, which, as explained below, is not the case for foreign lenders. Consequently, UAE-based banks have been able to leverage their relationships to negotiate terms that are considerably more advantageous compared to neighbouring regions. Nevertheless, international banks are able to facilitate their global networks for cross-border transactions and have also begun to play an essential role in UAE acquisition finance transactions.

Ultimately, the types of lenders vary based on various factors such as the nature of the acquisition, facility size, and credit rating and industry sector of the purchaser; however, in cross-border deals, it is common to see a mix of both local and international banks participating in an acquisition finance. For example, Saudi Arabia’s TAWAL raised USD1.42 billion in Islamic financing to fund the acquisition of the mobile telecommunications infrastructure unit of United Group from a group of UAE- and non-UAE-based Islamic financial institutions.

As an alternative to classical bank finance, direct lending from non-institutional lenders came to play a more active role in financing acquisitions in the UAE after the COVID-19 pandemic, especially with respect to mid-market and smaller transactions where the borrowers may struggle to secure financing from institutional lenders. Direct lenders in the UAE offer an attractive lending solution with more flexibility, faster execution times, and less stringent lending criteria. The most common direct lenders are hedge funds and venture capital and asset management firms. For example, in February 2023, Halo, the digital mortgage service provider in the UAE, announced that the firm had raised seven figures in its seed funding round, which was led by Watheeq Proptech Venture and Hambro Perks Oryx Fund. Additionally, direct lending is usually arranged through direct lending platforms (such as, for example, Dubai-based Beehive) both locally and globally.

Another alternative to bank lending in the UAE acquisition finance market is debt funds. Debt funds typically provide mezzanine debt (a hybrid debt issue that is subordinate to another debt issue from the same issuer – mezzanine debt is high risk, but offers some of the highest returns by comparison) and other forms of alternative financing arrangements to such transactions. These may be of a particular interest to the borrowers that may not meet the traditional bank’s credit requirements. This type of financing occupies a relatively small part of the market and is mainly relevant for the acquisitions made by private equity firms. Private credit funds are increasingly being raised by sponsors in the Middle East, and, while historically those funds have been domiciled outside the Middle East (eg, Cayman Islands), sponsors using local structures, particularly in the UAE Financial Freezones (the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)), have been observed recently. The DIFC introduced specific credit fund rules in 2022, and the ADGM’s credit fund rules were issued in 2023. Most of these funds focus on lending to SMEs, typically as venture debt or mezzanine debt. The authors see both conventional and Sharia-compliant private credit funds.

In the UAE’s acquisition finance market, buyers are typically either corporate entities or private equity investors, which is similar to other markets. In 2023, while sovereign wealth funds remained at the forefront of deal activity in the region to bolster their countries’ economic strategies, outbound deals emerged as the primary driver of M&A and acquisition finance deal value. The UAE secured the region’s largest M&A deal of the year with the acquisition of Univar Solutions by Apollo Global Management and Abu Dhabi Investment Authority (ADIA) for USD8.2 billion. Following closely were the acquisitions of US mobile games developer Scopely, Inc. by Savvy Games Group (owned by the Public Investment Fund from the Kingdom of Saudi Arabia) for USD4.9 billion, and the UAE’s Cvent Holding by a major asset manager and ADIA for USD4.7 billion, rounding out the top three deals. In the UAE, LBOs have been gaining traction in recent years, as investors look to make strategic acquisitions in a range of sectors, such as healthcare, technology, and infrastructure. Dubai, in particular, has been at the forefront of this trend, as the government seeks to capitalise on the city’s position as a major transport and technological hub. Similarly, LBOs in the UAE are focused on healthcare, as the country has a rapidly growing population, with an increasing demand for healthcare services.

There is no significant difference between the governing law provisions for finance documents relating to corporate loans, acquisition finance, and leveraged buyouts. The preference of governing law for such documents tends to be the laws of England and Wales for transactions that are completed for free-zone entities. For mainland entities such transactions are typically governed by the laws of the UAE and subject to the jurisdiction of the UAE courts.

Depending on the nature of the transaction that is being considered, the LMA “Leveraged/High Yield” and the LMA “Leveraged – Senior/Mezzanine” precedent documents will typically serve as the basis upon which the parties begin negotiations, and the documents will be amended to reflect the nuances of the specific transaction.

In addition, for Sharia-compliant transactions, LMA-based forms can also be the starting point for negotiations that more sophisticated and established banks and borrowers will accept and expect. This may be more challenging for smaller lending institutions and borrowers that may not be as familiar with such forms.

There are no specific language requirements. The documents will typically be in English, however, an Arabic translation (or execution of an English-Arabic bilingual document) might be required for the documents relating to pledge agreements in respect of real estate or shares related to mainland companies as well as to the transfer of shares in mainland companies. Arabic translations may also be required if the documents are governed by UAE law and submit to the jurisdiction of UAE courts.

Similar to mainstream markets, lenders will typically require legal enforceability opinions relating to the enforceability of the financing documents and the transfer of shares under the appropriate governing laws, and a legal capacity opinion relating to the capacity of the relevant borrower (and the other obligors) and the seller of shares to enter into the transactions they are entering into.

A law firm’s legal opinion will typically carve out providing any opinion in relation to compliance of the documents with Sharia principles. If the respective transaction needs to comply with Sharia principles, specialised Sharia advisers will typically issue a Fatwa in respect of the transaction, confirming that the transaction is Sharia-compliant and such advisers typically audit the transaction on a regular (often annual) basis to ensure that it continues to comply with Sharia principles.

External financing for acquisitions is less prevalent in the UAE in comparison to other jurisdictions, and a significant majority of acquisitions continue to be financed by the purchaser’s own funds. Where the transactions have a finance requirement, the sources of such financing continue to be largely regional with UAE-based banks, direct lenders, sponsors and sovereign wealth funds driving the market, especially in respect of acquisitions related to areas of public interest.

The majority of the acquisition financing transactions in the UAE (both domestic and cross-border) are usually structured as senior term loans, whereby the borrower provides the lenders with corporate or bank guarantees. However, given UAE banks’ ability to negotiate rather favourable terms, as mentioned in 1.1 Major Lender-Side Players, it is not uncommon to see personal guarantees (see 6.1 Types of Guarantees) from the ultimate beneficial owner of the borrower in such transactions (although the authors expect to be seeing more secured financings in the future – refer to 6.2 Restrictions, and “Key lenders’ security protections” in the UAE Trends and Developments article for Acquisition Finance 2024). In addition to the primary facility documentation, the borrower will likely sign a promissory note, a subordination agreement for its remaining debt, a security assignment in respect of certain assets (such as bank accounts or insurance proceeds) and security assignment of rights under the sale and purchase agreement in relation to a target’s shares. It is also common to see a call option agreement in relation to the target shares executed between the borrower and the lender (provided that the target company is incorporated in DIFC or ADGM) to ensure swift transfer of such shares to the lenders in case the event of default occurs.

Although most acquisitions are funded through conventional finance, there are a number of Islamic finance structures that may be utilised to facilitate financing where a party has to adhere to Sharia such as murabaha, musharaka, mudaraba, sukuk, and ijara structures. However, it is worth noting that the covenants of the Sharia-compliant structures are often more onerous than those found in conventional facilities, as they include obligations on the borrower to ensure that they take actions that are Sharia-compliant. As a general point, the UAE does not benefit from the covenant-lite approaches that will be seen in the more mature markets.

While mezzanine loans, PIK loans, high-yield bonds, private placements, and asset-based financings are all open to borrowers in the UAE and have the same application as in other markets, they are not as prevalent or commonplace as in more mature markets.

Although such structures are not prevalent in acquisition financing transactions in the UAE, mezzanine financing is a combination of debt and equity financing that gives the lender the right to convert the debt to an equity interest in the target company in case of default. It is a form of junior debt and can be structured in a number of ways to suit the cash flows of the target company. In the context of mezzanine financing, PIK is a periodic form of payment in which the interest payment is not paid in cash but rather by increasing the principal amount of the security in the amount of the interest.

Bridge loans are typically a short-term form of finance. In acquisition financing, this type of arrangement is more common amongst related corporate entities in order to remove an existing obligation prior to securing a longer-term financing solution.

Although such structures are not prevalent in acquisition financing transactions in the UAE, entities in the region that require a Sharia-compliant structure may consider a sukuk. The sukuk operates in a similar way to a traditional bond structure; however, in order to ensure that the investor has genuine participation in the business activity and noting that the concept of “interest” is prohibited, the issuer of a sukuk sells an investor group a certificate, and then uses the proceeds to purchase an asset that the investor group has direct partial ownership interest in. The issuer must also make a contractual promise to buy back the bond at a future date at par value.

A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than publicly by way of an initial public offer, which reduces the amount of regulatory compliance issues. Private placements on a smaller scale are utilised in the UAE and are favoured by high-net-worth individual investors, especially in the Sharia-compliant space.

Although such structures are not prevalent in acquisition financing transactions in the UAE, entities in the region that require a Sharia-compliant structure may consider utilising a mudaraba and/or ijara in order to replicate the more conventional asset-based financing structures while ensuring compliance with Sharia principles.

Intercreditor agreements are commonplace and typically follow the LMA format and will include elements such as:

• the ranking of loans given to the borrower between the relevant lenders;
• the sharing of a transaction security between the lenders;
• a lender’s decision-making process in relation to consents and waivers that shall be given under the financing documentation;
• enforcement and enforcement procedures;
• the subordination of intra-group loans made between entities related to the relevant borrower; and
• provisions governing set-off of the loans granted by such borrower to the target if the lenders enforce security over the target shares.

If a transaction involves senior and mezzanine lenders, the intercreditor will provide that the financing provided by the senior lenders will have first-ranking priority and will be entitled to the proceeds of any security ahead of the mezzanine lenders. Any intra-group loans provided to the relevant borrower will be subordinated to both the senior and mezzanine lenders as is similar in more mature markets.

A similar approach to that described in 4.1 Typical Elements will be taken regardless of whether the financing involves a bank loan or is structured as a bond.

It is typical in acquisition finance transactions for a senior lender to also act as the hedge counterparty. As this is the case, the liabilities of the hedge counterparty will be treated as the most senior obligations of the borrower.

An acquisition finance will typically involve security being granted over the shares of the target entity and (to the extent permissible by the financial assistance rules detailed at 5.5 Financial Assistance) the assets of the target entity and other obligors that are related to it.

Shares

The process of taking good security over the shares of the target in the UAE differs depending upon whether the company is incorporated with the department of economic development (ie, “Onshore”) or in a free zone such as the DIFC or the ADGM. In each case, taking security over the shares of the relevant company will involve the owner of the relevant shares (the Pledgor) and the relevant security agent or lender entering into a share pledge agreement. Further details on this process are provided at 5.2 Form Requirements.

Bank Accounts, Inventory, Intellectual Property (IP), and Receivables

Taking security over bank accounts, inventory, IP, and receivables will involve the relevant parties entering into a security document; however, the specific process of taking and registering security will differ depending on whether security is being taken onshore or in a free zone. Further details on the process of taking security are outlined in 5.2 Form Requirements and 5.3 Registration Process.

Real Property

Taking security over real property will involve the parties entering into a mortgage agreement. As with the examples above, the specific steps required to grant a mortgage and register it will differ depending on whether the asset is located onshore or in a free zone. Further details are provided in 5.2 Form Requirements and 5.3 Registration Process.

Movable Assets (Motor Vehicles) – Onshore

In the UAE, security over movable assets such as motor vehicles can be granted to banks that are licensed by the UAE Central Bank and will involve a mortgage agreement being entered into between the registered owner of the vehicle and the relevant bank. The mortgage must also be registered with the UAE Road and Transport Authority (RTA), which will issue a mulkiya (ie, a registration card) indicating that the car is mortgaged to the relevant bank.

Shares – Onshore

Federal Decree Law No. 32 of 2021 (CCL) provides that an entity may be incorporated as a limited liability company (LLC), a public joint stock company (PJSC), or a private joint stock company (PrJSC). The procedure of pledging the shares of an LLC involves the parties entering a share pledge that is in Arabic or, if in English, translated into Arabic by a translator who is certified by the Ministry of Justice of the UAE. The share pledge must be signed before a notary public and subsequently perfected by being registered with the UAE Department of Economic Development (DED). Once the pledge has been registered, it will not be possible to register a transfer of shares without the consent of the pledgee. It should also be noted that only banks that are licensed by the UAE Central Bank may hold security over the shares of onshore companies, therefore it may be necessary to appoint a security agent that is properly licensed in cases where the lender is a foreign entity.

In addition to entering a share pledge agreement, the procedure for pledging shares in a PJSC or PrJSC is completed by the physical delivery of the share certificates to the pledgee and entry of the pledge in the company register (although if the shares are not in certificate form, physical delivery is not required). A PJSC will usually be required to be listed at one of the UAE’s stock exchanges and the pledge should be recorded in the share register maintained by the relevant exchange. A PJSC will appoint a share register keeper (such as the Dubai Financial Market or Abu Dhabi Securities Exchange) to record the pledge. Upon such registration, the pledgee typically has the right to collect dividends and entitlements attached to the shares, although in most cases these are returned to the borrower (with certain limitations) unless the borrower defaults.

Shares – DIFC

The process of taking security in the DIFC is generally governed by the DIFC Law No. 4 of 2024 (the DIFC Security Law) and the DIFC Security Regulations of 2019. The DIFC does not provide different rules depending on the asset to be secured (excluding land and real estate); hence, in order to be effective, all security must be registered with the DIFC Security Registrar through the filing of a “financing statement”.

The financing statement should be filed as soon as possible after the execution of the relevant security agreement and will lapse five years from the date it is filed (notwithstanding the term of the security agreement itself), pending a continuation statement. Based on the above, security is granted in the DIFC over the shares of a company by the relevant parties entering into a share pledge agreement and such agreement being registered in the DIFC by filing a financing statement (which is in a form prescribed by the DIFC) with the DIFC Security Registrar. The share pledge agreement should be in written form. However, there is no prescribed form of share pledge agreement. Further details on the process registration of security in the DIFC are provided in 5.3 Registration Process.

Shares – ADGM

Similar to the DIFC process, taking security over the shares of a company incorporated in the ADGM requires the parties to enter into a share pledge agreement and for that agreement to be registered through the ADGM’s online registry portal. There is no particular prescribed form for a security agreement in the ADGM. Further details on registration are provided in 5.3 Registration Process.

Bank Accounts, Inventory, IP, and Receivables – Onshore

Taking security over receivables, inventory, IP, and bank accounts that are located onshore is governed by Federal Law No. 4 of 2020 (the Pledge Law) and Federal Cabinet Resolution 29 of 2023 (the Executive Regulations). The process of taking security over bank accounts, inventory, IP, and receivables involves the parties entering into a security agreement that must subsequently be registered on the register created by the Pledge Law (the Onshore Register). The Executive Regulations also require that where security is taken over a bank account, an account control agreement needs to be entered into between the relevant account’s bank and the security agent (unless the lending entity is also the relevant account’s bank). Unlike with shares, it is not required that the pledgee of security be a bank licensed by the UAE Central Bank and the security agreement does not need to be signed before a notary public at the point of execution.

Bank Accounts, Inventory, IP, and Receivables – DIFC

As mentioned above, the process of taking security in the DIFC does not differ depending on the asset to be secured (excluding land and real estate). Therefore, the process of taking security over bank accounts, inventory, IP, and receivables will typically involve entering into a security agreement and filing a financing statement with the DIFC Security Registrar.

Bank Accounts and Receivables – ADGM

The creation of charges over the assets of an ADGM company is governed by the ADGM Companies Regulations 2020 (the ADGM Companies Regulations). This process involves the parties entering into a security agreement, which must be registered as outlined at 5.3 Registration Process.

Real Property – Onshore

Real estate assets located onshore may be mortgaged to a bank that is licensed by the UAE Central Bank. In order to perfect a valid mortgage in the UAE, the mortgage agreement that is prescribed by the relevant Emirate’s land department (in the case of Dubai, this is the Dubai Land Department) must be (i) executed in writing in Arabic in the presence of a notary public or the relevant land department and (ii) provided to the mortgage registrar with the land department or the local municipality of the relevant Emirate.

Real Property – DIFC

Property within the DIFC is governed by DIFC Law No. 10 of 2018 (the DIFC Real Property Law), which outlines that real estate transactions must be registered in a central register administered by the DIFC and should include:

• a description to identify the property;
• a description to identify the interest to be mortgaged; and
• a description of the secured debt or liability.

A DIFC mortgage must be in written form and registered with the DIFC Real Property Registrar.

Real Property – ADGM

The ADGM Real Property Regulations 2015 (the ADGM Property Regulations) govern the process of taking security over property within the ADGM and provide that the Registrar shall maintain a real property register that shall record all documents relating to the creation or transfer of property rights in the ADGM. To create a mortgage over real estate in the ADGM, the parties must enter a written mortgage contract and register the mortgage with the ADGM registration authority.

Movable Assets (Motor Vehicles) – Onshore

Due to the nature of motor vehicles, they are secured by the parties entering a written commercial mortgage and such mortgages are registered with the RTA. Further details on registration are provided in 5.3 Registration Process.

Shares – Onshore

As mentioned above, a share pledge over the shares of an LLC must be registered with the DED. The process of registration involves providing a copy of the notarised share pledge to the DED and paying the fees prescribed by the DED. After the fees are paid, the DED will issue a certificate confirming the registration of the certificate.

Shares – DIFC

As mentioned above, a share pledge over the shares of a DIFC company must also be registered with the DIFC Security Registrar. Registration involves providing the DIFC Security Registrar with a complete financing statement and payment of a USD5,000 fee. Following registration, the DIFC Security Registrar will provide a confirmation of registration. It should also be noted that an initial financing statement will lapse after five years and the parties will be responsible for ensuring that they file a continuation statement, at a cost of USD1,000, in order to ensure that the registration of security is continued.

Shares – ADGM

As mentioned above, a share pledge over the shares of an ADGM company should be registered using the ADGM’s online portal, which involves filling out a questionnaire that is prescribed by the ADGM Security Registrar, providing a certified copy of the share security agreement and paying fees prescribed by the ADGM, which are approximately USD300. Following registration, the ADGM will provide a certificate confirming details of the registration. The registration in the ADGM remains in place until it is discharged using the same portal that was used for registration.

Bank Accounts, Inventory, IP, and Receivables – Onshore

Registering security on the Onshore Register involves using an online portal to fill out a prescribed online questionnaire, which will include details identifying the relevant pledgor and the pledgee, as well as the assets that are being secured. Registration will also involve the payment of fees prescribed by the Executive Regulations, which range from USD13 to USD55.

Bank Accounts, Inventory, IP, and Receivables – DIFC

The process of registering security in the DIFC does not differ for bank accounts and receivables and the process as outlined above will also apply to a security document relating to bank accounts and receivables.

Bank Accounts, Inventory, IP, and Receivables – ADGM

The process of registering security in the ADGM does not differ for bank accounts and receivables. Therefore, the process outlined above will also apply to a security document relating to bank accounts and receivables.

Real Property – Onshore

Registering a mortgage onshore involves making an application and paying fees to the land department of the relevant Emirate. In Dubai, in accordance with the Executive Council Resolution No. 3 of 2013 Approving Fees of the Land Department, the Dubai Land Department currently charges a fee of 0.25% of the mortgage value to register the mortgage.

Real Property – DIFC

Registering a mortgage in the DIFC involves making an application and paying fees to the DIFC Real Property Registrar. It should also be noted that the cost of registration varies in the DIFC; for example, a mortgage fee is USD100 for a conventional loan and USD273 for an Islamic mortgage. If the property has not yet been registered with the DIFC Real Property Registrar, an additional fee (currently 5% of the total value of the property) is also payable.

Real Property – ADGM

Registering a mortgage in the ADGM involves making an application to the ADGM registration authority and paying the applicable fees. In relation to the fees, the application to register a mortgage is charged at 2% of the principal amount of the value secured by the mortgage and is capped at USD300,000.

Movable Assets (Motor Vehicles) – Onshore

Registering a mortgage over a vehicle with the RTA involves making an online application through the RTA website and paying the applicable fees, which range from USD100 to USD350. After registration has been completed, the RTA will issue a mulkiya indicating that the relevant vehicle has been mortgaged.

The main restrictions on upstream security are outlined in 5.5 Financial Assistance and 5.6 Other Restrictions.

Onshore

The CCL 2021 states that neither a commercial company nor any of its subsidiaries may do the following:

• provide loans;
• grant gifts;
• provide collateral; or
• provide a guarantee,

in each case to a third party to enable that third party to purchase any securities issued by the Company (Article 224).

Prior to the issuance of the CCL 2021, the UAE Ministry of Economy issued guidance, by way of Ministerial Resolution No. 272 of 2016, confirming that the financial assistance prohibition will not apply to LLCs under the relevant commercial companies law in force at that time. It is currently not clear whether the intention is for this provision to apply to LLCs going forward under the CCL 2021.

DIFC

For the DIFC, a public company and its subsidiaries are prevented from providing financial assistance by granting security or providing guarantees in relation to the acquisition of shares in itself or in a holding private company unless:

• such assistance would not materially prejudice the interests of the company and its shareholders or the company’s ability to discharge its liabilities as they fall due and must be approved by the shareholders (90% in share value);
• finance or financial assistance is part of the company’s ordinary business and is on ordinary commercial terms; or
• it is specified in the DIFC Company Regulations (2018) as exempt.

ADGM

In relation to the ADGM, Chapter 2 of Part 17 of the ADGM Companies Regulations generally prevents a public company or a subsidiary of a public company (whether private or public) from providing financial assistance by granting security, a guarantee, or an indemnity in relation to the acquisition of shares in such public company. The ADGM Companies Regulations also prohibit a public company from giving financial assistance for the acquisition of shares in its private holding company. This distinction between public and private companies largely aligns with the Companies Act 2006 in the United Kingdom.

There are no specific tests relating to the granting of security; however, it is important to ensure that any transaction involving the granting of security is completed in accordance with the constitutional documents of the relevant company and that directors ensure that their duties are complied with.

There are no specific principles for enforcement that are unique to acquisition finance transactions in the UAE. As is the case with financings generally, upon a default, the holder of security may take enforcement action to take possession of or realise the assets that are subject to security. In most instances, it will be necessary to take court action to enforce a security taken in the UAE. This is particularly the case with a security that is taken over assets that are located onshore; however, security taken in the DIFC or the ADGM may provide the pledgee with certain self-help tools. For example, in the case of a share pledge, a pledgee will receive share transfer instruments, director resignation letters, irrevocable undertakings, and powers of attorney to facilitate enforcement action.

A guarantee (either personal or corporate) is commonplace for almost all financing transactions in the UAE. Typically, the guarantee will be provided by a parent or shareholder or subsidiary in favour of the lenders, noting that it will be an entity/person of substance and subject to an assessment of the restrictions set out in 6.2 Restrictions. As mentioned previously, it is not uncommon to see personal guarantees from the ultimate beneficial owner of the borrower in connection with these types of transactions; however, the recent amendments to UAE legislation and court practice that ultimately require banks to have “sufficient” security may limit the applicability of personal guarantees in the future (for further details, see “Key lenders’ security protections” in the UAE Trends and Developments article for Acquisition Finance 2024). Another popular form of guarantee in the UAE is a bank guarantee, which is offered by a reputable lending institution. The lending institutions offer several forms of guarantee, including payment guarantee, tender guarantee, tax and customers guarantee, performance guarantee, and advanced payment guarantee. The most relevant in an acquisition finance context is the payment guarantee, which provides the comfort to a lender that if the borrower fails to meet its payment obligations under the documentation on the acquisition date, they will be able to demand the payment from the lending institution in its role as guarantor. It should also be noted that guarantees are not always permitted in connection with Sharia-compliant transactions; however, lenders will typically rely on a determination from their relevant Sharia advisers.

There are no explicit restrictions on UAE entities providing related company guarantees or benefiting from guarantees from foreign-registered entities. However, the following potential pitfalls should be noted in relation to financial assistance.

• Related company guarantee – in particular, a PJSC or PrJSC may not provide a guarantee to a member of its board or any relative of such person. Furthermore, the CCL requires any transaction (including providing or benefiting from a guarantee) with a related party to be approved by the board of directors and, if the value of such transaction is greater than 5% of the company’s capital, by the company’s general assembly.
• Assistance by target – as mentioned in 5.5 Financial Assistance, the CCL prohibits companies and their subsidiaries from providing financial aid to any shareholder to enable the shareholder to acquire shares, bonds, or Islamic bonds (sukuk) of such company. Such financial assistance includes providing guarantees. Also, while there is no specific body of law governing acquisitions in the UAE, there are some applicable provisions in Federal Law No. 2 of 1987 (Civil Code), Central Bank circulars, Securities and Commodities Authority regulations, and the listing rules for the UAE’s three exchanges. As mentioned above at 5.5 Financial Assistance, the DIFC and ADGM have separate legislation in each case concerning financial assistance in acquisitions. These rules should be assessed separately in respect of the fact pattern for the acquisition.
• Financial stability – it is also worth noting the rules and regulations of each Emirate in the context of an acquisition. For example, any entity controlled by or that has received support from the government of Dubai, may require approval (or an exemption) from the Supreme Fiscal Committee pursuant to Law No. 8 of 2022 Regulating the Public Debt of the Government of Dubai prior to granting guarantees to a third party.
• Capacity – as with any jurisdiction, it is important to review the constitutional documents of a company giving a guarantee to ensure that it is fully authorised to act. As a condition precedent to closing, a lender would insist on a legal opinion regarding the capacity of the guarantor to enter into the arrangements contemplated therein. In general, the directors’/managers’ duties requirements under the CCL require the directors/manager to “preserve” the company’s rights, which is similar to the English law requirement that directors act in the best interests of the company. As a general rule, provided that the giving of a guarantee is considered to be in the best interests of the group as a whole, there should be no issues from a directors’ duties perspective.
• Sufficiency – recent changes in UAE law regarding guarantees include the implementation of Federal Law No. 50 of 2022 (the New Commercial Code) and Federal Law No. 23 of 2022 (the Banking Law Amendment). The New Commercial Code now requires banks to have sufficient securities or guarantees against loans they provide, while the Banking Law Amendment introduces new requirements for licensed financial institutions to obtain sufficient guarantees for all types of facilities provided to natural clients and private sole proprietorships. The application and interpretation of these laws, particularly regarding unsecured financing, remain uncertain, with conflicting views from different jurisdictions within the UAE. See also “Key lenders’ security protections” in the UAE Trends and Developments article for Acquisition Finance 2024.

There is no requirement for guarantee fees.

The UAE is primarily a civil law jurisdiction that does not have a specific set of predetermined equitable subordination rules. However, legislation exists that states that certain debts of the borrower will be prioritised in the event of an insolvency.

Onshore

Federal Law No. 9 of 2016 (the Bankruptcy Law) states that the following types of debts shall be considered preferential debts and shall be repaid ahead of unsecured debts:

• any court costs or fees (including the trustee’s and expert’s fees and any expenses disbursed for serving the common interest of the lenders);
• the outstanding end-of-service gratuity, wages, and salaries of the borrower’s employees, staff, and servants that are payable on a regular basis (excluding any allowances, bonuses or other casual payments or any other benefits, whether they are in cash or in kind), provided that the total thereof shall not exceed the wage or salary for three months maximum;
• the maintenance debt determined on the borrower pursuant to a judgment issued by a competent court;
• amounts payable to government authorities;
• the fees agreed upon between the creditor and any expert appointed to commence the procedures, including the fees of legal counsel; and
• any fees, costs, or expenses arising after the date of the decision to commence the procedures for the purpose of securing commodities and services for the borrower or for continuation of the performance of any other contract for the benefit of the borrower’s business or assets or any fees, costs, or expenses arising for the continuation of the borrower’s business after the date of commencement of the procedures in accordance with the provisions of the Bankruptcy Law.

DIFC

In the DIFC, the Preferential Creditor Regulations state that (i) any sum that is owed by a borrower that is a contribution to a pension scheme on behalf of the borrower’s employees or (ii) any sum that is owed to employees of the borrower will be deemed “preferential debts”, which are to be paid in priority to unsecured debts or debts secured by a security interest over all or substantially all of the undertakings or assets of a borrower.

ADGM

The ADGM Insolvency Regulations state that amounts that are (i) owed by the borrower to a person who is or has been an employee of the borrower and (ii) payable by way of non-discretionary salary or contributions to an occupational pension scheme in respect of the whole or any part of the three-month period before the borrower is wound up or placed into administration, will be deemed preferential debts and be paid above unsecured debts.

Onshore

The Bankruptcy Law states that the following transactions may be unenforceable against the creditors of a borrower, if they occurred within two years of formal proceedings being initiated:

• donations, gifts, or gratis transactions excluding customary small gifts made by the borrower;
• any transactions where the borrower’s obligations significantly exceed the counterparty’s obligations, whether they are cash or in-kind liabilities;
• payment of any debt before its maturity date, regardless of the mode of payment;
• payment of matured debts with something other than the one agreed upon between the borrower and the creditor or in a manner different from that usually applied in paying such kind of debts; and
• the creation of any new security over the borrower’s assets to secure pre-existing debts.

DIFC

The DIFC Insolvency law states that if a preference or a transaction at an undervalue is completed by a borrower:

• in the case of a “connected person”, six months before the borrower goes into liquidation or administration, and
• in the case of an unconnected person, two years before the borrower goes into liquidation or administration,

the court may make an order requiring the relevant person to rescind the transaction and put the borrower in the position it would have been in had the transaction not been completed.

ADGM

The ADGM Insolvency Regulations provide for substantially the same position as the DIFC, which largely corresponds with the position of the Companies Act 2006 in the United Kingdom.

The UAE does not impose a stamp duty. However, if the target company holds real estate in the UAE, then registration fees may be payable upon transfer.

Under the recently enacted UAE corporate tax, a 0% withholding tax rate currently applies to payments to non-resident persons on UAE-sourced income. Given that no withholding taxes apply, there is not a qualifying lender concept.

There is not any thin-capitalisation rule; however, the UAE corporate tax law has various limitations on the deductibility of interest, including transfer-pricing rules and a rule limiting net interest expenditure to 30% of EBITDA.

In the UAE, there are various industries subject to regulation, and companies engaging in commercial activities within these industries are governed by industry-specific authorities, and must adhere to particular laws and regulations. For example:

• banks are regulated by the UAE Central Bank and governed under Federal Decree-Law No 14 of 2018 Regarding the Central Bank and Organisation of Financial Institutions and Activities (as amended) (CBR Law) – the Higher Shari’ah Authority (or the Higher Sharia Authority) which was established pursuant to the CBR Law might need to be involved or consulted to approve the acquisition transactions in relation to the Islamic financial institutions (UAE-based banks);
• pharmaceutical companies are regulated by the health authority in each emirate (eg, in Dubai this is the Dubai Health Authority) and are governed under Federal Law No. 8 of 2019 concerning Medical Products, Profession of Pharmacy and Pharmaceutical Institutions (as amended); and
• insurance companies are regulated by the UAE Central Bank following the merger of the Insurance Authority into the Central Bank under Decretal Federal Law No. 25 of 2020 amending certain provisions of the CBR Law. Accordingly, all rules, decisions, circulars, and regulations issued by the former Insurance Authority under the provisions of the Federal Law No. 6 of 2007 on the Establishment of the Insurance Authority and Regulation of Insurance Operations continue to apply to all licensed institutions and activities until they are replaced by the Central Bank.

Where this is the case, a transaction that involves a change in the ownership of the target entity that is licensed by the relevant authority will need to obtain pre-approval from that authority (ie, the Central Bank or the relevant Emirate’s health authority). Lenders will typically require such approvals as a condition precedent to their disbursement.

Since the UAE Cabinet has issued a Cabinet Decision No. 55 of 2021 on the Determination of the List of Strategic Impact Activities (the Strategic Impact Resolution) foreign investors willing to acquire companies which carry out activities with a “strategic impact” must submit a licence application with the DED of the relevant Emirate. The DED will then work with the relevant regulatory authority (eg the UAE Central Bank) which will ultimately decide whether to permit the foreign investors to acquire the shares in the relevant company. The strategic activities as per the Strategic Impact Resolution are (among others) those related to security, defence and military activities, financial services activities, and telecommunications activities (refer to “Foreign ownership restrictions” in the UAE Trends and Developments articleAcquisition Finance 2024).

Separately, it is also worth mentioning that transfers of shares in companies in various commercial sectors require obtaining a special “no objection certificate” from governmental authorities evidencing that parties to the transaction are following special industry rules. For example, a special “no objection certificate” from governmental authorities would be required in the case of a transfer of shares in a real-estate owner or a developer.

Finally, in 2023 a new competition law was enacted – Federal Decree-Law No. 36 of 2023 on the Regulation of Competition which entered into force on 29 December 2023 and replaced the previous Federal Decree-Law No. 4 of 2012. Under the old regulation an M&A transaction was required to be filed only if the combined market share of the parties exceeded 40%. This was a relatively high threshold resulting in few filings in the UAE. Under the new law the parties intending to participate in an M&A transaction (“economic concentration” is a measure of the extent to which an industry/market is dominated by one or more firms, using the “concentration ratio” – the percentage of the total production/capacity held by the largest firms in the particular industry/market) are required to notify the UAE Ministry of Economy and obtain clearance before the transaction, if certain thresholds are met:

• turnover threshold – exceeding a certain amount of the total annual sales of the parties in the relevant market; or
• market share threshold – combined share of the parties’ transactions as compared to the total transactions in the relevant market exceeds a certain percentage of the market share.

Both the turnover amount and the market-share percentage are yet to be determined by the UAE Council of Ministers, who are expected to issue respective implementing regulations with the above thresholds within six months from the date of entry into force of the new law. Publication of these thresholds may lead to an increase of transactions that will require antitrust clearance in the UAE. All of the above should be considered by the lenders willing to provide financing for the purposes of acquiring/investing into regulated business in the UAE.

M&A transactions with respect to publicly listed companies are subject to specific disclosures, filings, and notifications. Publicly listed companies have continuous disclosure obligations, and, in situations where there is a possible merger or acquisition, the involved publicly listed companies and the acquirer typically request consent to postpone the obligation to disclose information about the negotiations until they sign a binding contract. Such a request must be submitted by either the publicly listed companies engaged in the merger or both the publicly listed company and the acquirer in an acquisition scenario.

Mergers

Merger transactions will require the following key filings and approvals:

• a formal application to the Securities and Commodities Authority (SCA) that will include details of the merger, and the approval process involves a review of the terms of the transaction and the financial standing of the companies involved;
• an initial approval from the relevant industry-specific regulator;
• an initial approval from the DED of the relevant Emirate;
• approval from the Competition Regulation Committee of the UAE Ministry of Economy subject to exceeding antitrust thresholds; and
• disclosure to the relevant stock exchange market when the merger agreement is signed.

Acquisitions

In essence, the acquisition of shares listed on the relevant stock exchange must typically be conducted via the market-trading system, utilising registered brokers, unless the transaction falls under certain exemptions or is an over-the-counter (OTC) transaction.

Simultaneously, the acquisition of 30% or more of a publicly listed company necessitates several steps, including obtaining preliminary approval from SCA, securing initial approval from the relevant industry-specific regulator, and disclosing the purchase order execution to the relevant stock exchange market. OTC transactions also require preliminary approvals from SCA and the relevant industry-specific regulator.

As per the Securities and Commodities Authority Decision No. 18/RM/2017 of 8 June 2017 on the Rules of Acquisition and Merging of Public Joint Stock Companies (M&A Rules) when an acquirer obtains 30% plus one share or more of a publicly listed company through acquisition, it triggers a mandatory tender offer (MTO) (Article 8(1) of the M&A Rules). In this scenario, the acquirer is required to inform the SCA of its intention to move forward with the mandatory tender offer. In the event that the acquirer chooses not to continue with the MTO, the ownership pertaining to it will decrease to 30% or less within three months of informing the SCA. The minimum requirement for a successful MTO is to acquire 50% plus one share or more of the publicly listed company (Article 8(3) of the M&A Rules). Failure to meet this requirement will result in the cancellation of the MTO, and the ownership stake will be reduced to 30% or lower.

Nasdaq Dubai, Abu Dhabi Securities Exchange (ADX), and Dubai Financial Market (DFM)

The NASDAQ Dubai is a stock exchange that operates within the DIFC and is subject to regulation by the Dubai Financial Services Authority (DFSA). A Nasdaq Dubai-listed company has disclosure and reporting obligations both to Nasdaq Dubai and the DFSA. The Takeover section of the DFSA Rulebook requires a person who acquires 30% or more of the voting rights of a listed company to make a mandatory takeover bid.

Since the ADX and DFM are “onshore” stock exchanges and regulated by the SCA, acquisition of shares of public companies listed on these stock exchanges is subject to the M&A Rules described above and other UAE mainland legal requirements and regulations.

UAE Free Zones

The UAE is home to an expanding number of offshore free zones, such as the DIFC, the ADGM, Jebel Ali Free Zone, and the Dubai Multi Commodities Centre. Lenders to acquisition finance transactions prefer to structure transactions to ensure that the borrower or a key obligor is incorporated in a free zone such as the DIFC or the ADGM.

The enforcement of court judgments between onshore and financial free zones in the UAE is subject to special rules that provide a streamlined procedure between the financial free zone and the Emirate in which it is located. The specific procedures for enforcement depend on the relevant financial free zone.

For the DIFC, the procedures for the enforcement of Dubai court judgments and arbitral awards ratified by the Dubai courts in the DIFC (and vice versa) are outlined in Article 7 of Dubai Law No. 12 of 2004 on the Judicial Authority at Dubai International Financial Centre (as amended). Additionally, the ADGM Court Regulations and a Memorandum of Understanding (2018) between the ADGM Courts and the Abu Dhabi Judicial Department provide for the reciprocal recognition and enforcement of judgments of the ADGM courts by the Abu Dhabi onshore courts (and vice versa).

Enforceability of Foreign Judgments

The UAE has entered into agreements with several countries for the purpose of judicial co-operation and the recognition of judgments and arbitration awards. The UAE also is a party to the 1983 Convention on Judicial Co-operation between States of the Arab League (Riyadh Convention), which has provisions governing the recognition and enforcement of judgments in member states. Generally, the jurisdiction of the court that issued a judgment from a Riyadh Convention member state or a state with which the UAE has a treaty is not reviewed, and the foreign judgment is likely to be enforced, subject to certain exceptions.

Enforcement of a judgment from a country with which the UAE does not have a bilateral treaty requires compliance with the provisions of the Federal Decree-Law No. 42/2022 dated 3 October 2022 on the Promulgation of the Civil Procedure Law (New CPL) which came into force on 2 January 2023, and which repealed the Federal Law No. 11/1992 of 24 February 1992 on the Civil Procedures Law. The main test for enforcement in such cases is satisfaction of certain conditions described in Article 222(2) of the New CPL, such as (i) courts of the UAE have no exclusive jurisdiction to try the dispute; (ii) judgment or order was issued by a court having jurisdiction in accordance with the law of the country in which it was issued and duly endorsed; and (iii) the parties to the action in which the foreign judgment was issued were summoned to attend, and were duly represented. The UAE ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention) in 2006, and UAE courts have since been enforcing foreign arbitral awards.