Private Equity 2024 Comparisons

An uptick in transactions in the renewables, FinTech and AI spaces has been noticeable in the United Arab Emirates (UAE). Foreign Direct Investments (FDI) are also on the rise, with foreign entities increasingly targetting Saudi Arabian markets through the Government's efforts to promote such ventures, backed by Saudi sovereign investors' push for more diversification initiatives.

Despite global declines in the realm of FDIs, the UAE and Saudi Arabia have made steady efforts to attract foreign capital through a combination of legislative reforms and other government incentives. Subsequently, global asset managers have shown increased interest in the region, with many asset managers setting up in the DIFC (Dubai International Financial Centre) or the ADGM (Abu Dhabi Global Market) in the UAE, while others are establishing a presence in Saudi Arabia. 

However, it is worth noting that private equity transactions continue to constitute a small proportion of M&A activity in the region, with the majority of such activity driven by sovereign wealth funds (SWFs), their portfolio companies and other government-owned entities, which are focused on economic diversification initiatives and consolidation efforts targeting specific sectors such as healthcare and education.

The transactions involving private equity funds are one of the main reasons for the surging popularity of W&I (warranty and indemnity) insurance in the UAE since it protects the seller in cases of breached warranties.

With regard to debt financing structures, senior facilities are the most common form of debt financing in the UAE, with mezzanine facilities and second-lien tranches being relatively rare. Acquisition financings are often challenging due to their complexity and high minimum financing thresholds required by banks.

According to EY MENA M&A Insights H1 2024 report, the MENA region witnessed a slight increase in M&A activity during H1 2024, with a total of 321 deals amounting to USD49.2 billion, a year-on-year increase of 1% by deal volume and 12% by deal value.

Because M&A activity in the region is primarily driven by SWFs, deal activity has remained robust despite higher interest rates and political uncertainty. This is driven by relatively stable oil prices and government diversification initiatives (such as tax incentives, free zones, and streamlined regulatory processes).

The UAE lifted foreign ownership restrictions (other than in relation to a list of strategic impact activities) in 2021, thereby permitting foreign persons to own 100% of UAE mainland companies.

Aside from recent legislation amendments, Dubai has recently launched a unified digital platform titled "Invest in Dubai", pursuant to Dubai Decree No. 13/2024. The purpose of this platform is to streamline business setup processes by integrating various licensing and approval services into a single digital window.

The UAE also enacted a new Competition Law in 2023 pursuant to Federal Decree-Law No 36 of 2023, which includes provisions relating to merger control. However, implementing the regulations of the new law, which will set out the relevant thresholds for merger control, have not yet started.

The UAE introduced a federal corporate income tax system in 2022, commencing on or after 1 June 2023. Previously, no corporate income tax was applicable. This will have implications for structuring transactions over the coming years.

Most recently, in July 2024, the DIFC published revisions to its rules governing Prescribed Companies – the DIFC's alternative to SPVs – and introduced the Commercial Enterprise Package, both of which offer lower-cost alternatives to establishing private limited companies and are intended to accommodate various corporate and transactional structures.

For impending regulations for merger control in the UAE and recent updates to foreign ownership restrictions and the introduction of a corporate tax regime, see 2.1 Impact of Legal Developments on Funds and Transactions.

The UAE has updated its regulatory and legal frameworks in areas such as money laundering, terrorism financing, sanctions, cybercrime, data privacy, bankruptcy, and whistle-blower protections to enhance its attractiveness for foreign investment and address compliance risks. This has led to an increased focus on compliance issues in M&A transactions throughout due diligence and negotiation of warranty and indemnity protections (see also 1.1 Private Equity Transactions and M&A Deals in General).

For transactions involving government-backed targets, the EU FSR regime is also relevant.

The level of due diligence for private equity transactions is generally strong, albeit due diligence can be complicated for small to medium-scale targets, family businesses and other enterprises with limited experience in transaction processes.

Key areas of focus include corporate and constitutional document reviews, shareholding arrangements, nominee arrangements, foreign ownership restrictions (if relevant to the activities of the target), regulatory consents and approvals, material contracts, financing, labour and employment (including end of service benefits), litigation, IP, IT, data protection, tax and compliance with laws (including policies and procedures relating to AML/sanctions/anti-bribery and corruption).

Sell-side advisers typically provide vendor due diligence reports and investment memoranda (or similar) in auction sales. The successful bidder typically relies on these due diligence reports at closing.

Most transactions in the UAE are structured through private sale and purchase agreements of the target company shares. Statutory mergers are less common unless a public company target, such as an onshore public joint stock company (PJSC), is involved. Such targets are rarely involved in private equity transactions and are generally the target of SWF-backed transactions.

Auction sales may involve more seller-friendly terms, given the competitiveness of the process.

Private equity-backed buyers usually structure their transactions through special purpose vehicles (SPVs) or similar entities established in offshore jurisdictions. In this context, the DIFC and the ADGM are popular options for setting up SPVs (referred to as "prescribed companies" in the DIFC). While the ADGM provides more flexible solutions, the DIFC has also recently expanded its regulations regarding prescribed companies.

In structuring private equity transactions, equity commitment letters may be utilised, though they are not always required to ensure contractual certainty, and as such, this aspect can be negotiated. Occasionally, an equity commitment letter will also include assurances regarding the availability of debt financing. Alternatively, debt commitment letters that outline agreed-upon summary terms or draft loan agreements can be used. However, these have become less common in practice, particularly in the past 12 months.

Both passive stakes taken by limited partners (LPs) alongside a general partner (GP) of a fund in which they are invested, as well as external co-investors, are common in deals involving a private equity sponsor in the Gulf Cooperation Council (GCC). Many regional private equity funds face investment limits that make it challenging for them to make large investments independently, so co-investment transactions are frequently utilised. Established GPs tend to prefer passive LP co-investments, which are becoming increasingly common as LPs seek to negotiate "no fee" and "no carry" co-investment rights at the outset of their commitments to a fund.

In previous years, locked box compensation mechanisms were more common in the UAE; however, trade sellers in certain cash-generating industries such as healthcare, hospitality, retail and others have recently shown a preference for completion account mechanisms, particularly if guided by financial advisors.

Using the locked box mechanism for an M&A transaction typically incurs interest on the equity price between the signing and closing date, especially in cases where regulatory conditions may delay the process and are beyond the parties‘ control. Reverse interest is less common.

In UAE, it is typical to have an expert dispute resolution mechanism in place for completion accounts mechanisms.

Conditions regarding material adverse changes are often heavily negotiated, and typically, some form of this condition will be included in acquisition documentation (unless the transaction process is extremely competitive). Additionally, third-party consents from key contractual parties are usually required, especially for businesses that have concentrated revenue streams. Restructuring conditions are also quite common, particularly in cases where target businesses are not initially organised under a holding company structure.

Hell or high water undertakings are less common in the UAE, especially since merger control and foreign investment conditions are seldom applicable. However, merger control conditions are becoming more important for regional transactions involving business activities in Saudi Arabia, where hell or high water undertakings may be negotiated – albeit, such clauses are generally less accepted in regional transactions due to the relatively recent and inherently unpredictable nature of merger control regimes.

Break fees and reverse break fees may be negotiated but are relatively rare in the region.

In the UAE, longstop dates are negotiated based on specific conditions, and for transactions involving regulatory conditions precedent, it is common to have longstop dates ranging from six to twelve months. For the precedent for material adverse change conditions, please refer to 6.4 Conditionality in Acquisition Documentation.

Aside from the failure to satisfy conditions precedent, private equity buyers typically seek a termination right related to breaches of warranties occurring between the signing and closing of the transaction, which may be subject to materiality or other thresholds. Conversely, private equity sellers generally resist this idea.

Sovereign wealth funds and corporations backed by SWFs tend to be more risk-averse than sellers backed by private equity. Private equity sellers are also more inclined to seek "clean breaks" during an exit, making them more open to considering warranty and indemnity insurance, which is increasingly popular in this jurisdiction. In contrast, corporate buyers and sellers (as well as SWFs) often prefer not to invest the time and resources needed to obtain such insurance.

Management warranty deeds are relatively rare in this jurisdiction. Sellers are generally the ones who are expected to disclose data room information.

Customary limits on liability are typically negotiated for business warranties at 100% of the consideration for fundamental warranties and sometimes for tax warranties. Time limits for these warranties usually fall within the following ranges:

• fundamental warranties have a limit of over five years;
• tax warranties range from five to seven years or follow the statute of limitations; and
• business warranties generally have a limit of one to three years.

6.8 Allocation of Risk addresses the allocation of risk concerning warranty and indemnity insurance. This type of insurance is generally pursued to cover all transaction warranties, including tax warranties, fundamental warranties, and business warranties.

Notably, while escrows and retentions may be discussed during negotiations, they are typically not favoured by private equity sellers, and their aversion to them often relates to the desire for a cleaner exit and reduced ongoing liabilities after finalising the sale.

Arbitration clauses that ensure proceedings remain private are common, and public searches are not available for all court systems in the UAE. Consequently, it is difficult to obtain information as to whether litigation is common in connection with private equity transactions.

In the UAE, most transactions involving public company targets are conducted by SWFs, corporates backed by SWFs or prominent families rather than by private equity buyers and sellers.

Completing Public M&A Transactions in the United Arab Emirates

Companies and transactions involved in public mergers and acquisitions (M&A) in the United Arab Emirates are governed by onshore UAE laws and the regulatory authority of the Securities and Commodities Authority (SCA). This applies to companies listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM). Additionally, it is important to consider the relevant legal and regulatory rules of the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) when conducting transactions involving companies based in these jurisdictions.

Disclosure thresholds apply under SCA Decision No. (3) of 2000 Concerning Regulations as to Disclosure and Transparency (DTRs) where: (i) a natural person together with his or her children or (ii) a body corporate together with Associated Group entities (as defined in the DTRs), acquires on an aggregate basis:

• 5% or more shareholding in a company listed on a relevant market (ie, ADX or DFM);
• 10% or more shareholding in a mother company, subsidiary company, sister company, or affiliate company (in each case, as defined in the DTRs, which broadly amounts to affiliated or associated entities) of a company listed on a relevant market.

Further disclosure obligations apply for each 1% change above these thresholds.

In addition, where (i) a natural person together with his or her children or (ii) a body corporate together with Associated Group entities (as defined in the DTRs), seeks to acquire on an aggregate basis 30% or more of the shares in a listed company, the transaction is subject to the prior approval of the SCA.

The SCA has broad powers to investigate natural persons or corporate bodies and to compel private or public disclosure of information relating to activities concerning publicly traded securities.

Over-the-counter acquisitions

Over-the-counter ("OTC") acquisitions may be permitted (pursuant to Securities and Commodities Authority Decision No. 2/2001, Concerning the Regulation on Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities), subject to the following conditions listed below.

• For an OTC acquisition to proceed, the transaction must be authorised by the SCA or the market's Director General.
• Following an OTC acquisition, the entity whose shares have been traded shall notify the market of the transactions within two working days of the transactions occurring (Articles 3 and 4 of Securities and Commodities Authority Decision No. 2/2001).

OTC transactions are also subject to the rules of the relevant market where the securities are traded (ie, the ADX or the DFM).

Mergers & Acquisitions

See Completing Public M&A transactions in the United Arab Emirates in section 7.2 Material Shareholding Thresholds and Disclosure in Tender Offers for the companies and transactions this applies to.

Under SCA Decision No. 18/RM of 2017, regarding the Rules of Merger and Acquisition (the “M&A Rules"), mandatory offer rules are triggered at a shareholding threshold of 30% + one share in a company whose shares are listed on a relevant market. To calculate the threshold, shares attributed to the acquirer include the acquirer's "associated group" and "related parties", where:

• "associated group" means entities who, together with the acquirer, have the ability to exercise influence, directly or indirectly, over 30% or more of the target's shares pursuant to an agreement or an arrangement; and
• "related parties" means the acquirer's chairman, members of the board, senior executive management, employees, and any company in which any such persons hold 30% or more of the share capital.

If the mandatory offer threshold is exceeded, the acquirer must:

• immediately stop increasing the ownership ratio in the target; and
• immediately inform the SCA of:
1. the ownership ratio; and
2. whether the acquirer intends to make a full acquisition of the target.

If the acquirer does intend to make a full acquisition of the target, it must submit an offer in accordance with the provisions outlined in Annex 2. The shares owned by the acquirer over and above the 30% threshold will not have voting rights until the acquisition is performed successfully (unless otherwise decided by the SCA in accordance with the M&A Rules).

If the acquirer does not intend to make a full acquisition of the target, the ownership ratio shall be lowered to 30% and below, provided that no damage is caused to the market, within a period of no more than 3 months from the date of notifying the SCA. In the intervening period, any shares held by the acquirer above the 30% threshold shall have no voting rights.

The M&A Rules provide a framework for acquisitions and implementing offers regarding public shareholding companies offering their shares for public subscription or listing shares on a market licensed by the SCA, which would include companies listed on ADX and DFM (a "target"). Offers can be made by way of buying in cash or undertaking a swap (meaning in exchange for non-monetary consideration from the acquirer, including shares by way of a share swap) and must be presented to the holders of the target's shares.

The SCA retains broad powers to exempt certain transactions or investors from the regime. For example, acquisitions carried out by:

• the Government or a strategic partner; and
• any other case as required by the public interest may be exempted from the regime.

In general, the M&A Rules are not flexible or well-suited for a variety of transactions, and in practice, parties seeking to complete mergers or acquisitions involving publicly listed targets in the UAE will often seek exemptions from the SCA.

Cash is more commonly used with private company targets, whereas shares may be used in transactions involving publicly listed buyers and sellers (but private equity buyers and sellers are not often involved in such transactions).

Tender Offers

See Completing Public M&A transactions in the United Arab Emirates in section 7.2 Material Shareholding Thresholds and Disclosure in Tender Offers for the companies and transactions this applies to.

The M&A Rules do not prohibit conditional tender offers. However, the tender offer process is subject to the oversight of the SCA, which may impose conditions regarding the offer or require that a condition be amended or removed.

The M&A Rules establish a 90% threshold for both squeeze-outs and sell-outs. If a bidder's general offer is accepted for at least 90% of the target's shares, the bidder can buy out the remaining shares, or minority shareholders can sell their shares on the same terms as the original offer through a compulsory sale.

The processes outlined by the M&A Rules are as follows.

• Sell-out process: shareholders holding at least 3% of the shares may request the acquirer who holds 90% + 1 share to make an offer for their minority shares. If the acquirer rejects the request or fails to respond within 60 days, the minority holders can request the SCA to compel the acquirer to make an offer. The acquirer must then submit a draft offer within 60 days of the SCA's decision.
• Squeeze-out process: an acquirer who holds 90% + 1 share can apply to the SCA to submit a mandatory offer forcing the minority holders to sell/swap their shares within 60 days of the primary offer's settlement. The mandatory offer can only be suspended by a court order and must be settled within 7 days after the grace period for minority shareholders has expired. Minority holders have the right to challenge the acquirer's application in court within 60 days of receiving written notification.

Any irrevocable commitments are usually obtained from the selling sponsor shareholders who own sizeable stakes in the target company. It is important to note that in this region, public companies often have a limited percentage of free float, so commitments from sponsor shareholders (which may be SWFs or their operating subsidiaries) are valuable for ensuring the deal's certainty.

Equity incentivisation for management, triggered upon an exit, is common in private equity portfolio companies. However, the level of equity ownership varies widely among different private equity sponsors, ranging from approximately 5% to as much as 20-30%.

“Phantom” share plans are frequently triggered during exit events due to their administrative simplicity. Otherwise, sweat equity may take the form of a separate voting or non-voting share class for entities established in the DIFC or the ADGM.

In contrast, the administration of share plans for onshore UAE companies is more complex, as share transfers and issuances necessitate increased interaction with notary publics, regulatory bodies, and other relevant entities, etc.

Vesting provisions are common and typically involve vesting over four years, with a one-year cliff.

Non-compete and non-solicitation restrictions are popular in the UAE, particularly in the two financial-free zones, as they are normally part of the equity package and/or the employment contract.

The enforceability of any restrictions depends on various factors. Below, you will find the key factors that need to be taken into account in each of the financial-free zones (the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)) as well as in "onshore" employment.

Onshore

UAE Labour Law specifically addresses non-compete restrictions, while other post-termination restrictions are not covered by it.

An employer may include a non-compete restriction in the employment contract, where the employee's work provides them with access to the employer's clients or confidential information. However, the non-compete restriction must be limited in terms of:

• geographic scope;
• duration of the restriction (a maximum of two years); and
• the type of work being restricted.

Subsequently, they only go as far as necessary to protect an employer's legitimate business interests. A non-compete restriction might also be nullified in certain circumstances (for example, where an employer terminates an employment contract in breach of the UAE Labour Law).

In the UAE, it is not possible to obtain injunctive relief onshore. If an employee breaches a non-compete or any other post-termination restriction, the employer can only seek damages resulting from that breach.

ADGM and DIFC

The DIFC and ADGM employment laws do not specifically address post-termination covenants. However, as two common law jurisdictions, the provision and interpretation of post-termination covenants are subject to contract and case law as well as public policy. Therefore, similar considerations apply to other common law jurisdictions that provide:

• the restrictions should have a legitimate interest to protect; and
• the restrictions should go no further than is reasonably necessary to protect that interest.

Obtaining injunctive relief in each of the DIFC and the ADGM courts is possible, albeit the enforcement of an injunctive order would be limited to the applicable free zone and cannot be enforced through the local courts.

Management generally does not have veto rights or the authority to appoint directors, and anti-dilution protection is not always offered. While the management team may participate in an exit strategy, they typically do not have influence or control over the process unless some members of management are also part of the investment committee of the private equity sponsor.

Typical control rights for private equity shareholders over portfolio companies include:

Board Appointment Rights

Reserved matters, including board and shareholder reserved matters (which may include rights over changes to constitutional documents, rights over significant operational matters, governance changes, rights relating to the formation of joint ventures, subsidiaries, new lines of business, changes in business, C-suite appointment rights, exit rights, etc).

Information Rights

Some private equity sponsors will be keen to have a level of say or control over exit processes and may negotiate IPO (initial public offering)/exit consultation rights, robust tag rights, rights to force an exit, etc.

In the event that the portfolio company is an onshore limited liability company, the shareholders of the company will benefit from limited liability, and the circumstances under the UAE Commercial Companies Law (Federal Decree Law No. 23 of 2021) pursuant to which the shareholders may be held liable in their personal capacity (either jointly or collectively) are limited. Those include specific issues, such as not having contributed disclosed share capital or overvaluing in-kind contributions against share capital.

If a portfolio company is held through a DIFC or ADGM private limited company, the principles of shareholder limited liability will apply. Arguments to pierce the corporate veil will depend on English common law principles.

Dual and triple-track exits are rare in this jurisdiction, and so are private equity-led IPOs. Exits involving a sale are typically by way of private secondary sales. In most transactions, private equity sellers seek a complete exit and do not roll over or reinvest upon exit.

Drag and tag rights are usually negotiated in equity arrangements but are often used only as a last resort. Typical drag thresholds exceed 50%, whereas tag thresholds can vary significantly.

Private equity IPOs are quite rare in the UAE. No statutory lock-ups are mandated; however, lock-up periods are typically negotiated in the underwriting agreement for the main shareholders, usually lasting six months.