Energy & Infrastructure M&A 2024 Comparisons

In 2024, the energy sector in Pakistan witnessed a significant increase in M&A deals compared to the previous year. Based on the information set out on the website of the Competition Commission of Pakistan (CCP), while 2023 saw approximately three to four M&A transactions, there have been approximately six noteworthy deals in 2024. The energy sector is increasingly recognised as a vital area for growth and investment, particularly amid the global shift towards sustainable energy solutions. This transition has encouraged companies to pursue strategic partnerships and restructuring to strengthen their competitive positions. In 2023, caution prevailed due to economic uncertainties and tighter financing conditions; however, there has been a gradual improvement in investor sentiment in 2024. Despite ongoing inflation and challenges in the financing landscape, many companies are actively seeking mergers and acquisitions as a way to mitigate risk. In recent times, Pakistan has seen increasing interest in investment in the distributed generation sector where various solar power companies continue to offer diversified solutions, providing on-grid and off-grid renewable energy generation set-ups, which has facilitated joint ventures and other partnerships in this space.

Geopolitical tensions, particularly from the conflicts in Ukraine and Gaza, continue to present challenges, but have also underscored the importance of energy security and diversification, which have driven companies to pursue mergers that can enhance their market standing and resilience. When compared to the global energy M&A landscape, Pakistan’s activity, while on the rise, remains relatively modest. Although Pakistan’s increased activity in 2024, with six M&A transactions, marks a positive development, it still lags behind the global pace of deal-making.

The requirement to incorporate a company in Pakistan is driven, among other things, by the applicable laws in the relevant industry in which such investors propose to do their business. In the power sector, the relevant legal framework requires that any entity undertaking a regulated activity of power generation, transmission, distribution, sale and supply of electric power be a company registered under the laws of Pakistan.

The incorporation of start-ups in Pakistan has increased in recent years. Where business operations are proposed to be undertaken in Pakistan, it is advisable to incorporate a limited liability company in the jurisdiction. The corporate structuring of such company and identifying the jurisdiction for the holding company of such Pakistani target is dependent on various factors, including tax benefits and connected matters, complex regulatory processes, stringent foreign exchange controls (in relation to repatriation of dividends and disinvestment/sale proceeds) and generally, stability in the political environment in such jurisdictions.

Incentives

According to a report published by Atlantic Council of the United States (ie, a think tank in the field of international affairs) called State of Pakistan’s Technology Landscape and Startup Economy, the start-ups and technology sector in Pakistan witnessed unprecedented growth during the COVID-19 pandemic and raised USD350 million during 2021. This surge was due to the incentives being provided to start-ups including by the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP). Notably, the SBP introduced general permission for residents in Pakistan to make investments abroad, including by allowing investment by resident companies for the expansion of business and the establishment of a holding company abroad by residents.

From the perspective of the SECP, the Companies (Amendment) Act, 2021 enacted Section 458A of the existing Companies Act, 2017 (the “Companies Act”) which empowered the SECP to implement measures for providing greater ease of doing business, improving regulatory quality and efficiency, facilitating innovation and the use of technology by the corporate sector in conducting business, and also specifying modes and procedures to enable greater ease of entry into, and exit from, the market to start-ups.

The incorporation of a company in Pakistan usually takes less than one week from submission of the complete documentation to the satisfaction of the SECP.

Minimum Capital Requirements

Additionally, companies in the oil and gas sector and power sector may be subject to minimum capital requirements. For example, under the Pakistan Oil (Refining, Blending, Transportation, Storage and Marketing) Rules, 2016 (the “OMC Rules”), to apply for a licence to undertake marketing of petroleum products, the relevant company should have a total investment capacity of at least PKR500 million over an initial period of three years with minimum upfront equity of PKR100 million. Although applicable laws in the power sector do not expressly set out minimum capital requirements, typically, the initial project costs for power projects and large-scale oil and gas and infrastructure projects are higher and therefore, adequate capital is required to be maintained at the time of incorporation and thereafter. Further, financing agreements and tariffs issued by the National Electric Power Regulatory Authority (NEPRA) are often based upon a minimum debt-to-equity ratio. 

In the energy and infrastructure sector, the most common form of entity is a limited liability company, particularly a private limited company or a public unlisted company. Entrepreneurs are typically advised to incorporate such form of entity on account of the limited liability of shareholders and ease in incorporation. In particular, project companies in the power sector are incorporated as private limited companies or public companies. Companies may also consider subsequently listing on the Pakistan Stock Exchange (the “PSX”) to raise capital from the public. As mentioned above, the decision to incorporate a specific type of company may stem from the regulatory requirements for specific industries.

Further, a foreign company may establish a branch office to undertake workstreams of a defined project. This mode may not be preferred, however, as permission to maintain a branch office from the Board of Investment of the Government of Pakistan (GOP) has to be periodically renewed and the nature thereof is limited to a specific project.

In Pakistan, early-stage financing or seed investment comprises a mix of local investors, family offices, government sponsored funds and foreign investors. Locally, angel investors are a key source of early state capital for start-ups; the availability of sources in this regard has increased due to the establishment of the Pakistan Angel Investors Network (ie, a private investor network incorporated in England, which connects start-ups with local angels).

Wealthy individuals or families often invest in start-ups in the technology and real estate sectors, which tend to have higher risk tolerance and offer more flexible financing terms to start-ups.

Recently, government sponsored funds have also been on the rise, such as the Pakistan Innovation Fund (ie, a fund launched by the Ministry of Planning and Development and Special Initiatives), which supports start-ups in various sectors, and the Pakistan Startup Fund, which announced in 2023 that it aims to inject PKR2 billion annually into local start-ups.

Seed investments and early-stage financing are typically documented through term sheets, shareholder agreements or convertible notes (which allow investors to convert their debt into equity). The simple agreement for future equity (SAFE) is also becoming popular, as it provides a flexible way to provide early-stage funding without immediately issuing equity.

As is the case with early-stage financing, venture capital is generally sourced through local venture capital firms such as Fatima Gobi Ventures, Sarmayacar and Lakson Venture Capital, which invest in start-ups in industries such as fintech, e-commerce, transportation and health tech.

International firms are also a source of venture capital in Pakistan. These include 500 Global, which has made several investments in Pakistan in start-ups such as Cheetay and Patari.

While standards and guidelines for venture capital documentation are emerging, they are not as well developed and standardised as more mature markets for venture capital. However, the framework is gradually evolving based on active involvement from regulators, contractual norms and industry practices.

The SECP regulates venture capital under the Non-Banking Financial Companies Rules, 2003 and Private Funds Regulations, 2015, which outline fund registration and capital requirements but do not specify guidelines or forms for venture capital documentation, leaving such documents subject to private negotiation.

Practically, the documentation for venture capital is based on international norms and best industrial practices and typically includes a term sheet, shareholders’ agreement, subscription agreement, and a convertible note or SAFE.

Start-ups are typically incorporated as private limited companies or single member companies with the SECP due to the relative ease of incorporation, lower regulatory burdens and limited liability protection afforded by such corporate forms. However, as start-ups grow and need to raise additional capital, particularly when raising venture capital from international investors, most start-ups opt to incorporate an offshore holding company in a foreign jurisdiction while maintaining the operating company in Pakistan. This is on account of the preference of investors to invest in jurisdictions with tax efficiencies, predictable corporate laws, regulatory ease, clear governance structures and favourable exit options. The fairly recent changes to the Foreign Exchange Manual (FEM) of the SBP also enable local companies to pursue the aforementioned holding company structure.

Research also suggests that a sizeable number of start-ups choose to expand outside Pakistan or contemplate doing so because of their revenues declining based on depreciation of the local currency.

At the outset, it is common for start-ups in Pakistan seeking a liquidity event to pursue a sale process rather than opt for an IPO or a dual-track approach, primarily, due to the stringent requirements associated with listing on the PSX, which can be challenging and prohibitive for start-ups. For instance, Regulations 5.5.1 and 5.19.1 of the Regulations of the Pakistan Stock Exchange (the “PSX Regulations”), mandate a minimum post-issue capital of PKR200 million and an annual listing fee of 1.5% of the paid-up capital.

Additionally, start-ups often avoid going public because IPOs can be time-consuming and costly, while a sale may offer a quicker exit.

In a challenging fundraising landscape, Pakistani entrepreneurs are increasingly considering acquisitions as a strategic option for the exit of investors, while domestic corporations are capitalising on the opportunity to diversify their portfolios and engage with the local start-up market.

A company in Pakistan may be more likely to list on a local stock exchange like the PSX rather than a foreign one on account of the limitation set out in the Securities Act, 2015 (the “Securities Act”) which requires that no company incorporated under the laws of Pakistan may issue or list any securities outside Pakistan without the prior approval of the SECP, which may be more time-consuming and relatively non-customary. The preference to list locally may also be on account of familiarity with the regulatory requirements of the PSX, the ease of complying with local regulations as opposed to those of foreign exchanges, and the ability to create domestic visibility and brand recognition in the local market.

When a Pakistani company chooses to list on a foreign exchange (assuming all regulatory approvals are in place), this decision may affect the feasibility of a future sale or takeover. The assessment of any legal implications would not solely be a Pakistan law issue as when a Pakistani company lists on a foreign exchange, such company becomes subject to the rules and regulations of the relevant jurisdiction (including any squeeze-out mechanisms that may become applicable as a result of listing in such foreign jurisdiction). Under Pakistan law, the squeeze-out mechanism has limited application in accordance with Section 285 of the Companies Act and is not affected by the listing of the securities of such company on the PSX.

The sale process of a company in Pakistan typically takes the form of bilateral negotiation with the relevant buyer. In the case of public listed entities, the takeover regime would be applicable and accordingly, it would be necessary for the acquirer to make a public offer for the benefit of all other shareholders in such listed company, provided that the sale of shares meets the thresholds for a mandatory offer (see 6.1 Stakebuilding). 

The venture capital ecosystem in Pakistan is still developing and is not very mature in the context of the energy and infrastructure sectors. While venture capitalists have been active in the start-up space, particularly in fintech and e-commerce, the overall landscape for energy and infrastructure investments remains relatively nascent.

According to invest2innovate.com, the year 2023 witnessed a significant decline in investment activity in Pakistan compared to 2022, primarily due to an uncertain macroeconomic environment and political unrest.

The political climate and economic instability in Pakistan deter potential investors. In light of these challenges, the prevailing trend for start-ups in Pakistan often leans towards shutting down rather than pursuing a sale.

Typically, transactions involving the sale of a privately held company tend to be structured as cash sales. However, there are instances of stock-for-stock transactions, particularly when strategic buyers see value in the acquired company’s growth potential and prefer to use their own equity as part of the consideration.

A combination of stock and cash can also occur, especially in larger deals where both parties aim to align interests post-transaction. Ultimately, the structure of each deal depends on factors such as the negotiating power of the parties, the financial health and business potential of the companies involved, and the overall market conditions at the time of the transaction.

Given the current economic climate and funding challenges, cash transactions are probably more common, as buyers may prefer immediate liquidity over equity stakes in uncertain ventures.

Any representations and warranties provided by parties under a commercial arrangement are enforceable, and founders and investors are expected to adhere to them. If a representation turns out to be inaccurate or a warranty is breached, the applicable remedy in the contract, whether in the form of indemnification or otherwise, is available to the innocent party. Accordingly, founders and VC investors in Pakistan are generally expected to back their representations and warranties, and indemnification is a common mechanism for addressing post-closing liabilities.

Parties also employ escrow or holdback mechanisms in relation to the completion of the transaction.

While representations and warranties insurance (RWI) is becoming more common globally, its use in Pakistan is still developing. Some larger or cross-border transactions might include RWI as a way to mitigate risk and provide assurance to buyers. RWI can be obtained outside of Pakistan and, in practice, is not typically obtained within Pakistan.

Spin-offs are not commonly practised in Pakistan’s energy and infrastructure sectors. This is largely due to the nature of project financing and corporate structure prevalent within the industry. Most companies involved in electricity generation are established as special purpose vehicles, which are incorporated by sponsors to undertake particular projects and execute concession agreements.

Clients are advised to seek specialist taxation advice on this issue, as taxation matters in Pakistan are generally dealt with by chartered accountants.

An analysis of the tax issues in relation to a spin-off followed by a business combination, and the possibility of achieving such a transaction without adverse tax consequences, would generally be dealt with by chartered accountants in Pakistan.

The timing for a spin-off is not expressly set out in the law. Clients are advised to seek specialist tax advice, as taxation matters in Pakistan are generally dealt with by chartered accountants.

In Pakistan, the acquisition of a stake in a public company is governed by various laws and regulations, primarily the Securities Act, the Competition Act, 2010 (the “Competition Act”) and the Companies Act. In addition to the foregoing requirements, publicly listed companies are required to comply with the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2017 (the “Takeover Regulations”) and the PSX Regulations.

An acquisition of a stake in a public unlisted company does not trigger any mandatory public offer but in the case of public listed companies, the acquisition is subject to strict disclosure and offer requirements under the Securities Act read with the Takeover Regulations.

Under Section 110 of the Securities Act, any acquirer who, together with their existing shares, acquires over 10% of voting shares in a listed company, must disclose the total shareholding to the PSX and SECP within two working days. However, an acquirer may acquire additional shares (up to 30% of voting shares) within 12 months without further disclosure.

Additionally, Section 96 of the Securities Act requires a listed company to disclose to the public forthwith any price-sensitive information relating to the company or its subsidiaries which has come to the company’s knowledge and which would be material to an investor’s investment decision, including information that:

• is necessary to enable the public to appraise the position of the company and its subsidiaries;
• is necessary to avoid the creation or continuation of a false market in the securities of the company (a “false market” being defined as an uninformed market or one which is based on incomplete information); or
• might reasonably be expected to materially affect market activity and the price of its securities.

Such disclosure may be delayed by the listed company so as not to prejudice its legitimate interests, provided that:

• such delay would not be likely to mislead public investors;
• any person receiving the information owes the listed company a duty of confidentiality, regardless of whether such duty is based on law, regulations, articles of association or contract; and
• the listed company is able to ensure the confidentiality of that information.

A listed company must disseminate to the SECP and the PSX, all price-sensitive information relating to the business and other affairs of the company that may affect the market price of its shares prior to its release to any other person or print/electronic media and as soon as any decision in relation to the price-sensitive information is taken by the board, or such matter has come to the knowledge of the listed company’s management. An indicative list of what constitutes price-sensitive information is set out in the aforesaid regulation and includes information regarding any joint venture, merger, demerger, restructuring, material change in ownership of the company, and any other information that is deemed price-sensitive information.

The acquisition of a stake in a public listed company is likely to be considered price-sensitive information and will require disclosure in the manner set out above. This is also consistent with market practice. To maintain complete transparency and provide all the material facts at the time of making a disclosure, a listed company should ensure that the disclosure states the purpose of the acquisition, any future plans of the acquirer with regard to the listed company, and any other material or necessary information.

With respect to reporting obligations, Regulation 3 of the Reporting and Disclosure (of Shareholding by Directors, Executive Officers and Substantial Shareholders in Listed Companies) Regulations, 2015 requires any person who becomes a substantial shareholder (ie, a person who has an interest in the listed shares, the value of which is at least 10% of the issued share capital or a person who exercises or controls at least 10% of the voting power of the shareholders) of a listed company to give notice in writing to the company, in the prescribed form, of any beneficial ownership in the equity securities of the company, and also notify any change to or gain from this beneficial ownership.

There is a “put up or shut up” requirement under Pakistan law which is applicable, if a transaction meets the thresholds set out in the section below. In such case, the acquirer is required to make a mandatory public announcement of offer (PAOO) to the existing shareholders of the target company (at the price calculated in accordance with the Takeover Regulations), after which an acceptance period will commence. During the acceptance period, the shareholders of the target company may accept the public offer by tendering their shares in the manner set out in the Takeover Regulations.

Section 111 of the Securities Act sets out the thresholds for a mandatory offer and states that no person will, directly or indirectly, do any of the following unless such person makes a public offer to acquire voting shares of the listed company in accordance with the provisions of the Securities Act and the Takeover Regulations:

• acquire voting shares, which includes any existing voting shares, which would entitle such person to more than 30% of the voting shares in a listed company; or
• acquire additional voting shares where the existing shareholding of the acquirer is more than 30% but less than 51% of the voting shares of a listed company (provided that the acquirer will not be required to make a fresh public offer within 12 months of the previous public offer); or
• acquire control (ie, the right to appoint the majority of directors or to control management or policy decisions, individually or through any person acting in concert, directly or indirectly, whether by virtue of their shareholding, management right, shareholders’ agreement, voting agreement or otherwise) of a listed company.

In Pakistan, the acquisition of a public company typically follows one of the following transaction structures, depending on the specifics of the deal and the regulatory requirements.

Acquisition of Shares

An acquisition of shares may be made by way of a direct share purchase, which is the most common method for acquiring control of a public company in Pakistan. The acquirer purchases shares from existing shareholders, either through a negotiated transaction by execution of a share purchase agreement or through the stock exchange.

In the case of an acquisition of a listed company, if a transaction meets the thresholds set out in 6.2 Mandatory Offer, a mandatory offer is required to be made to the existing shareholders in the manner prescribed in the Takeover Regulations.

Additionally, an acquisition of shares is also subject to regulatory approvals; see 7.5 Antitrust Regulations.

Merger or Amalgamation

Mergers between companies are governed by the Companies Act. Pursuant to Section 279, where an arrangement is proposed between a company and its creditors or any class of them, or between a company and its members, the SECP or the High Court of competent jurisdiction may, upon the application of the company or of any creditor or member of the company, order a meeting of the creditors (or class thereof) or of the members of the company (or class thereof) to be called, held and conducted in such a manner as the SECP or the High Court of competent jurisdiction may direct.

Additionally, a company and one or more other companies that are directly or indirectly wholly owned by it, may amalgamate and continue as one company (being the company first referred to) without complying with Section 279 (which includes the requirement to pass a resolution of the shareholders of the company and seek an order of the court). Two or more companies under the direct or indirect ownership of the same person may amalgamate and continue as one company without complying with Sections 279 or 282 of the Companies Act.

Such mergers are generally adopted when the relevant stakeholders agree to amalgamate the two corporate entities, as opposed to an acquisition of one corporate entity by the other.

In Pakistan, public company acquisitions can be structured in various ways depending on the specifics of the deal, the target company, and the regulations involved.

Acquisitions are typically structured as cash transactions – that is, an acquirer acquires shares in a target company for consideration in cash. In the technology and start-up sectors, it is often agreed that shares be issued as future equity for immediate direct investment pursuant to SAFEs.

Stock-for-Stock Transactions

Stock-for-stock transactions are permitted but are not common in Pakistan. It should be noted that such stock-for-stock transactions cannot result in a subsidiary holding any shares in its holding company as this is restricted under the Companies Act.

Takeover Offers

In relation to takeover offers, Regulation 13 of the Takeover Regulations sets out the requirements for the minimum offer price, depending on whether the shares are frequently traded (as defined therein) or not. In the case of frequently traded shares, the price is the highest of, among others, the negotiated weighted average share price under the share purchase agreement and the highest price paid by the acquirer for the acquisition of voting shares of the target during the prior six months. Where the shares are not frequently traded, the PAOO to acquire shares will be at the highest price, as elaborated in Regulation 13 (2) of the Takeover Regulations.

Shares are considered to be frequently traded if they have been traded for at least 80% of the trading days during the six months prior to the date of the PAOO and their average daily trading volume in the ready market is not less than 0.5% of their free float or 100,000 shares, whichever is higher.

In order to ensure transparency and fairness to minority shareholders, the Takeover Regulations establish certain conditions and restrictions related to takeover offers, which are briefly set out below.

• Minimum offer price: See 6.4 Consideration: Minimum Price.
• Book closure: On the 22nd day of the PAOO, the target company is required to announce its book closure from the 36th day of the PAOO to determine the eligibility of persons to receive the offer letter.
• Provision of list of shareholders: On the 43rd day of the PAOO, the target company must provide an updated and certified list of its shareholders to the acquirer to enable the acquirer to send the offer letters.
• Number of voting shares to be acquired: An acquirer may acquire any number of voting shares through an agreement. However, if an acquisition attracts the provisions of Section 111 of the Securities Act, the acquirer must make a PAOO for at least 50% of the remaining voting shares of the target company. Additionally, where the public offer is conditional upon a minimum level of acceptance, such minimum level may not be more than 35% of the remaining voting shares.
• Security by the acquirer: For the performance of obligations under the public offer, the acquirer must provide security in the form of, among other things, cash deposited in an escrow account with a minimum rating of “A” to be operated by the manager to the offer; government securities with a minimum 10% margin; a bank guarantee in favour of the manager to the offer from a commercial bank with a minimum rating of “A” and valid until all the obligations of the acquirer are fulfilled, as certified by the manager to the offer; or the shares of a listed company offered as non-cash consideration (subject to the following requirements) – 
1. non-participation of persons with interest: persons, other than the acquirer, representing or having interest in the target company or an insider or a beneficial owner of more than 10% of the voting shares during the last 12 months, may not participate in any matters concerning or relating to a public offer, including any preparatory steps leading to the offer; and
2. financial arrangements: the acquirer must ensure that firm financial arrangements for fulfilment of the obligations under the public offer and suitable disclosures in this regard have been made in the PAOO.

In Pakistan, it is customary to enter into a transaction agreement in connection with a takeover offer which typically outlines the terms of the acquisition and provides a framework for the deal between the acquirer and the seller. The target company is not generally a party to such agreements – however, the seller agrees to ensure that the target company undertakes the relevant actions.

Under such agreements, the target company often undertakes that it will procure or facilitate procurement of certain regulatory approvals and make all the requisite filings or provide any support that the seller or buyer may require to undertake the transaction (see 7.3 Restrictions on Foreign Investments, 7.4 National Security Review/Export Control, 7.5 Antitrust Regulations and 7.6 Labour Law Regulations). The conditions precedent in a share purchase agreement may also include certain entity-specific approvals which emanate from the contractual obligations or business operations of the target company.

In practice, until completion of the transaction, the seller agrees that it will exercise all its rights and powers to ensure that the target company carries on its business as usual and does not, among other things:

• create, issue, purchase, sell or redeem any class of share capital of the target company;
• make any amendments to its constitutional documents;
• operate its business in a way that negatively impacts the going-concern status of the company;
• act in any manner that is materially inconsistent with applicable law or that may jeopardise the validity of any material licences and other approvals required to carry on its business; or
• dispose of, transfer, grant or create any encumbrance over or affecting any of the sale shares.

Since the obligations of the target company in a takeover scenario are essentially dictated by the Securities Act, the target company is not required to become (and is not generally made) a party to the share purchase agreement.

Regulation 14 of the Takeover Regulations states that a public offer by the acquirer may be made conditional upon a minimum level of acceptance, and such minimum level must not be more than 35% of the remaining voting shares. 

There is no squeeze-out mechanism under applicable law in Pakistan which would permit an acquirer to buy out shareholders that have not accepted a public offer.

The public offer is made by the acquirer through the manager to the offer and the acquirer and the manager to the offer are required to ensure that firm financial arrangements for fulfilment of the obligations under the public offer are available and suitable disclosures in this respect have been made in the public announcement. A manager to the offer is a bank, securities broker or an investment bank licensed by the SECP which has been appointed as per the requirements of the Securities Act.

Further, the acquirer is required to furnish security for performance of its obligations under the public offer to the manager to the offer (see 6.5 Common Conditions for a Takeover Offer/Tender Offer in this regard).

In the case of a transaction which is subject to the Takeover Regulations and the Securities Act, the Takeover Regulations require all shareholders of the target company to be treated equally and all shareholders of the same class to be treated similarly. Therefore, the grant of exclusivity to the acquirer by the target company or the selling shareholder may not be possible and may breach this requirement.

However, in the case of a transaction which does not attract the provisions of a mandatory offer, the acquirer and seller may undertake the transaction on any commercial terms agreed under a bilateral arrangement. In such a case, the acquirer, target company and seller may commercially agree on exclusivity and non-compete/non-solicitation terms (which may need to be reasonable and subject to approval from the CCP). The share purchase agreement may also provide for mechanisms in case the transaction is not completed on account of a breach of either party or otherwise.

If an acquirer is not able to obtain 100% ownership of the target as a result of the takeover offer, the target is obliged under Regulation 25(5) of the Takeover Regulations to ensure that the acquirer is entitled to a proportionate representation on the board of directors or control of the company.

Additionally, under Section 162 of the Companies Act, a member having acquired the requisite shareholding to be elected as a director to the board, may require the company to hold a fresh election of directors in the manner prescribed in the Companies Act. Upon receipt of a requisition, the board of a company will, as soon as is practicable but not later than 30 days therefrom, proceed to hold a fresh election of directors of the company. 

Pakistan law does not contemplate irrevocable commitments from principal shareholders of the target company to tender or support the transaction. However, in the absence of any restriction, such agreements may be executed on a commercially agreed basis and may include provisions binding the principal shareholders of the target company to vote in favour of the transaction. Where the transaction is subject to the Securities Act and Takeover Regulations, such agreement should also be disclosed in the PAOO and to the PSX as material information (see 6.1 Stakebuilding).

While a notice of the PAOO is required to be submitted through the manager to the offer to the target company, the SECP and the PSX, there is no requirement to have the public offer approved by the SECP or PSX prior to such dissemination. The form of public offer is already set out in the Takeover Regulations.

A PAOO is required to be made by the acquirer through the manager to the offer within 180 days of making the public announcement of intention (PAOI) in the newspapers. However, such time period may be extended for a maximum of 90 days under intimation to the SECP and PSX, and such intention will be made on or prior to the expiry of the aforesaid 180 days. In case regulatory approvals are not obtained in the initial timeframe, the public offer may be extended as stipulated.

Parties typically obtain regulatory approvals after signing the share purchase agreement and within the relevant timeframe set out under the law for making a public offer. However, sometimes in high-profile transactions, certain approvals are not obtained within the extended 90-day period. Consequently, the acquirer can withdraw its PAOI and recommence the process afresh. A 90-day extension can be sought each time the PAOI is filed under the Takeover Regulations.

In the energy and infrastructure sector in Pakistan, the incorporation of companies is subject to receipt of the necessary licences to undertake business in Pakistan.  However, in practice, the SECP often incorporates companies for such purpose, without receipt of the relevant licences, on the basis that the sector-specific laws require a company to be duly incorporated prior to applying for a licence. The requirements for procurement of licences also require certain obligations to be fulfilled by directors of a company, therefore, a duly incorporated company is also required for such purpose.

In particular, the incorporation and operation of companies in the power sector are regulated by NEPRA and in the oil and gas sector, they are regulated by the Oil & Gas Regulatory Authority (OGRA). Section 24 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (the “NEPRA Act”) provides that a licence under the NEPRA Act will not be granted to any person unless it is a company registered under Pakistan law (or unless exempted). Similarly, Rule 35 of the OMC Rules requires an applicant for a licence for marketing petroleum products to be a private or public limited company registered under the laws of Pakistan.

The incorporation of a company usually takes less than one week, depending on the diligence with which an application is pursued and whether the SECP raises any objections with respect to the application. Regarding procurement of a licence, although the relevant NEPRA laws do not set out a timeline for issuance of a licence, in practice, NEPRA may take from six months to one year to issue a licence to an applicant (which may vary depending on the nature of the licence). OGRA laws do not set out a timeframe for the issuance of a licence. 

The primary regulator for M&A transactions in Pakistan is the SECP, which oversees the corporate sector and capital markets in Pakistan. However, the PSX, SBP and CCP also play important roles in such transactions, particularly in the context of approvals and filings. In relation to the energy and power sector, approval is also required from NEPRA for any transfer of shares of more than 10% to a licensee and therefore, NEPRA would also play an important role in an M&A transaction.

Generally, there are no prohibitions on foreign investments in the energy and power sector in Pakistan. The foreign investment regime in Pakistan is encapsulated in various pieces of legislation, including the Foreign Private Investment (Promotion and Protection) Act, 1976 and the Protection of Economic Reforms Act, 1992, which contain provisions pertaining generally to the promotion of foreign direct investment in Pakistan, and which encourage foreign investment by allowing, among other things, concessions in relation to taxation on foreign investors, and which outline a framework to protect economic policies.

Evidently, Pakistan encourages and welcomes foreign investment and on a broader level, all sectors and activities are open for foreign investment (including the energy sector) unless specifically proscribed for reasons of national security and public safety.

As mentioned above, in relation to the energy and power sector, approval is also required from NEPRA for any transfer of shares of more than 10% to a licensee.

Additionally, in the upstream oil and gas sector, the disposition of share capital by a licensee or its parent company which results in a change in control (which is not defined but is generally understood to mean more than a 50% shareholding), requires the approval of the GOP. In the downstream oil and gas sector, while regulatory approval is not required from OGRA, in practice, parties sometimes notify OGRA in the event of a change in shareholding. 

There is no specific foreign direct investment filing in Pakistan. However, foreign investment may be subject to certain regulatory approvals and foreign exchange controls (see 7.4 National Security Review/Export Control, 7.5 Antitrust Regulations and 7.6 Labour Law Regulations).

Pursuant to Section 465 of the Companies Act, the SECP may require the security clearance of any shareholder or director or other office bearer of a company, or class of companies, as may be notified by the GOP minister concerned. Regulations 19 and 39 of the Companies Regulations, 2024 provide that where shares are allotted to an individual of a foreign nationality or a foreign company/body corporate, additional information is required to be submitted to the SECP, as prescribed. The SECP will then seek security clearance from the Ministry of Interior in respect of the foreign shareholder(s) and directors.

In practice, security clearance from the Ministry of Interior is a post facto requirement (except in the case of persons of Indian origin) and the SECP accepts filings relating to the appointment of a foreign director or the issuance or transfer of shares to a foreign shareholder, and clearance or denial will follow from the Ministry of Interior in due course (ie, after incorporation or transfer).

Competition and antitrust-related matters in all sectors in Pakistan are regulated by the CCP pursuant to the Competition Act and the rules and regulations framed under the aforesaid act.

Pre-merger Clearance Application

Under Section 11(1) of the Competition Act, no undertaking (including any natural or legal person, government body including a regulatory authority, body corporate, partnership, association, trust or other entity engaged, directly or indirectly, in the production, supply or distribution of goods, or the provision or control of services and an association of undertakings) may enter into a merger (including an acquisition or combination) which substantially lessens competition by creating or strengthening a dominant position in the relevant market. Pursuant to Section 11(2) of the Competition Act, where an undertaking intends to acquire the shares or assets of another undertaking, or two or more undertakings intend to merge all or part of their businesses, and meet the pre-merger notification thresholds set out in the Competition (Merger Control) Regulations, 2016 (the “Merger Regulations”), such undertaking(s) must apply for pre-merger clearance of the intended merger from the CCP by submitting a pre-merger application to the CCP as soon as they agree in principle or sign a non-binding letter of intent to proceed with the merger. In practice, parties usually submit a pre-merger application upon signing the share purchase agreement.

There are also exemptions to the above set out in Regulation 5 of the Merger Regulations.

Upon receipt of a pre-merger application, the CCP will pass an order deciding whether the intended merger meets the thresholds set out in Regulation 4 and the presumption of dominance (as determined under Section 3 of the Competition Act).

Assessment of the merger by the CCP

In determining whether or not the merger is likely to substantially prevent or lessen competition, the CCP will assess the strength of competition in the relevant market and the probability that the merger parties in the market will behave competitively or co-operatively after the merger. Factors that the CCP may consider relevant to competition in the market include, among others, the actual and potential level of import competition in the market; the ease of entry into the market, including tariff and regulatory barriers; the level and trends of concentration, and the history of collusion, in the market. The CCP will pass an order within 30 days of receipt of the pre-merger application and may permit the parties to proceed with the intended merger (if the merger does not raise any competition concerns) or else notify them that it is carrying out a second-phase review (as described below). Failure by the CCP to make a determination within the prescribed period for the first-phase review means that the CCP has no objection to the intended merger.

If, during the first-phase review, the CCP is unable to conclude that the merger does not raise competition concerns, the CCP will carry out a more detailed assessment and initiate a second-phase review which entails notifying the merger parties and potentially requiring them to furnish any such information as it considers necessary to enable it to make a determination. Where the concerned undertakings fail to provide the requested information, the CCP may reject the application. The CCP will, within 90 days of the receipt of information under Regulation 11(6), review the merger and assess whether it substantially lessens competition by creating or strengthening a dominant position in the relevant market and accordingly, it will give its decision regarding the proposed transaction. If, after the second-phase review, the intended merger does not lessen competition by creating or strengthening a dominant position, the CCP may give its clearance and authorise the intended merger, with or without conditions. Failure to render a decision within the prescribed period will be deemed as no objection by the CCP to the intended merger.

Following the 18th Amendment to the Constitution of Pakistan, 1973, the subject of labour devolved to the provinces and therefore, falls within the legislative domain and purview of the respective provincial assemblies and the National Assembly with respect to the Islamabad Capital Territory. The applicability of such laws to trans-provincial establishments (ie, entities operating in more than one province) is also a pertinent issue for acquirers in Pakistan to consider, and such issue has been discussed in various judgments of the superior courts in Pakistan, but currently remains to be conclusively settled.

Employees undertaking a managerial or supervisory function and whose work is not of a manual or clerical nature generally do not fall within the ambit of an employee/worker under labour laws in Pakistan. Therefore, the rights and obligations of a sizeable segment of the working class are subject to private negotiations between the employer and employee, which are largely influenced by the terms of their individual employment contract.

The West Pakistan Shops and Establishments Ordinance, 1969, the Punjab Shops and Establishments Ordinance, 1969, the Sindh Shops and Commercial Establishments Act 2015, the Khyber Pakhtunkhwa Shops and Establishments Act 2015 and the Balochistan Shops and Establishments Act, 2021 set out the law relating to the hours and other conditions of work and employment of persons employed in shops and commercial, industrial and other establishments in each of such provinces. The aforesaid laws are applicable not only to workers but also to other employees.

The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (as applicable in ICT and adapted in Punjab), the Sindh Terms of Employment (Standing Orders) Act, 2015, the Khyber Pakhtunkhwa Industrial and Commercial Employment (Standing Orders) Act, 2013 and the Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021 are applicable to workers hired by an establishment to do any skilled or unskilled, manual or clerical work for hire or reward, subject to satisfaction of the thresholds related to the number of employees set out therein. These laws provide for, among other things, the closure of establishments, the payment of bonuses and compulsory group insurance, and the termination of employment.

Additionally, an acquirer should also be familiar with the federal and provincial laws related to industrial relations and trade unions, maternity and paternity benefits, social security, minimum wages, employee old-age benefits, and the regulation of factories.

The relevant industrial relations and trade union laws set out specific matters which require the advice of the worker’s representative on the management of the company, which include, a change in physical working conditions in the factory/ establishment, the recreation and welfare of workers and matters relating to the order and conduct of workers within the factory/establishment. In so far as an acquisition does not trigger or relate to any of these matters, no approval or consultation from the work council or worker’s representative is required.

Currency controls and dealings in foreign exchange in Pakistan are regulated by the SBP in accordance with the Foreign Exchange Regulation Act, 1947 (FERA) and the FEM.

Section 13(1) of the FERA requires the general or special permission of the SBP to, among other things, take or send any security to any place outside Pakistan, transfer any security or create or transfer any interest in a security to (or in favour of) a person resident outside Pakistan, or to issue, whether in Pakistan or elsewhere, any security which is registered or to be registered in Pakistan, to a person resident outside Pakistan. Such restriction applies to the transfer of:

• all securities expressed to be payable in Pakistan currency or registered in Pakistan whether held by persons resident in or outside Pakistan; and
• all foreign securities held by Pakistan nationals.

Paragraph 6 of Chapter 20 of the FEM grants a general exemption from the provisions of Section 13(1) of the FERA in connection with the issue and transfer of shares in the situations listed in sub-paragraph (B) to the persons set out in sub-paragraph (A) of Paragraph 6 of Chapter 20 of the FEM. The exemption under Paragraph 6 applies to, among other things:

• a transfer of shares of any class or kind of new/initial shares to foreign investors by a public or private limited company;
• the transfer of shares quoted on stock exchanges of the country; and
• the transfer of Pakistan securities held by a person resident outside Pakistan on a repatriable basis to other eligible persons resident outside Pakistan on the same basis, against payment outside Pakistan, provided a certificate to this effect is given by the transferee to the company concerned.

Such transfers are exempted if made to any of the persons set out therein, subject to the conditions that, the issue or purchase price of such shares is paid in foreign exchange through normal banking channels by remittance from abroad, and in the case of unlisted securities, the purchase price of the shares is not less than the break-up value of such shares (as certified by a practising chartered accountant in Pakistan).

Pursuant to Paragraph 7(vi) of Chapter 20 of the FEM, shares issued/transferred to non-resident shareholders will be intimated by a company to its authorised dealer (for onward registration with the SBP) within 60 days of the issuance/transfer of shares (on the form prescribed under applicable law), along with the relevant documents stated therein. Upon registration of such shares with the SBP, the authorised dealer of a company may permit remittances in respect of dividends and disinvestment proceeds outside Pakistan.

Furthermore, special permission of the SBP is required if any shares are issued or transferred to an entity that is owned or controlled by a foreign government.

In the past three years, several significant legal developments in Pakistan related to energy and infrastructure M&A have occurred, shaping the regulatory landscape, including the following.

The Constitutionality of the Competition Act

In 2021, a pivotal judicial development took place when the Islamabad High Court (Writ Petition No 4942 of 2010) and the Lahore High Court (2021 CLD 214) resolved protracted litigation regarding the constitutionality of the Competition Act. The challenges contended that the Competition Act was ultra vires the Constitution of Pakistan, 1973 on the basis that competition law falls within the provincial legislative domain following the 18th Amendment to the Constitution of Pakistan, 1973. However, both courts upheld the validity of the Competition Act and affirmed that it was constitutionally enacted as federal legislation. This ruling has had significant implications for the regulatory framework governing competition in the context of mergers and acquisitions, including in the energy and infrastructure sectors.

Under the takeover regime, the target company must ensure that the acquirer and the manager to the offer are provided with all relevant and material information which they require for the purposes of due diligence. Therefore, the board of directors may allow high-level due diligence of any and all material information. Notably, there is no yardstick for what constitutes relevant and material information under the Takeover Regulations and accordingly, this would be at the discretion of the target company. However, in providing such information, the target and the acquirer should ensure that no disclosure of material non-public information or inside information is made unless the receiving party is under a duty of confidentiality under law, articles of association or contract, as any dealings or transaction consummated on such basis may amount to insider trading and expose the acquirer to the risk of financial penalties; however, this would not invalidate the transaction agreement. In practice, parties execute a non-disclosure agreement before providing relevant documentation for the purposes of due diligence by the acquirer to address the restriction set out above.

Unlisted companies may disclose any information considered necessary for the purposes of due diligence.

Data privacy laws in Pakistan are considerably underdeveloped and in a nascent stage. The Personal Data Protection Bill, 2023 has been undergoing legislative process for many years but has not yet come into force.

Currently, the Prevention of Electronic Crimes Act 2016 (PECA) is predominantly cited for its provisions relating to data privacy. Section 16 of PECA prohibits obtaining, selling, possessing, transmitting, or using another person’s (which term is defined to mean a company or body of persons, whether incorporated or not) identity information (ie, any information which may authenticate or identify an individual) without authorisation. This provision would therefore operate to limit due diligence to information that has been provided by the target company or that has been obtained with its authorisation.

Furthermore, Section 41 of PECA penalises any person with secured access to any material or data containing personal information about another person, who discloses such material to any other person (except as required by law, with consent or without breaching the underlying contract) with the intent to cause, or knowing that they are likely to cause harm, wrongful loss or gain to any person or compromise the confidentiality of such material or data, with imprisonment for a term of up to three years or a fine of up to PKR1 million, or both. Therefore, to the extent that any personal information in relation to another person is disclosed without the consent of such person and with intent to compromise the confidentiality of such data, a fine may be payable and the persons responsible for causing contravention of the aforementioned provision may be liable to imprisonment.

If the acquisition of shares in a public listed company by an acquirer exceeds the thresholds set out under the Securities Act, the acquirer must make a PAOI prior to:

• entering into negotiations for the relevant agreement;
• in the case of a company, passing a board resolution;
• proceeding to raise funds; and
• commencing due diligence to evaluate the share price of the target company.

A PAOI is required to be published in the newspapers at least two days before submission of the notice to the target. Thereafter, a PAOO must be made within 180 days of making the PAOI in the newspapers.

Additionally, Section 120 of the Securities Act requires any person, other than the acquirer who has made the first public announcement, who is desirous of making a competitive bid (ie, a bid offering a higher purchase price and for higher voting shares) to make a public announcement of their offer for acquisition of at least the same number of voting shares of the target company within 21 days of the public announcement of the first offer, in the same newspapers in which the first PAOO was made.

A copy of the public announcement of the competitive bid must be submitted, through the manager to the offer, to the SECP, the acquirer who made the previous PAOO, the target company (at its registered office where the board of directors of such company meet) and the PSX (so the bid can be put on the noticeboard and on the automated information system), at least four days prior to the date of publication in the newspapers.

In the case of a competitive bid, the acquirer who made the public announcement of the earlier offer has the option to make another announcement revising the first public offer (to the extent of the price and the number of shares) or withdrawing the first public offer.

For the issuance of shares by a listed company to a buyer, a prospectus is mandatory in a stock-for-stock takeover offer (although relatively uncommon in Pakistan) or a business combination. However, there is no obligation for the buyer to be listed on a stock exchange to engage in a stock-for-stock takeover offer or business combination.

Under the Takeover Regulations, as part of the public offer, brief audited financial details for at least the last five years should be disclosed.

Financial statements of companies incorporated in Pakistan must be prepared according to the financial reporting standards prescribed in the Companies Act, depending on the type of company (most commonly, the International Financial Reporting Standards).

The Takeover Regulations require copies of all announcement and offer documents and necessary supporting documents to be submitted to the target company, the PSX and the SECP, including a copy of the agreement for the acquisition of shares and/or control of the target. Practically, parties may comply with such requirement by filing a redacted copy of the relevant share purchase agreement with the public offer.

Additionally, the agreement for an acquisition may be filed with an application for pre-merger clearance to the CCP. In practice, parties may file a confidential version with appropriate redaction with the pre-merger application to the CCP.

The duties and responsibilities of the directors of a Pakistani company are set out in the Companies Act and under common law.

Section 204(1) of the Companies Act sets out the duties of directors and provides that a director of a company must act in accordance with the articles of the company, discharge their duties with due and reasonable care, skill and diligence and exercise independent judgement. Further, directors of a company should avoid a situation resulting in direct or indirect interest that conflicts, or potentially conflicts, with the interests of the company.

The duties of a director are owed to the members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.

It is common for directors in large listed companies to establish special committees to regulate the affairs of the company including in connection with business combinations and to oversee any proposed transaction.

Under the Takeover Regulations, the board of an acquirer must establish an independent committee to assess the proposed public offer if any director of an acquirer (ie, a public company) faces a conflict of interest because of the proposed acquisition.

The board of the target company is not expected to be actively involved in negotiations and its role would be limited to resolving and authorising the entry into any instruments to be executed by the target company, if applicable.

However, the board of an acquirer or the selling shareholder may be expected to be actively involved in negotiations as the business of a company must be managed by the board of directors (except for those matters which fall within the purview of the shareholders). Moreover, directors of a company must act in accordance with their statutory duties (including the duty to exercise independent judgement).

In the context of the above, shareholder litigation challenging the board’s decision to recommend an M&A transaction is relatively uncommon in Pakistan.

Directors being fiduciaries of a company may be inclined to seek legal or financial advice from independent advisers. The need for such an opinion (and the form thereof) would largely depend on the complication involved in the relevant matter dealing with a takeover or a business combination in Pakistan, or the underlying issue for which the opinion is sought. The advice may concern the feasibility of the transaction, compliance with directors’ duties and any requisite regulatory filings and approvals required by the target company.

Under the Takeover Regulations, the manager to the offer is required to provide a due diligence certificate to the SECP along with the proposed offer letter. In the form set out in the Takeover Regulations, the manager to the offer must confirm, among other things, that the acquirer has created security in accordance with Section 123 of the Securities Act and the Takeover Regulations, and firm financial arrangements are in place. Additionally, the manager to the offer must ensure that the contents of the public announcement and offer letter are reliable, true, fair and adequate. Therefore, the manager to the offer may seek a fairness opinion in respect of the proposed transaction.