Contributed By ASAR - Al Ruwayeh & Partners
Generally speaking, a small increase in M&A activity is anticipated during 2019, compared to 2018 figures. This is mainly due to a predicted increase in public M&As, increased financial sector transactions and investment exits.
An increase in business consolidations is expected in 2019, in addition to public M&A transactions spurred on by the strides taken by the Boursa Kuwait (Kuwait’s stock exchange) and a significant number of private trade sales.
Banks and investment companies are currently experiencing significant M&A activity and a number of business consolidations in the banking and finance sector are anticipated. A good deal of trade sales in a spectrum of sectors including logistics, manufacturing, technology, health, and telecommunications is also predicted.
Companies in Kuwait may be acquired through a merger or an acquisition. The Companies Law (Law 1 of 2016) (the Companies Law), the Capital Markets Law (Law 7 of 2010) (the Capital Markets Law) and the executive regulations to the CML (Law 72 of 2015, as amended) (the CML Bylaws) primarily govern M&As in Kuwait.
An acquisition of shares or assets of a company is ordinarily effected by an asset or share purchase agreement. Where the target is listed (ie, it is a Kuwait-incorporated company listed on Boursa Kuwait), the transaction may also be subject to the takeover regime under the CML and the CML Bylaws.
There are three forms of mergers provided for under the Companies Law:
The regulatory bodies are primarily the Ministry of Commerce and Industry (MOCI), the Kuwait Capital Markets Authority (CMA), the Boursa Kuwait, the Competition Protection Board (CPB) and other sector-specific regulators, as the case may be.
Subject to certain exemptions, foreign nationals are prohibited from engaging in business in Kuwait through a corporate entity established in Kuwait without at least one or more Kuwaiti partners maintaining at least 51% of the participation interests. Applicable exceptions to the general rule include wholly Gulf Co-operation Council (GCC)-owned GCC entities, companies listed on Boursa Kuwait, companies licensed under Kuwait’s Foreign Direct Investment Law (Law 116 of 2013) and certain companies established in connection with projects approved under Kuwait’s Public Private Partnerships Law (Law 116 of 2014).
Certain commercial activities are also restricted to Kuwaiti nationals. These include commercial agency services, insurance brokerage and agency services, printing presses, advertising and publishing services, establishing newspapers and magazines, pilgrimage and Umra services. Additionally, as a matter of practice, any activities requiring the prior approval from the Ministry of Information are generally restricted to Kuwaiti nationals.
The antitrust regulations in the Competition Law (Law 10 of 2017) and the CML Bylaws apply to business combinations in Kuwait. Under the Competition Law, a transaction that results in a person acquiring assets that result in a person exercising ‘control’ over a market or increasing his or her ‘control’ over a market must be referred to the CPB for approval. A person is deemed to exercise ‘control’ of the market if he or she alone controls more than 35% of a market; or he or she works directly with another person or group or persons to control more than 35% of a market; or he or she works indirectly with another person or group of persons to control more than 35% of a market.
In addition, the CML Bylawsrequire that a merger or acquisition should comply with the Competition Law in the event that a transaction results in a person exercising ‘control’ over a market or increasing his or her control over a market (the CPB Notification Threshold). It is possible to apply to the CPB for a waiver of the notification requirements.
In the event the CPB Notification Threshold is not met, there will be no need for CPB approval of a transaction that is governed by the CML Bylaws. However, where applicable, the entities involved in the transaction are usually required to submit an undertaking to the CMA that it is compliant with the Competition Law. The CMA, nevertheless, reserves the right to refer the transaction to the CPB for appropriate action.
Under the Kuwait Labour Law (Law 10 of 2010), if a transaction involves the acquisition of assets or a business, as opposed to acquiring the shares of a target company that is the sponsor/employer of the employees, there is a requirement to transfer the employees to the acquirer. This transfer is not automatic, and requires the consent of the affected employees. However, if the acquisition only relates to the shares of a target company that sponsors employees, no obligation or legal requirement arises, as there is no change to the sponsor/employer of the employees.
It should be noted that Kuwait law provides for local Kuwaiti manpower ratios (referred to as ‘Kuwaitisation’) under the Manpower Law (Law 19 of 2000). All private sector employers are required to employ a certain percentage of Kuwaiti national employees in various sectors, depending on the rates set by the authorities. Any private sector employer that does not follow Kuwaitisation requirements is subject to sanctions, including disqualification from awards of contracts or tenders from government authorities, as well as monetary fines for work permits issued to non-Kuwaiti employees in excess of the authorised non-Kuwaiti quota applicable.
We are not aware of any express national security review of acquisitions in Kuwait. It should be noted however that the Boycott Law (Law 21 of 1964) specifically prohibits dealings with persons who are resident in and nationals of Israel, and with any companies and firms from any jurisdiction that has interests, branches, or general agencies in Israel.
The most significant legal development in Kuwait in the last three years related to M&As has been the amendment of certain legislation as discussed in 3.2 Significant Changes to Takeover Law, below.
As a civil law jurisdiction, Kuwait is not able to provide a definitive significant court decision. It does not have a precedent system and court decisions are made on a case-by-case basis, depending on their circumstances.
A notable amendment to local regulations that could impact the M&A landscape has been the removal of the requirement for cabinet approval where a non-Kuwaiti investor seeks to own more than 49% of a local bank. With this recent amendment (Ministerial resolution 694 of 2018) the only requirement provided for is that any shareholding above 5% requires the approval of the Central Bank of Kuwait (CBK).
The CML Bylaws have also been amended to exempt non-Kuwait incorporated companies that are dual-listed on the Boursa Kuwait and are the subject of M&A activity from the takeover regime. In addition, the CML Bylaws now provide for a partial voluntary takeover. There is also a new regime for transactions involving the purchase of no less than 5% of the shares of a listed company and leading to a holding of 30%-50% of the share capital of a listed target company.
Further, Boursa Kuwait has consolidated the regime for off-market negotiated trades in the 2018 version of the Boursa Kuwait Rulebook. The Rulebook allows for the execution of a negotiated off-market trade where the value of the trade is KD150,000 or more, provided that Boursa Kuwait’s approval has been obtained. The trade has to be implemented through a CMA-licensed broker.
It is not unusual for a bidder to build a stake prior to launching an offer. Common strategies for stakebuilding in Kuwait are to build a stake through off-market trades, where an acquirer and a seller agree in advance on a trade at an agreed price and quantity and through block trades, where an acquirer purchases 5% or more of a company’s share capital. Where a stakebuilding strategy results in a person acquiring 5% or more of the voting shares in a company listed on the Boursa Kuwait (the disclosure threshold), that person must disclose the acquisition to the concerned listed company, to the Boursa Kuwait and to the CMA.
An obligation to disclose the transaction to the CMA and the Boursa Kuwait is triggered once the disclosure threshold is met and the concerned purchaser is required to file certain share disclosure notices (disclosure notice) with the listed company, Boursa Kuwait and the CMA (the initial disclosure) within five business days. In addition, further disclosure obligations apply with respect to any change of more than 0.5% of the target’s capital (be it an increase or a decrease) in shareholdings (subsequent disclosure). A disclosure notice must also be filed where the share interest in a listed company in Kuwait falls below the disclosure threshold (final disclosure). An acquisition of more than 30% of the share capital of a listed company in Kuwait triggers a mandatory takeover and the disclosure requirements that accompany such a transaction.
A company may not introduce different rules; the minimum reporting thresholds are statutory and cannot be changed to lower thresholds in a company’s articles of association. However, subject to MOCI approval, higher reporting thresholds can be provided in the articles of association.
Hurdles to stakebuilding include insider-trading regulations. A shareholder is not able to stakebuild during the prescribed blackout periods or while holding insider information. Additionally, creep provisions under the CML Bylaws only allow for a person in control of a listed company to sell or purchase no more than +/-2% semi-annually for ownerships of 30%-50% and only +/-5% semi-annually for ownerships of 50%-100%. Exceeding these thresholds triggers the mandatory takeover regime.
Dealings in derivatives may be permitted, depending on whether the derivatives are considered tradable or non-tradable. In the case of a tradable derivatives transaction, the tradable derivatives should be considered a ‘security’ under Kuwait law. A security is defined under the CMA Law and the CML Bylaws as: “Any document, regardless of its legal form, that evidences a share in a tradable financing transaction licensed by the Authority, such as: (a) shares issued or to be issued in a company's share capital; (b) any instrument that creates or confirms an indebtedness issued or to be issued by a company; (c) loans, bonds, sukuk and other instruments convertible to shares in a company's share capital; (d) all tradable public debt instruments issued by various government authorities or public authorities or institutions (e) any right, option or derivatives related to any security (f) units in a collective investment scheme; and (g) any document which the authority considers a security for the purposes of applying the Law and these Bylaws.
“Commercial papers, such as cheques, bills of exchange, promissory notes, letters of credit, cash transfers and instruments traded exclusively by banks amongst each other, insurance policies and rights arising from pension funds are not deemed securities.”
Note that a ‘tradable’ interest in Kuwait would, for example, be a stock option listed on the Boursa Kuwait. In the case of a non-tradable derivatives transaction, it could be considered as a private negotiated contract between two or more parties. Non-tradable derivative transactions should not be considered as securities transactions, particularly where the parties entered into the derivative transactions under the umbrella of an International Swaps and Derivatives Association (ISDA) or other master-type agreement.
Derivatives with a banking product as an underlying asset (eg, foreign exchange, FX spot, etc.) may be seen as a banking activity and as such may be subject to regulation by the CBK.
In the context of an acquisition, the notification and disclosure thresholds for the CPB, CMA and Boursa Kuwait discussed previously would all apply if the underlying asset for the derivatives is:
A shareholder is required to make known the purpose of his or her acquisition, the date on which a relevant disclosure threshold has been reached or crossed, names of any associated persons and the percentage of the previous percentage shareholding in comparison to the interest being disclosed.
The CMA also requires that an offer document contains sufficient detail as to the bidder, sources of financing, the bidder group, and whether the bidder is acting in concert with any entity to gain control of the company. Further, a bidder is expected to disclose whether following the takeover process, the shares would be transferred to other persons. In addition, the CMA has the discretion to request other information, which could include the bidder’s intentions regarding control of the target entity.
Note also that both the bidder and the target entity are required to procure a report that is produced by an independent CMA-approved investment adviser who must provide his or her opinion on the offer and present it to the shareholders who retained him or her. Where the CMA approves an offer, the offering document must be published in at least two daily newspapers circulating in Kuwait and in accordance with the timeline prescribed by the CMA. The offer (and its details) must be announced on the websites of Boursa Kuwait, the bidder and the target company.
The CML Bylaws require the offeror and the target to make a disclosure upon concluding an initial agreement. An initial agreement is in turn defined as one containing the general principles and initial steps to present a voluntary acquisition offer or to enter into a merger. It is a question of fact as to whether a non-binding offer meets these requirements and should therefore be disclosed.
Additionally, the CML Bylaws require publicising any material information as soon as an event triggering a disclosure occurs. While there is no specific requirement for the disclosure of a non-binding offer, note that the CML Bylaws require a listed company to disclose the entry into of a contract with ‘significant effect’.
The approaches taken by parties differ, but it is not unusual for a disclosure to be made when a preliminary agreement is signed with a supplementary disclosure once definitive agreements are entered into. Additionally, in the event of any rumours being leaked, eg, to the press or social media, the target entity would be required to comment on it without delay.
Where disclosure of material information would prejudice the confidentiality of negotiations or preliminary procedures for a transaction involving a listed entity, that entity may delay disclosure until a binding agreement is entered into. However, this approach is subject to strict requirements:
That said, the listed entity may also approach the CMA prior to delaying disclosure to test the validity of its justification in delaying disclosure.
Market practice on timing of disclosures differs from legal requirements, as described in 5.1 Requirement to Disclose a Deal, above.
The scope of due diligence is the standard scope expected of an acquirer to satisfy him or herself as to the business of a target entity and any risks associated with it.
Both standstills and exclusivity are common at the stakebuilding phase.
Documentation of offer terms and conditions are common at the stakebuilding phase. However, mandatory offers and voluntary takeover offers are documented in their respective offer documents. Note that mandatory offers are required to be unconditional.
Each transaction is different and different considerations arise, depending on the circumstance of each transaction. However, an acquirer would have to allow a minimum of six months in the event that a CPB Notification Threshold is reached, and if the takeover regime is in play.
In the private sphere, it takes about ten-sixteen weeks to complete the sale or acquisition process for the shares of a limited liability company or a closed joint stock company. This estimate includes pre-transaction structuring, due diligence, negotiation of documentation and closing.
Under the CML Bylaws, a person who has come into possession of more than 30% of the voting shares of a listed company must launch a mandatory takeover within 30 days of the acquisition of the shares giving rise to the mandatory takeover.
If the takeover is a mandatory takeover, the consideration required by the CMA under the Mandatory Takeover Regulations is an unconditional cash offer. Where the takeover is a voluntary takeover, the consideration can take the form of a mixture of cash and shares. The CML Bylaws do not prescribe any minimum level of consideration under a voluntary takeover.
An offer must not be subject to conditions that can only be satisfied at the discretion, and in the subjective judgement, of the bidder or the target company, or where their satisfaction is within the control of the bidder or the target company. Only voluntary takeover offers may be subject to conditions required by the bidder. However, in the case of a mandatory takeover offer, the bidder may not impose conditions.
There is no minimum acceptance threshold for a mandatory takeover; however the takeover must be concluded within 30 days of the date the mandatory or voluntary offer is published.
Proof of funding is required for a business combination subject to the takeover regime under the CMA Law. It is mandatory for all offer documents to contain a description of how the offer will be financed and to provide the sources of that financing. The principal lenders for any financing must also be identified.
There are no specific rules in Kuwait dealing with break-up fees and similar deal security measures. Parties are free to agree specific arrangements to this effect.
The bidder may enter into agreements with other shareholders in the form of shareholders agreements. However, in accordance with the Companies Law, the agreement is not binding on the target entity unless its competent authority has approved it. Voting agreements may also be entered into. However, such agreements must be disclosed where they relate to ownership stakes in excess of the disclosure threshold.
Shareholders may vote by proxy.
At present, Kuwait law does not have provisions that allow for a bidder to compulsorily squeeze out any remaining minority shareholders.
Irrevocable commitments are permitted by the CML Bylaws. However, these have not yet been extensively used in Kuwait and therefore the practice in relation to them continues to evolve. For instance, at one point the authorities did not look favourably upon irrevocable commitments as they were viewed as offering an advantage to certain shareholders over others.
Negotiations are typically undertaken prior to submitting a draft offer document to the CMA. They are drawn up as unilateral undertakings, and generally do not provide a way out for the principal shareholder.
Following the CMA’s approval of the bid, the bidder must announce the approval immediately to the Boursa Kuwait on his or her website and that of the target company, as well as in at least two daily newspapers.
The bid document itself must be published on the Boursa Kuwait’s website and those of the bidder and the target company.
See 4.2 Material Shareholding Disclosure Threshold, above.
A bidder is required to provide his or her audited financial statements for the previous three financial years. The statements must be prepared using an internationally recognised accounting standard.
The following documents are considered transaction documents and must be disclosed and made available from the date the bid document is announced:
Pursuant to the CML Bylaws, the members of the board of directors of a target company are prohibited from engaging in any of the following activities during an offer period or during the period of initial negotiations on the lodging of an offer if the approval of the shareholders’ general assembly has not been obtained:
The directors must also ensure that any notice sent to the shareholders of a target company calling for the convening of a shareholders’ meeting must include complete and accurate information on any offer. All documentation relating to a takeover offer must be accurate and the information provided must be sufficient and fairly presented.
The CML Bylaws have conflict of interest provisions that preclude a director, his or her spouse and relatives up to the fourth degree from voting on a matter in which he or she may have an interest.
Establishing special or ad hoc committees normally depends on the internal corporate governance structure of the company. However, a board member with an interest in an offer presented to the board would be precluded from voting with respect to that interest.
Kuwait does not have a precedent system and therefore it is not possible to give a definitive answer as to whether courts in Kuwait defer to the judgement of the board. However, takeover issues do not appear to have been the subject to any significant litigation in Kuwait.
Both the bidder and the target entity must procure a report that is produced by an independent CMA-approved investment adviser, who must provide his or her opinion on the offer and present it to shareholders of the entity who retained the adviser.
While Kuwait does not have a precedent system, the courts have handled a number of conflict of interests matters. Further, the CMA through its disciplinary processes, has also handled a number of conflict of interest cases.
Although hostile bids are not common in Kuwait, the law currently provides for competitive bids during the mandatory takeover process. In addition, during a block trade, there is a public auction during which a person could instigate a hostile bid.
A target company's board of directors is required to treat any hostile bid as it would a takeover offer. Therefore, by implication the board is not able to undertake defensive measures in relation to a hostile bid. In addition, conflict of interest provisions preclude a director from voting on a matter in which he or she may have an interest.
There are no defensive measures because hostile bids are treated as takeover bids.
As there are no defensive measures to enact, directors do not owe any duties in such instances.
The decision to accept a takeover offer is for the shareholders to make. The board of directors of a target company must make a recommendation to the CMA and the target's shareholders regarding any offers (within seven working days from the date of receiving an approved bid document). This recommendation must be accompanied by the opinion of on independent investment consultant licensed by the CMA concerning the proposed bid.
Litigation cases in the field of M&As are generally rare in Kuwait.
Lawsuits generally occur at any time, both prior to closing and post-closing.
There is no significant shareholder activism in Kuwait.
Activists do not appear to seek to encourage companies to enter into M&A transactions.
There are only a limited number of cases where shareholders have sought to stop the progress of announced transactions.