Contributed By ASAR – Al Ruwayeh & Partners
M&A activity rebounded in 2021 and this trend is continuing. Cross-border activity has also picked up and is almost at pre-pandemic level. This positive change is largely driven by accelerated growth arising out of companies finding ways to resolve the challenges caused by COVID-19, such as supply chain and labour-related disruptions being resolved with digital technologies.
Increased activity is also being driven by acquisitions that align with the long-term corporate strategies of purchasers, for both cross-border and local transactions.
Additionally, the recent rises in oil prices are expected to fuel M&A activity in due course.
Investors with deep pockets are also looking to acquire vulnerable businesses which are available at attractive valuations.
During 2021, there was significant use of locked box mechanisms, although completion accounts were also popular. There was also an increased interest in transaction break fees.
From a business impact perspective, there was an increased use of earnouts, as parties recognised that EBITDA for 2020 to 2021 may not present a company’s position accurately, due to the extraordinary strain on businesses as a result of COVID-19.
There was also increased activity in merger control, particularly following the publication of notification thresholds by the Kuwait Competition Protection Authority (CPA) in 2021.
Lastly, more firms committed to improving their environmental, social and governance (ESG) positions in their corporate strategies in the aftermath of the pandemic. However, ESG is not yet a big deal driver in Kuwait, and there have been limited instances in which deals have been assessed from an ESG perspective. Having said this, it is worth noting that in February 2022 the Kuwait Capital Markets Authority (CMA) issued extensive amendments to Module 11 (Dealing in Securities) of the Capital Markets Law (CML) bylaws (as defined further in 2.1 Acquiring a Company), which now expressly recognises and puts in place a regulatory regime for the issuance of ESG instruments (as well as short-term bonds). As such, it is expected that ESG instruments may increasingly become part of the M&A landscape in the coming years.
The FMCG (fast moving consumable goods), health, education and TMT (technology media and telecommunications) sectors experienced significant M&A activity in 2021.
M&A activity in the banking and finance sector continued at a slow pace, however, parties to transactions in the banking sector that stalled at the height of the pandemic have now begun to re-assess their positions.
Companies in Kuwait may be acquired through a merger or an acquisition. The Companies Law (Law 1 of 2016) (the "Companies Law") and its executive regulations (issued under Ministerial Resolution 287 of 2016), the Capital Markets Law (Law 7 of 2010) (CML) and the executive regulations of the CML (Law 72 of 2015, as amended) ("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:
In a fusion, ie, the liquidation of the entities involved and the creation of a new company into which the assets and liabilities of the fused companies are contributed, the shareholders of the liquidated companies receive shares in the new company in exchange for their shares in the liquidated companies.
In an amalgamation, which involves the absorption of one or more companies by another company, the absorbed company would be liquidated and all its assets and liabilities would be transferred to the surviving company. The shareholders of the absorbed entity receive new shares in the surviving entity.
In a division and absorption, the business of a company is split into distinct parts, which are then merged into existing companies.
The regulatory bodies are, primarily:
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.
Kuwait recently enacted Competition Law (Law 72 of 2020) (which repealed the previous Law 10 of 2007), which regulates antitrust matters in Kuwait.
Under the Competition Law persons participating in “economic concentrations” are required to apply to the CPA for approval in certain circumstances. The Competition Law considers the following circumstances to be “economic concentrations”:
A notification is required if the value of the parties’ registered assets or relevant annual sales in Kuwait, according to audited financial statements for the last financial year before “economic concentration”, exceed thresholds ranging between KD500,000 and KD2,500,000.
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.
It should also be noted that foreign workers who are permitted to work in Kuwait may not work for any entity other than the employer who sponsored such employee, with very limited exceptions provided under the Kuwait Foreigners Residence Law (Law 17 of 1959) and its executive regulations (issued under Ministerial Resolution 640 of 1987).
There is no current knowledge 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.
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.
In 2021, the CPA published notification thresholds for recent transactions, ranging between KD500,000 and KD2.5 million of the turnover or assets of the parties (as applicable). Kuwait’s new bankruptcy law, Law 71 of 2020, is now in full force and effect, following the publication of its executive regulations in 2021.
While there have been no significant changes to the takeover law in the past 12 months, following the publication of thresholds under the new Competition Law, there has been an increased presence of the CPA in the market.
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, the Boursa Kuwait and 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 plus or minus 2% semi-annually for ownerships of 30% to 50% and only plus or minus 5% semi-annually for ownerships of 50% to 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 CMA, such as:
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 CPA, CMA and Boursa Kuwait discussed previously would all apply if the underlying asset for the derivatives is a tradable security as defined by the CMA Law and the CML bylaws.
A shareholder is required to make known the purpose of their 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 their opinion on the offer and present it to the shareholders who retained them. 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, 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. It should be noted that the Boursa Kuwait may require a listed company to disclose, eg, where there is speculation, or leaks of information and news or where rumours are circulating.
If this occurs, the listed company is required to comment and if it fails to do so, Boursa Kuwait may require it to comment. The listing may also be temporarily suspended. Similar considerations may apply where there is unusual trading activity.
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.
The scope of due diligence is the standard scope expected of an acquirer to satisfy themselves as to the business of a target entity and any risks associated with it.
Where pre-pandemic non-binding offers had been signed and transactions stalled on account of the pandemic, it has been observed that many acquirers conducted top-up due diligence to determine the extent to which the pandemic affected a target’s operations. The top-up due diligence approach has been the market standard.
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. Given that governmental departments are now operating at full capacity following a relaxation of COVID-19 related restrictions, a return to the pre-pandemic transaction timelines is anticipated.
With regard to private transactions, one may generally expect a transaction timeline of about 12 to 16 weeks from pre-transaction. This estimate includes pre-transaction structuring, due diligence, negotiation of documentation and closing.
In the event that the approval of the CPA is required, the above timeline may increase substantially. While the CPA’s trend in terms of timelines is still evolving, parties are generally advised to allow approximately three to six months for the CPA process.
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.
In sectors with high valuation uncertainty and where the consideration is cash, there has been an increased use of completion accounts as opposed to locked-box mechanisms, mainly due to the disruption to many target company’s operating positions on account of the pandemic. Sellers are also increasingly negotiating earn-outs into transaction documentation.
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.
Please see 6.1Length of Process for Acquisition/Sale and 6.3 Consideration in relation to regulatory changes for mitigating pandemic risk and contractual considerations for managing pandemic risk, respectively.
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, but 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 immediately announce the approval to the Boursa Kuwait on its 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.
A bidder is required to provide their 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, their spouse and relatives up to the first degree from voting on a matter in which they 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 their opinion on the offer and present it to the 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 interest 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 takeover process. In addition, where public auctions are utilised, any person can 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 they may have an interest.
There are no generally no common defensive measures because hostile bids are treated as takeover bids. This has not changed as a result of the pandemic.
As there are no prescribed defensive measures to enact, directors do not owe any specific duties in this regard. However, see 8.1 Principal Directors' Duties , which describes certain restrictions on board powers during a takeover process.
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 an independent investment consultant licensed by the CMA concerning the proposed bid.
Litigation cases in the field of M&A are generally rare in Kuwait.
Lawsuits can occur at any time, both prior to closing and post-closing.
It is too early to say if there have been any lessons learned as disputes are still pending before the courts.
There is no significant shareholder activism in Kuwait.
Activists do not appear to seek to encourage companies to enter into M&A transactions. This has not changed on account of the pandemic.
There are only a limited number of cases where shareholders have sought to stop the progress of announced transactions.