Corporate M&A 2024 Comparisons

Bahrain's economy is surging forward after a period of stabilisation, fuelled by a rise in foreign investment and increased money supply. The impact of COVID-19 on M&A is diminishing, and businesses are largely back to normal operations.

However, the pandemic has left a lasting mark on how business is done in Bahrain, with some continuing the remote work practices adopted during COVID-19.

Global trends like industry consolidation and inflation in Europe and the US are fuelling local M&A activity in Bahrain. In the past year, global M&A deals spurred acquisitions of subsidiaries and branches in Bahrain, leading to a rise in domestic M&A transactions.

Public M&A deals seem to reflect strategic divestments that align with Bahrain's Vision 2030. The generated liquidity could potentially be reinvested in projects that support the government's long-term goals. Bahrain has already made strides in this direction by integrating the UN's Sustainable Development Goals 2030 into its national strategies.

The recent M&A wave in Bahrain has been particularly active in sectors like healthcare, rental services, real estate investment management, engineering and financial services.

COVID-19's impact on the education sector is visible, with negotiations around distressed asset acquisitions emerging in certain transactions. This suggests that some educational institutions may be facing financial difficulties.

There are two principal ways to effect a takeover of a Bahraini public company:

• a friendly or hostile contractual takeover offer by the bidder for the shares of the target; or
• a merger of the target by consolidation or absorption into the bidder or a subsidiary or associate of the bidder.

A business can also be purchased by way of an asset purchase, commonly known as a business premises transfer.

Bahrain's Commercial Companies Law allows for two main types of merger:

• a merger by absorption, whereby one or more companies (merged company) dissolve and transfer everything they own and owe (assets and liabilities) to an existing company (merging company); and
• a merger by consolidation, whereby two or more companies (merged companies) dissolve completely, and a brand new legal entity (merging company) is created.

The Central Bank of Bahrain (CBB) is the primary regulator for public M&A in Bahrain. The Capital Markets Supervision Directorate at the CBB administers Rulebook 6, including the Takeovers, Mergers and Acquisitions (TMA) regulations, while the Ministry of Industry and Commerce (MOIC) regulates the foreign ownership restrictions and antitrust issues.

Other sector-specific regulators may also regulate sector-specific M&A (the Telecommunications Regulatory Authority, the Ministry of Education, the Ministry of Health, etc).

Bahrain significantly relaxed foreign ownership regulations in 2021. Previously, many commercial activities mandated a minimum 51% ownership by a Gulf Cooperation Council national, but foreign companies can now own a majority stake in a wider range of businesses, provided a Bahraini shareholder is included. The minimum ownership percentage for the Bahraini partner remains unclear, with estimates suggesting it could be as low as 1%. The MOIC has discretion to determine this percentage on a case-by-case basis.

Foreign-owned companies can now participate in a significantly broader range of business activities, encompassing a total of 178 previously restricted sectors. While many activities are now open to majority foreign ownership, there are still limitations for certain sectors. Roughly a third of activities that were previously capped at 49% foreign ownership have been liberalised. A small fraction (around 3%) remain capped at 49% foreign ownership, and a very limited number of activities (around 3%) are entirely off limits to foreign ownership.

Competition and antitrust in Bahrain are regulated under Law 31 of 2018 (the “Competition Law”), which provides that various practices will be deemed to be anti-competitive and unlawful, and outlines issues regarding particular transactions that require reporting to and/or approval by the Competition Authority (CPA).

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 that an “economic concentration” has been created if a change of control resulted from:

• a merger between two establishments or more, fully or partially, that were previously independent; or
• an acquisition of direct or indirect “control” over an establishment by:
1. one or more natural persons, controlling one establishment or more; or
2. one or more other establishments.

The Competition Law granted the CPA the authority to issue a resolution specifying the terms and conditions that create control, as referred to above. As per the Economic Concentration Resolution, a merger control filing will be required in Bahrain if a shift in market control occurs as a result of the acquisition of direct or indirect control over another entity, fully or partially. For a change of market control to occur, at least 40% of the relevant market would need to be affected in the case of one entity, or 60% of the market in the case of two entities.

Under the Bahrain Labour Law No 36 of 2012, 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 is worth noting that Bahrain imposes a nationalisation scheme, known as “Bahrainisation”, by which a ratio of Bahraini nationals to foreign nationals would apply if there are more than six employees (for certain industries the requirement does not apply until ten workers are employed.). If there are more than six employees, the ratio of foreign to Bahraini employee differs from one industry sector to another. Nevertheless, Bahrain has instituted a system permitting the issuance of work permits outside of the Bahrainisation ratio requirement through the payment of an increased annual work permit fee.

There is no current knowledge of any express national security review of acquisitions in Bahrain.

As a civil law jurisdiction, there are no definitive significant court decisions in Bahrain; it does not have a precedent system and court decisions are made on a case-by-case basis, depending on the circumstances.

In October 2023, the CBB revised the rules regarding M&A of publicly traded companies. These revisions focus on ensuring transparency and fairness through independent evaluations.

An independent adviser must assess the fairness of an offer for shareholders. Their advice and reasoning should be included in relevant communications. If there is disagreement within the board or with the adviser on the offer, explanations must be presented to shareholders, including the dissenting directors' view. Directors with conflicts must be disclosed and should not vote on the offer. If the offering company is publicly traded or has a conflict, it also needs an independent adviser and shareholder approval.

It is not unusual for a bidder to build a stake prior to launching an offer. The structure of the market does not facilitate stakebuilding as the lack of market depth coupled with scarce volatility implies that any stakebuilding may have a significant impact on the price of the securities to the detriment of the person seeking to build a stake in the company when it comes to launch a subsequent offer, whether mandatory or voluntary. Furthermore, all trades must be effected in the market, whether in the regular market or in the market for special trades where certain negotiated trades may be settled. However, if a person decides to build a stake prior to launching an offer, it would have to trade on the regular market by placing ordinary trades or seek a negotiated sale with a private seller, which would likely be settled in the special market in the form of a “block trade”.

The threshold for disclosure to the Bahrain Bourse (BHB) is triggered when a person's ownership alone or together with that of their minor children, or any other accounts under their disposal, or the ownership of any of their associate or affiliate companies, amounts to 5% or more of any listed security of a joint stock company.

In addition, all persons must obtain the CBB’s prior written approval to execute any order that will bring their ownership alone or their ownership together with their minor children, or the accounts standing under their disposal, to 10% or more in any listed security. Any further increase of 1% or more shall also be subject to CBB prior written approval.

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. Reporting thresholding are mandatory provisions introduced in the interest of all market participants and are therefore not disposable by a company.

The Bahrain disclosure requirements are triggered upon the acquisition of 5% or more of any listed securities on the BHB. In addition, the CBB has prescribed certain disclosure requirements for offerings and initial listings (the CBB Disclosure Standards). Furthermore, the Listing Rules of the BHB provide for certain disclosures in relation to changes in the interests of substantial shareholders.

In general, dealings in derivatives related to the target company's securities are allowed, except for people who are privy to confidential takeover information relating to the takeover. These insiders are restricted from trading the target company's securities (including derivatives) during a specific window surrounding the takeover announcement. This period typically starts when there is a reason to believe a takeover is being considered, and ends when the takeover is officially announced (or when the discussions fall through and are made public). Equity derivatives, however, would likely be deemed unlawful if used to circumvent disclosure standards – for example, by using cash-settled equity derivatives to hide corporate ownership interests.

There is no specific disclosure requirement for derivatives under securities disclosure. However, if the derivative would give a person control of the proprietary and administrative rights over a listed company in excess of the material threshold indicated in 4.2 Material Shareholding Disclosure Threshold, then this would likely be subject to disclosure.

Bahrain's TMA regulations mandate that acquirers disclose details of all existing derivatives held by themselves or any associated parties on the target company's securities when making a firm offer announcement.

Bahrain's competition laws do not create filing/reporting obligations for derivatives. However, there is a general prohibition on mergers that create a monopoly in any economic activity, commodity or product.

Generally, shareholders do not have to disclose their purpose of acquisition or their intention regarding control of the company. However, there are disclosure requirements in certain circumstances, such as when a shareholder acquires a significant stake in a company (eg, more than 5% of the shares).

In Bahrain, potential acquirers (offerors) or those considering an offer (potential offerors) have a responsibility to make public announcements under certain conditions. One such instance is when rumours or speculation about a possible takeover of the target company (offeree company) circulate before any formal approach has been made.

The target is required to make an announcement when there are negotiations or discussions between a potential offeror and the holder, or group of holders, of shares carrying 30% or more of the voting rights of the company and the company is subject to rumour or speculation about a possible offer or there is unusual movement in its share price or in the volume of share turnover, and there are reasonable grounds for concluding that it is the potential vendor's actions that have led to the situation.

Announcements are sometimes deferred subject to receiving the CBB’s approval.

Under Bahrain’s TMA regulations, the target is not required to provide due diligence information to a potential bidder; however, where a target's board chooses to disclose information or grant access to management to a potential or actual bidder, it must, on request, provide equal information access to rival bidders. Caution must be exercised in respect to the nature of the information provided, as the company cannot disclose material information that is not publicly available.

In case of a necessity to disclose such information, an exemption may be sought from the regulator. Any such exemption, however, would be accompanied by measures to protect the market from any such disclosure insofar as permitted on an exceptional basis.

The COVID-19 pandemic did have an impact on deals, but it did not have affect the scope of due diligence as such, as physical data rooms were already a thing of the past by the time of the outbreak.

Standstills are highly unusual, probably due to the fact that hostile takeovers were traditionally unusual if not altogether non-existent, although things are changing in this respect. Standstills – in certain forms at least – could also give rise to an issue of validity under local law. Exclusivity is more commonly demanded and granted.

It is permissible to document the agreements reached between the buyer and the target in the terms or a framework agreement defining the road-map of the deal, although the exact terms and conditions of the offer would, of course, have to be included in the offer document to be addressed to the shareholders of the target, noting that the board of the target has no power to bind shareholders but can influence their vote by issuing a board circular with its opinion on the offer.

Each transaction is different, and different considerations arise depending on the circumstances of each transaction. Governmental departments are now operating at full capacity, and transaction timelines have returned to the pre-pandemic transaction timelines.

With regard to private transactions, the timeline for completing the acquisition process differs from one case to another, depending on the nature of the business to be acquired. While the process of closing non-regulated business acquisitions could be completed within two to three weeks from all required documents being prepared, acquisitions of other regulated businesses that are subject to prior regulatory approvals, including from the CBB, the Ministry of Education, the Council for Regulating the Practice of Engineering Profession, etc, could be closed within five to 16 weeks. If the approval of the CPA is required, the transaction timeline may be extended for up to another 60–90 days.

All takeover offers must be open for acceptance for at least 15 days after becoming or being declared unconditional. The acceptance condition must be satisfied within 60 days from posting the offer document. All other conditions must be fulfilled within 15 days of the first closing date or the date on which the offer becomes or is declared unconditional as to acceptances, whichever is later. A merger will typically implicate a shorter timeframe for completion. Competing offers adopt the timetable of the new bidder.

In Bahrain, a mandatory offer is required when:

• any person acquires 30% or more of the voting rights of a company, whether by a series of transactions over a period of time or not;
• two or more persons acting in concert collectively hold less than 30% of the voting rights of a company, and any one or more of them acquires voting rights that increase the holding to 30% or more of the voting rights of the company; and
• any person, alone or together with persons acting in concert, is interested in shares that in total carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights, and such person, or any person acting in concert with them, acquires additional shares carrying more than 1% of the voting rights in any six-month period.

Unless CBB consent has been obtained, a cash offer is required where the bidder has bought – for cash, during the offer period or within three months before its commencement – an interest in shares of any class under offer in the target carrying 10% or more of the voting rights of that class or if in the view of the CBB there are circumstances that render such a course of action necessary.

The TMA regulations prohibit an offer from being declared unconditional as to acceptances unless the bidder has acquired over 50% of the voting rights in the target. A bidder must squeeze out minority shareholdings if it holds or controls 90% or more of the target's voting share capital within three months from the date of acquisition of the 90% stake. There would be no squeeze-out right or obligation for acquisitions of a stake below 90%.

For joint stock companies, a merger must be approved by at least 75% of the shares present at the relevant extraordinary general meeting for both merging entities. With respect to limited liability companies, a merger must be approved by the majority of the partners owning at least 75% of the company’s capital, unless the company’s deed of association requires a higher percentage.

With respect to listed joint stock companies or companies licensed by the CBB, the provisions of Central Bank Law No 64 of 2006 and its implementing regulations and rulebooks must be taken into consideration.

In Bahrain, mandatory takeover offers (MTOs) must be unconditional. However, there is one exception that is subject to CBB approval, whereby the offer can be contingent on the offeror (and those acting together) acquiring over 50% of the voting rights. The squeeze-out provisions are triggered at reaching the 90% threshold.

As a general rule with limited exceptions, financing for an offer must be fully committed when the announcement of the firm intention to make an offer is made.

A voluntary offer must not be made subject to conditions the fulfilment of which depends on the subjective interpretation or judgement of the bidder, or lies in the bidder's hands. Once a firm intention to make an offer is formally announced, the bidder is committed to proceed. Scope to withdraw by invoking the conditions to the offer is limited. To the extent that the bidder intends to attach conditions other than normal conditions, the CBB must be previously consulted.

The validity of deal security measures is highly questionable as the board of the target would not normally have the power to agree on such measures that would affect the company's shareholders exercising their lawful rights in respect thereto. There are no new contractual considerations or tools for managing “pandemic risk” in the interim period. Discussion around possible future pandemics would likely be held as part of the discussions relating to a material adverse change clause, noting however that this type of conditionality would not be permissible in the case of a mandatory tender offer.

It is the prevailing view that a shareholders’ agreement purporting to give special governance rights outside of the generally applicable governance rules is not permissible for listed companies. For this reason, any arrangement between the bidder and the target aimed at giving the bidder special governance rights might be held to be unenforceable.

Shareholders may vote by proxy and/or a special power of attorney.

In Bahrain, after a successful takeover offer exceeding 90% acceptance (excluding the acquirer's existing stake), a squeeze-out mechanism allows the acquirer to buy the remaining shares from dissenting shareholders. The acquirer must issue a formal notice within 15 days and complete the purchase at the original offer price within three months. Dissenting shareholders have 60 days to challenge the process in court, but are still entitled to receive payment during the dispute.

Irrevocable commitments are permitted by the TMA regulations. However, these have not yet been extensively used in Bahrain so the practice in relation to them continues to evolve. Any person proposing to contact a private individual or a corporate shareholder with the aim of obtaining an irrevocable commitment should consult the CBB in advance. As irrevocable commitments could be viewed as offering an advantage to certain shareholders over others, negotiations are typically undertaken after consulting the CBB. The irrevocable commitments are drawn up as unilateral undertakings and, generally, do not provide a way out for the principal shareholder.

Takeover offers in Bahrain require CBB approval before a public announcement is made, except for MTOs that are triggered by regulation.

The target company (offeree) board is obliged to promptly announce to the stock exchange, market participants and their shareholders whenever any of the following conditions arise:

• the board receives a formal notification of a firm intention to make an offer, regardless of its own position on the matter;
• following an initial approach by a potential acquirer, rumours or unusual trading activity begin to surround the possibility of an offer;

• negotiations involving more than a limited group of individuals are about to begin regarding a potential offer;
• the board becomes aware of discussions between a potential acquirer and a major shareholder holding at least 30% of the voting rights; or
• the company itself is actively seeking potential acquirers and this search coincides with rumours, unusual trading activity or the need to approach multiple potential buyers.

Strict regulations govern the announcement of MTOs. Even before approaching the target company, a potential acquirer must announce their intentions if rumours or speculation spread about a possible offer. Similarly, unusual trading activity suspected to be caused by the acquirer, or expanding negotiations beyond a select group, necessitate immediate public announcements. Finally, any acquisition that triggers the MTO threshold automatically requires an announcement without delay for additional information gathering.

The TMA regulations mandate specific procedures for announcing an offer or possible offer. The announcement itself must adhere to the guidelines outlined in Appendix B of Part B within CBB Rulebook Volume 6. It needs to be disseminated through two channels: the licensed stock exchange and two local Bahraini daily newspapers. One of these publications must be entirely in Arabic, while the other can be either English or Arabic.

Shareholders considering a business combination through a securities exchange offer need to be aware of disclosure requirements for two key areas: Merger Benefits Statements and Asset Valuations.

The offer document and the offeree board circular must clearly disclose the availability and location for inspection of key financial documents, including audited consolidated financial statements, covering the last two years. The specific accounting standards used for preparing these statements depend on the nature of the companies involved. Islamic financial institutions must adhere to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) standards. For non-Islamic institutions or those following different standards, any accounting standards approved by the CBB are acceptable.

There is no local GAAP in Bahrain. All companies incorporated in Bahrain prepare their financial statements according to the international accounting standards (IFRS) or AAOIFI, as applicable. In addition, Appendix E specifies that all reports must be prepared in accordance with IFRS, with AAOIFI Standards applying to Islamic institutions.

All transaction documents may not be disclosed in full. However, TMA regulations specify that certain documents must be readily available for shareholder inspection during a potential takeover offer in Bahrain. The offer document and the offeree board circular need to specify clearly which documents are included and where they can be accessed, from the offer announcement until the offer period ends.

The following documents are considered transaction documents and must be disclosed and made available from the date the bid document is announced:

• company documents – memorandum and articles of association (or equivalent documents) for both the offeror (acquiring company) and the offeree (target company);
• financial statements – audited consolidated accounts for the last two financial years, prepared according to AAOIFI standards (for Islamic financial institutions) or other CBB-approved accounting standards;
• management contracts – all service contracts of the offeree company's directors;
• referenced documents – any reports, letters, valuations or other documents used in materials issued by either company;
• professional adviser consents – written consents from any professional advisers involved in the offer;
• material contracts – all significant contracts related to the offer;
• profit forecast documentation – if profit forecasts are included, reports from auditors, consultant accountants and professional advisers, along with their written consent to the use of their reports;
• asset valuation documentation – if asset valuation is involved, the valuation certificate, associated report details and a letter confirming the valuer's consent to their name being published;
• commitment letters – any documents evidencing irrevocable commitments or letters of intent obtained by either company or their associates;
• dealings aggregation – a full list of all dealings if the CBB has approved aggregation;
• financing arrangements – documents related to the offer's financing or a detailed statement from the professional adviser confirming sufficient resources for implementing the offer;
• inducement fees – documents related to any inducement fees or similar arrangements; and
• agreements and arrangements – all agreements or arrangements disclosed in the offer document, including memorandums if not written down formally.

Directors of an offeror and the offeree company must only consider the shareholders' interests taken as a whole when they are giving advice to shareholders. Directors of the offeree company must give careful consideration before they enter into any commitment with an offeror that would restrict their freedom to advise their shareholders. Such commitments may give rise to conflicts of interest or result in a breach of the directors' fiduciary duties.

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.

Bahrain does not have a precedent system, so it is not possible to give a definitive answer as to whether courts in Bahrain defer to the judgement of the board. However, takeover issues do not appear to have been the subject of any significant litigation in Bahrain.

Both the bidder and the target entity must procure a report from an independent investment adviser, who must provide their opinion on the offer and present it to the shareholders of the entity that retained the adviser.

While Bahrain does not have a precedent system, the courts have handled a number of conflict of interest matters. The CBB has also handled a number of conflict of interest cases, through its disciplinary processes.

Although Bahrain's TMA regulations permit hostile takeovers, they are practically non-existent.

Once a bona fide offer has been communicated to the board of the target or once the board of the target has reason to believe that a bona fide offer may be imminent, no action that could effectively result in an offer being frustrated may be taken by the board of the target in relation to the affairs of the company without the approval by the shareholders of the target, nor may any action be taken that results in the shareholders of the target being denied an opportunity to decide on the merits of an offer.

In particular, the target's board must not, without shareholders’ approval, do or agree to do the following:

• issue any shares;
• create, issue or grant, or permit the creation, issue or grant, of any convertible securities, options or warrants in respect of shares of the target;
• sell, dispose of or acquire assets of a material amount, other than during the normal course of business;
• enter into contracts, including service contracts, other than in the ordinary course of business; or
• cause the target or any subsidiary or associated company to purchase or redeem any shares in the target or provide financial assistance for any such purchase.

Without approval by the shareholders of the target, a board of the target may consider the following possible anti-takeover defences or impediments:

• denying due diligence access;
• soliciting competing offers; and
• encouraging shareholders not to accept the offer.

In the case of a merger, the non-co-operation of the target's board could prevent the merger from completing. In such instances, the hostile bidder would necessarily have to launch a contractual takeover offer.

The directors are under the overarching duty to act in the sole interest of the shareholders, and this duty is clearly enshrined in the TMA regulations. This duty is not “new” as it stems from the general fiduciary duties of the directors.

The board can refuse to engage in discussion with a would-be bidder but the latter could still seek to acquire control by launching a voluntary offer. In this case, the board could recommend the shareholders not to accept the offer, but the ultimate decision would rest with the shareholders.

Litigation in the field of M&A is generally rare in Bahrain.

Lawsuits can occur at any time, both prior to closing and post-closing.

As far as is known, there have been no disputes between parties with transactions pending in early 2020. Even if there are, it is too early to determine whether any lessons have been learned.

There is no significant shareholder activism in Bahrain.

Activists do not appear to seek to encourage companies to enter into M&A transactions. This has not changed on account of the pandemic.

As far as is known, there are no cases where shareholders have sought to stop the progress of announced transactions.