Corporate M&A 2024 Comparisons

We have seen a significant uptick in M&A activity during 2023, particularly in the healthcare, aviation, banking, education, financial services (including fintech) and utilities sectors.

Investors with deep pockets are capitalising on what we perceive to be a buyer’s market, and are moving to acquire vulnerable businesses which are available at attractive valuations.

During 2023, there was significant use of locked box mechanisms, although completion accounts were also popular. There was also an increased interest in transaction break fees.

A key topic in cross-border transactions are the recent ultimate beneficial ownership rules issued by the Ministry of Commerce and Industry (MOCI), which came into force during 2023.

The new rules require companies to maintain a register of ultimate beneficial owners and to submit this register (and updates to it) to the MOCI. Also of significance, the Competition Protection Authority (CPA) has continued to be increasingly active in merger control to ensure compliance with the Competition Law (Law No. 72 of 2020). As a result, transaction parties are now more aware of competition regulation issues. Financing considerations continue to impact on deal structures, particularly in relation to the provision of security for financing. We also noticed increased attention being paid to material adverse change clauses driven by, amongst other reasons, conflicts in nearby jurisdictions.

Companies’ commitment to improving their environmental, social and governance (ESG) positions in their corporate strategies in the aftermath of the pandemic is gaining traction but is not a definitive driver in Kuwait. Having said this, it is worth noting that the Kuwait Capital Markets Authority (CMA) has issued extensive amendments to Module 11 (Dealing in Securities) of the CML Bylaws (as defined in 2.1 Acquiring a Company), which now expressly recognise, and put in place a regulatory regime for the issuance of, ESG instruments (as well as short-term bonds). As such, and as expected, we are starting to see local banks structure their debt capital market programmes such that they are able to issue ESG-type instruments. We expect that ESG instruments may increasingly become part of the M&A landscape at some point in the future.

We have seen a significant uptick in M&A activity during 2023, particularly in the healthcare, aviation, banking, education, financial services (including fintech) and utilities sectors.

Companies in Kuwait may be acquired through a merger or an acquisition. The Companies Law (Law No. 1 of 2016) (“Companies Law”) and its executive regulations (issued under Ministerial Resolution 287 of 2016), the Capital Markets Law (Law No. 7 of 2010) (CML) and the executive regulations of the CML (Law No. 72 of 2015, as amended) (“CML Bylaws”) primarily govern M&A 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 merger provided for under the Companies Law and the CML Bylaws, as follows:

• “amalgamation”, which is defined to entail the transfer of the entire business of one company (including all its assets and liabilities) to another;
• “consolidation”, which is defined to entail the liquidation of two or more companies and the formation of a new company into which the merged companies’ assets and liabilities are transferred; and
• “division and amalgamation”, which is defined as the division of a company’s financial assets and liabilities into two parts or more and the transfer of each part into an existing company.

The CML Bylaws also provide for various means of acquiring another company and this primarily relates to voluntary and mandatory acquisitions. It is not uncommon for purchasers who are seeking to acquire a Kuwaiti listed company to adopt a creeping strategy until they come into possession of more than 30% of the voting shares of a listed company, whereafter mandatory takeover provisions are triggered. While purchasers previously leaned on block trade mechanisms included in the Boursa Rule Book for such creeping (which raised certain administrative issues as well as a measure of risk as to whether the purchase would actually complete), there have been certain recent reforms which can be taken advantage of to make direct purchases of shares in a listed company in a more streamlined manner.

The regulatory bodies are, primarily:

• the MOCI;
• the CMA;
• Boursa Kuwait (previously known as the Kuwait Stock Exchange);
• the CPA; 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 entities wholly owned by the Gulf Cooperation Council (GCC), companies listed on Boursa Kuwait, companies licensed under Kuwait’s Foreign Direct Investment Law (Law No. 116 of 2013) and certain companies established in connection with projects approved under Kuwait’s Public Private Partnerships Law (Law No. 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, and pilgrimage and Umra services. Additionally, as a matter of practice, any activities requiring the prior approval of the Ministry of Information are generally restricted to Kuwaiti nationals.

Also noteworthy are certain recent reforms made during 2024 to the Kuwaiti Commercial Law (Law No. 68 of 1980) which allow a foreign entity to establish a branch of itself in Kuwait. However, the new implementing regulations of the MOCI which should clarify how this would be done in practice have not yet been issued by the MOCI. Please see 3.1 Significant Court Decisions or Legal Developments in this regard.

The Kuwait Competition Law (Law No. 72 of 2020) 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 concentration”:

• a merger between two persons or more that may lead to “control” or increased “control”;
• an acquisition of direct or indirect “control” by one person in all or parts of another person or persons, whether by the acquisition of assets, ownership rights or usufructs or by the purchase of shares, stock or liabilities or by any other way; and
• the existence of a partnership between two persons or more that leads to a permanent and independent economic or commercial activity, regardless of the legal form or activity exercised.

A notification is required if the value of any of the parties’ annual sales in Kuwait, according to audited financial statements for the last financial year before the “economic concentration”, exceeds KWD500,000; if the combined annual sales of the parties exceed KWD750,000; or if the combined value of the parties’ assets exceeds KWD2.5 million.

Under the Kuwait Labour Law (Law No. 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 No. 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 a foreign worker who is 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 No. 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 No. 21 of 1964) includes specific prohibitions against dealings with persons who are resident in and nationals of 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 what is perhaps one of the most significant developments of the last decade regarding foreign parties doing business in Kuwait, Amendment Law No. 1 of 2024 (the “Amendment Law”) was issued during January 2024. Under the Amendment Law, a foreign entity may establish a branch in Kuwait. The Amendment Law represents an exception to the restrictions in Article 23 of the Commercial Law (Law No. 68 of 1980), where it is provided that a foreigner may not do business in Kuwait save with a Kuwaiti partner who hasa 51% interest in such business. Further changes have been made to tender requirements.

The Amendment Law amends Article 24 of the Commercial Law and Article 31 of the Tenders Law (Law No. 49 of 2016) to essentially provide as follows:

• Amended Article 24 of the Commercial Law: A foreign party may now establish a Kuwaiti branch without the appointment of a Kuwaiti agent.
• Amended Article 31 of the Tenders Law: A foreign party appropriately registered as a service provider/contractor may participate in government tenders directly and without a Kuwaiti agent/partner (under the amended Article 31 of the Tenders Law).

As such, and under the Amendment Law, foreign parties should now generally be able to establish a branch in Kuwait through which they can conduct their business affairs. Having noted this, there are still other laws which may apply that require Kuwaiti participation. For example, the laws restricting foreigners from owning land remain unaffected. Significantly, the MOCI has advised that it is not currently applying these changes and will only begin to do so once new implementing regulations have been issued which give effect to these amendments.

Save for the establishment of a branch by a foreign party as set out in 3.1 Significant Court Decisions or Legal Developments, there have been no significant changes to takeover law in the past 12 months.

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, or through block trades, where an acquirer purchases 5% or more of a company’s share capital. Certain restrictions apply in relation to the pricing of such sales.

Where a stakebuilding strategy results in a person acquiring 5% or more of the voting shares in a company listed on Boursa Kuwait (the disclosure threshold), that person must disclose the acquisition to the listed company concerned, Boursa Kuwait and the CMA. Mandatory takeover provisions would also apply where the total stake in the target’s share capital exceeds 30%.

An obligation to disclose the transaction to the CMA and Boursa Kuwait is triggered once the disclosure threshold is met, and the purchaser concerned is required to file certain share disclosure notices 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).

Touched on above, 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.

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 and provided they do not amount to “Financial Derivatives” that are related to the interest rates relevant to the Kuwaiti dinar (KWD) or the foreign exchange rates of KWD which may not be issued unless approved by the Central Bank of Kuwait. “Financial Derivatives” are defined in the CML Bylaws as “financial instruments, the value of which is derived from the value of the relevant assets such as shares, bonds, commodities and currencies, which are purchasable, sellable and tradable similarly to shares or other financial assets. Financial Derivatives are considered securities subject to the provisions of the Law and these Bylaws.”

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 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:

• shares issued or proposed to be issued in the capital of a company;
• any instrument that creates or acknowledges a debt issued or to be issued by a company;
• loans, bonds, sukuk and other instruments that can be converted shares in the capital of a company;
• all public debt instruments that are tradable and issued by the various government entities or public institutions or authorities;
• any right, option or derivative relating to securities;
• units in a collective investment scheme; and
• financial instruments whose value is derived from assets or price references, including the value of shares, bonds, commodities, currencies and interest rates, and which can be bought, sold and traded in a manner similar to shares or any other financial assets.

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 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 derivatives should not (in our view) be considered as securities, particularly where the parties entered into the derivatives transactions under the umbrella of an International Swaps and Derivatives Association or other master-type agreement.

In the context of an acquisition, the notification and disclosure thresholds for the CPA, the CMA and Boursa Kuwait discussed above would all apply if the underlying asset for the derivatives is a tradable security as defined by the CML 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, the 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 bidder 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 the publicising of 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 entering 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 Boursa Kuwait may require a listed company to comment, eg, where there is speculation, or leaks of information and news, or where rumours are circulating, and if it fails to do so, the listing may be temporarily suspended and additional sanctions may apply. 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:

• the delay should not be intended to mislead;
• the listed entity must take measures to ensure confidentiality of the information; and
• after subsequent disclosure, the listed entity must provide the CMA with justification for the delay and may be subject to disciplinary action if there was no valid justification.

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 tends to be in line with that which is expected abroad of an acquirer to satisfy themselves as to the business of a target entity and any risks associated with it. While a full due diligence tends to be required, an abbreviated red flags due diligence exercise is becoming increasingly popular, with added warranties to help mitigate the risks involved.

Both standstills and exclusivity are common during the stakebuilding phase.

Documentation of offer terms and conditions are common during 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. Governmental departments are now operating at full capacity, and transaction timelines have returned to the pre-pandemic transaction timelines.

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 transaction timeline may be extended for up to another 60 to 90 days from the date documents are signed.

As noted above, a person who has come into possession of more than 30% of the voting shares of a listed company is required to launch a mandatory takeover under the CML Bylaws within 30 days of the acquisition of the shares.

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. Sellers are also increasingly negotiating earn-outs into their transaction documentation given certain volatility which has been prevalent during the last few years.

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 CML. 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, 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 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, their practice 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. The irrevocable commitments 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 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 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 its 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:

• the advice of the target’s board of directors on the bid;
• the articles of association of both the bidder and the target;
• audited financial statements of the bidder and the target for the last three financial years;
• any reports, notices or documents referred to in the bid document;
• any document providing an irrevocable commitment accepting the bid;
• documents evidencing funding of the bid; and
• any other documents required by the CMA.

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:

• issuing new shares;
• issuing or granting options;
• creating, issuing or permitting the creation or issue of any securities convertible into shares or subscription rights to shares;
• disposing or agreeing to the disposal of any assets of fundamental value;
• signing any contract outside the scope of the company’s regular activities;
• taking any measures relating to the company that would lead to the bid not being accepted or to denying shareholders the opportunity to make a decision in this regard; and
• having the company take on any significant material obligations.

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 of 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 that 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 whether 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.