Secondary Equity Offerings in MENA: A Tale of Two Approaches

The Middle East and North Africa (MENA) region has seen a notable increase in primary equity capital markets activity in recent years, particularly through initial public offerings (IPOs) by UAE and Saudi issuers. IPO activity in these markets has grown faster than in any other Europe, Middle East and Africa (EMEA) region in the past few years. However, until early 2024, this surge in primary equity capital markets activity was not mirrored in the secondary markets, where underwritten secondary offerings remained relatively uncommon. This changed within the span of one week in May 2024, when two substantial underwritten equity offerings in the shares of Saudi Aramco and ADNOC Drilling brought secondary capital markets activity in MENA into the spotlight.

The Saudi Aramco and ADNOC Drilling secondary equity offerings followed distinct structures, reflecting the broader global dichotomy in the structuring of these transactions: the US approach, which requires the involvement of the US-listed issuer in underwritten secondary offerings by major shareholders (which are regarded as “affiliates” for US securities law purposes), and the European approach, where continuous disclosure regimes enable shareholders to execute underwritten secondary transactions without the issuer’s direct involvement. This article considers the philosophy underpinning both approaches, their suitability for MENA regions, and key considerations in structuring secondary trades following either approach.

The US approach: issuer involvement

The involvement of the issuer in a secondary block trade is more common in respect of issuers listed in the US compared to EMEA. This approach is driven by the US securities laws which require any offer or sale of securities to be registered with the US Securities and Exchange Commission under Section 5 of the US Securities Act of 1933, as amended (the “US Securities Act”), absent an exemption from registration. As a general matter, exemptions from registrations are available in situations where the offer is limited to sophisticated investors who can fend for themselves without the protection of registration, or in situations where the transaction represents ordinary course trading without a “distribution” of securities to the public. Neither of these two broad categories of exemptions from registration are suitable for underwritten secondary offerings as they either, in the case of private placements, would result in those sophisticated investors receiving “restricted securities” that are not freely tradeable, or, in the case of resales by affiliates pursuant to Rule 144 under the Securities Act, would be subject to volume and manner restrictions that are not compatible with the nature of underwritten offerings.

As such, registered offerings are typically the preferred liquidity route for affiliates of US issuers as they allow selling shareholders to sell freely tradeable securities without limiting the universe of investors to certain sophisticated investors. It is therefore common for US issuers to grant pre-IPO investors registration rights that require the issuer to register their securities for resale. A registered sale would normally require significant issuer involvement in the preparation of the registration statement and prospectus supplement, facilitating due diligence exercise by the underwriters, and providing standard representations, warranties, undertakings and indemnities to the underwriters in connection with the offering. The heightened disclosure liability in the US increases the focus on the due diligence undertaken by the underwriters to establish a defence from liability.

In addition, the legal requirement for an issuer to produce or update the registration statement pursuant to which the secondary offering is made in respect of the US-listed securities can be explained by the need to ensure that the market has full and up-to-date disclosure around the issuer when the offering is made. Unlike the European regime, the US public disclosure regime does not include an independent obligation on issuers to continuously disclose any inside or material information to the market – any such obligation is triggered only when a periodic report is due, when the issuer files or updates a registration statement, or when it is undertaking a securities offering transaction. As such, without issuer involvement, there would be no assurance that the public disclosure around the issuer includes all material information that investors in the secondary offering need to take into account when making their investment decision. Indeed, issuers may have valid business reasons to delay the disclosure of certain material information (eg, in connection with ongoing negotiation of a significant M&A transaction) and, for that reason, registration rights agreements typically allow issuers to suspend the registration rights of the shareholders for limited periods to avoid forcing issuers to disclose this information prematurely.

The European approach: relying on market disclosure

In contrast to the US model, secondary equity offerings by selling shareholders in Europe do not typically require involvement from the issuer. This practice can be justified by the continuous disclosure regime that applies to European-listed issuers. Unlike their US counterparts, European-listed issuers are under an independent obligation to disclose material non-public information (MNPI) to the market as soon as possible, subject to the issuer’s ability to delay such disclosure in limited circumstances. While this obligation finds its basis in Article 17 of the EU Market Abuse Regulations (MAR), European jurisdictions that are not subject to MAR, such as the UK and Switzerland, have adopted similar continuous reporting obligation regimes.

As a result, the public disclosure of Europe-listed issuers is presumed to be continuously up-to-date in all material respects. Selling shareholders therefore do not need the issuers to update their public disclosure to permit them to sell their shares to the market in an underwritten secondary offering. However, this general principle has its own limitations. For example, as is the case in the US, selling shareholders of listed issuers in Europe are not permitted to trade if they are in possession of MNPI. The underwriters would typically seek to confirm the absence of MNPI both by obtaining clear representations in the block trade agreements from the selling shareholders to this effect, and by asking the selling shareholders to confirm that they are not in possession of MNPI in the course of the limited due diligence conducted prior to the trade. In addition, if the selling shareholders are “persons discharging managerial responsibilities” in the issuer or persons closely associated with them (eg, directors, senior executives or entities controlled by them), they will generally not be permitted to trade in the issuer’s securities during a closed period of 30 calendar days prior to the announcement of the issuer’s annual or interim results.

In addition to the presumed current nature of disclosure of listed issuers in Europe, there are other securities law and corporate law reasons that may favour not involving the issuer in the secondary offering transaction by selling shareholders. For example, if the fact that the secondary sale is planned could constitute inside information in respect of the issuer (eg, where the sale relates to a significant interest of a major shareholder and is not part of a plan previously communicated by the issuer or the selling shareholder to the market), the selling shareholder and its advisors would typically try to avoid communicating the trade to the issuer prior to its market announcement to avoid triggering an obligation on the issuer to disclose the trade to the market prematurely as inside information. This concern may be alleviated by the changes recently introduced to MAR under the EU Listing Act, which generally exempts issuers from the obligation to disclose as inside information intermediate steps in a protracted process until the materialisation of the “final circumstances or final event” associated with those steps.

Corporate law considerations may also favour excluding issuers incorporated in certain jurisdictions, such as the UK, from secondary transactions in its shares to avoid falling foul of the rules prohibiting the issuers from providing financial assistance for the purchase of its shares. “Financial assistance” is typically defined very broadly and could, in principle, capture indemnities provided by the issuers to the underwriters or other liabilities (such as payment of commissions or transfer tax) assumed by the issuer to facilitate the secondary transaction in its shares. While exemptions may be available (eg, if those indemnities or liabilities can be characterised as “legitimate business cost”), issuers typically seek to avoid the risk of breaching this prohibition which may, in theory, result in civil as well as criminal liabilities. Since, unlike in an IPO or other primary offerings by the issuer, the proceeds of the secondary offerings belong only to the selling shareholders, the analysis of characterising any costs or liabilities borne by the issuer to facilitate the secondary transaction as “legitimate business cost” is generally less straightforward than in an IPO context.

The European approach of not involving the issuer in secondary equity offerings is only possible if the shares are to be sold exclusively to qualified investors, as otherwise offering the shares to the public would normally require a prospectus. Even if exemptions from the requirement to publish a prospectus may technically be available in certain circumstances (eg, very small retail portion or offering to a limited number of non-qualified investors in a given jurisdiction), risk and execution considerations would make these exemptions unattractive or impracticable.

Where does MENA fit?

The secondary equity offerings executed this year by ADNOC, in relation to its shares in ADNOC Drilling, and by the Saudi Government, in relation to its shares in Saudi Aramco, followed remarkably different structures.

The offering of ADNOC Drilling’s shares followed the European approach. In that respect, the offering was made through an accelerated bookbuilding process with no prospectus or offering document, and was limited to institutional investors. The offering was also extended to qualified institutional buyers in the US. The structure of the ADNOC Drilling offering resembles a similar structure whereby ADNOC sold approximately 3% of its interest in ADNOC Distribution in an accelerated bookbuilding offering in May 2021, with no prospectus or offering document produced by ADNOC Distribution.

Conversely, the offering of Saudi Aramco’s shares was closer to the US approach, with the offering being made on the basis of a full price range prospectus produced by Saudi Aramco. The offering involved a five-day marketing period, including roadshow meetings by the management of Saudi Aramco. In addition to institutional investors, the offering was extended to eligible retail investors in Saudi Arabia. The offering was made outside the US in reliance on Regulation S under the US Securities Act. The structure of the Saudi Aramco offering followed a similar structure whereby the Public Investment Fund sold a 5% interest in Saudi Telecom Company (stc) in December 2021 based on a full price range prospectus produced by stc, although, in that case, the offering was extended to qualified institutional buyers in the US pursuant to Rule 144A under the US Securities Act.

In both of the ADNOC Drilling and the Saudi Aramco trades, the selling shareholder was a majority controlling shareholder of the issuer. The shares were offered at broadly similar discounts to pre-announcement trading price in both transactions (5.6% discount in the case of ADNOC Drilling and 6% discount in the case of Saudi Aramco).

As the secondary offerings of the shares of ADNOC Drilling and Saudi Aramco open the door for further secondary offerings by shareholders of MENA-listed companies, several factors would determine the suitability of the US or the European approach in structuring the offerings. Some of these factors are considered below.

Disclosure regime

As a general matter, the public disclosure regimes of the main listing venues in MENA follow the European regime of requiring listed companies to disclose MNPI to the market as soon as possible, even if a periodic report is not otherwise due. For example, the rules of the UAE’s Securities and Commodities Authority requires an issuer to disclose to the market as soon as possible any material information, and provides an expansive list of events that would be considered material per se for this purpose. Similarly, the Listing Rules issued by Saudi Arabia’s Capital Markets Authority requires issuers to disclose to the market “without delay ... any material developments ... which are not public ... and which may ... lead to movements in the price of the listed securities ...”. The securities laws of Egypt, Oman, Qatar, Bahrain and Kuwait impose broadly similar obligations on listed companies to promptly disclose inside information to the market.

As such, MENA-listed companies are broadly subject to a MAR-type continuous disclosure regime that creates a presumption of current market information and allows shareholders to carry out secondary equity offerings without needing the issuer to update its disclosure. The concern that an issuer, if involved in the preparation for such a secondary trade, may be required to disclose it to the market prematurely as inside information is also relevant in MENA in light of that continuous disclosure obligation, although it remains to be seen whether the exemptions introduced to MAR under the EU Listing Act would, in practice, result in a more flexible interpretation of that requirement in MENA. As is the case under MAR, whether the fact that secondary trade is upcoming constitutes material information that triggers a disclosure obligation by the issuer would depend on several factors, including the size of the trade, the extent of the expected discount, the impact on the governance of the issuer, the impact on any services or support being provided by a strategic selling shareholder and whether the trade was sufficiently publicised and is thus already “priced in” to the share by the market.

Despite the presumed current market disclosure, selling shareholders and the underwriters should be satisfied that the selling shareholders are not in possession of any MNPI when executing the trade. Where the selling shareholder is a controlling shareholder with board and management representations in the issuer (which is a common structure for MENA-listed issuers) and so has continuous access to the issuer’s records, financial data and strategic plans, this consideration becomes subject to an increased focus. Selling shareholders and the underwriters may seek to alleviate this concern by executing the trade as soon as possible after the release of the issuer’s results such that the existing market disclosure is as “fresh” as possible. For example, the ADNOC Drilling secondary trade was launched around a week following the release of ADNOC Drilling’s Q1 results.

Targeted investor base

The deep liquidity among the retail investor base in MENA, specifically in the GCC countries, played a key role in building the books for recent primary equity offerings in the region. This abundance of local liquidity allowed issuers and underwriters to complete most of the recent IPOs in the region with heavy oversubscription without accessing the US capital markets. It remains to be seen whether that reliance on local liquidity will continue to shape secondary equity offerings as well in the region.

While the continuous disclosure regime for publicly-listed companies in MENA facilitates the speedy execution of secondary trades by the selling shareholders on an undocumented basis without issuer involvement, the availability of this structure requires limiting the offering to institutional investors. If, for example, for sociopolitical or liquidity considerations, there is a desire to extend the offering to retail investors, typically exclusively in the market of the listing venue, the issuer will need to produce a prospectus, based on which the offering can be made to retail investors.

If the secondary offering is extended to qualified institutional buyers in the US in reliance on Rule 144A under the US Securities Act or another exemption from registration, such as the so-called “Section 4(1½)” exemption that is typically relied upon when certain requirements of Rule 144A are not available, there will be an increased focus on the quality of the issuer’s disclosure to avoid liability under the antifraud provisions of the US securities laws. If a disclosure document is produced by the issuer, the underwriters will normally require the issuance of the so-called “10b-5 disclosure letters” from counsel and “SAS 72 comfort letters” from auditors to help the underwriters establish a defence against disclosure liability under the US securities laws. The delivery of these letters would require the issuers and the underwriters to factor in sufficient lead time in the preparation of the transaction to complete the underlying due diligence and audit procedures.

Corporate law considerations

The corporate laws of the free zones established in MENA, such as the Abu Dhabi Global Market, the Dubai International Financial Centre and the Qatar Financial Centre, generally follow the English law regime, with provisions similar to those included in the UK Companies Act 2006 prohibiting the issuer from providing financial assistance in the context of the acquisition of its shares. As free zone companies are taking an increasing share in listings in MENA, the prohibition of financial assistance will likely become a more relevant consideration as shareholders in these issuers consider secondary equity offerings. Conversely, the prohibition of financial assistance is unlikely to be relevant for secondary equity offerings of shares in on-shore incorporated issuers as the on-shore corporate laws of most MENA jurisdictions either do not prohibit the provision of financial assistance in this context, or, as is the case in the UAE Federal Companies Law, specifically carve out from the financial assistance prohibition indemnities or liabilities assumed by an issuer towards the underwriters in a securities offering transaction.

The way forward

As equity capital markets in MENA continue to evolve and develop, secondary equity offerings by controlling shareholders are likely to become more common. In addition to allowing controlling shareholders to monetise parts of their holdings, they can play a vital role in increasing liquidity in the issuer’s shares and facilitating inclusion in equity indices. The difference in the structures between the ADNOC Drilling and Saudi Aramco trades underscore the flexibility available in structuring transactions to meet diverse regulatory and market expectations. With robust disclosure regimes, deepening local liquidity, and increasing investor confidence, MENA-listed companies are well-positioned to take advantage of both models. As more secondary offerings emerge, issuers and underwriters will need to carefully balance regulatory, timing, and investor demand considerations in structuring these trades.