Mergers & Acquisition
Due to the positive economic development and the fact that no taxes are levied there, the UAE are an interesting business location. Some foreign companies decide to enter the local market through the acquisition of already existing companies. By this means, the foreign company saves time and money for the market launch and the gaining of market share and also has the opportunity to achieve synergies in the context of acquisition.
In the acquisition of companies in the UAE, essentially the same criterion is applied as in the acquisition of a company in Germany. A legal and financial due diligence is carried out. In the absence of local tax law, a tax due diligence is not necessary. The following peculiarities, among others, should be emphasized, however:
1. Control of Mergers
With the 'Federal Law No. 4 of 2012 Concerning Regulating Competition', a competition law was introduced in the UAE with the aim of ensuring free competition. The law is applied to numerous economic transactions that could have effects on free competition. This law is also always applied to company purchases and company mergers. In this respect, in the case of company mergers, 'merger approvals' must if necessary be acquired from the UAE Ministry of Economy.
Despite the Cabinet Resolution No. 37 of 2014, which clarified several open points, the law leaves many questions open. Thus, the law contains a provision that is not to be applied to small and medium companies, without defining the term 'small and medium companies'.
Because of the existing uncertainties that have arisen from the still relatively recent law, it is of utmost importance in the company acquisition contracts to clearly regulate who is responsible for any necessary approval.
2. Local Sponsor
Any LLC that is not domiciled in a free trade zone has a local sponsor that holds 51% of the shares. In a company acquisition, the buyer should carefully check the articles of association and the side agreements (even if the legal enforceability of the latter is fraught with risk). Independent of this, the acquiring party should gain a personal impression of the 'Local Sponsor'. One should also take into consideration in each individual case whether one should activate as a 'sponsor' an LLC that is held 100% by UAE citizens and in which the foreign investor or a person appointed by the foreign investor shall take over the management.
3. Payment of Purchase Price – Earn-out Clauses
In numerous acquisitions, a contractually agreed fixed payment is made when a company takeover is completed. Further payments are made provided certain 'milestones' are reached by the company; certain profit expectations should be met on a regular basis. These 'milestones' and downstream purchase price payments are defined in so-called 'earn-out clauses'. Provided that the existing management undertakes, on the request of the acquirer, to continue to manage the company for a certain period, 'earn-out clauses' of this kind are fair and acceptable to both sides. If, however, an acquirer is not interested in the old management, the enforcement of 'earn-out clauses' may become difficult for the acquirer, as it is difficult to make the former management responsible for the reaching of or failure to reach 'milestones'.
4. Annual Financial Statements
In the case of smaller acquisitions, often only a very brief legal and financial due diligence is carried out in Europe. In the financial due diligence, the commercial and tax balance sheets are only checked summarily. For reasons of cost, this approach makes sense in the case of small acquisitions in jurisdictions with a functioning financial administration. In the UAE, by contrast, balance sheets are only audited for reasons of 'compliance'. The audit for 'compliance' reasons is performed by the auditors only in a very superficial way. It is thus important in the case of smaller companies to not 'blindly' trust the balance sheets, and to work carefully on the drafting of the contract. The purchase price should be paid in instalments and the acquiring party should demand accounts warranties from the seller.
5. Contractual Clauses and Practical Handling of the Acquisition
When drafting the contract, the local circumstances should be taken into account in the completion of the transfer of shares. The procedure of transferring shares varies from emirate to emirate and can be very time-consuming. Moreover, in the context of completing a company purchase, follow-up contracts (more or less standard contracts of the notaries) must be concluded. Here it is important to ensure that these do not conflict with the actual company purchase agreement.
Company purchase contracts should contain provisions that determine when the company acquisition has to be completed. Following the expiry of this deadline, the seller is normally entitled to withdraw from the contract and to enforce certain contractual penalties. When determining the time frame, one should take into account any 'merger approvals' and the sometimes time-consuming transfer procedure at the local authorities, in order to reach a fair and also enforceable agreement.