Introduction
In the UAE, the legal aspects of the mergers and acquisitions focus on fairness to shareholders, disclosure of relevant information, timely filing of M&A documents with the ministry, enhancing a dominant position and restrictive agreements, and free zones, among others. The main laws that regulate the formation of M&A are the Competition Law of 2012 and the Commercial Companies Law of 1984, which was amended in 1988. The Competition Law requires firms to seek approval from the Ministry of Economy. Competition Law has measures to prevent firms’ actions that may affect competition. Initially, the Commercial Companies Law (CCL) was the main law that guided the formation of M&A. The CCL prohibits foreigners from owning more than 49 percent of shares in firms that operate outside the free zones. The Competition Law, with its restraint on enhancing a dominant position and restrictive agreements, has increased the requirements of forming an M&A.
The penalty for violating the Competition Law has been set proportionate to a firm’s revenue. The fine may range from 2 percent to 5 percent of a firm’s recent annual revenue. Other penalties may also be imposed by the courts, which may include closing the business for a few months. The Commercial Companies Law had very few requirements for preventing anti-competitive formations. Other laws that have a minor implication on M&A include the Consumer Protection Law, the Labour Law, and the Market Law. The Consumer Protection Law focuses on firms’ actions that may result in abnormally higher prices. The Labour Law recommends that firms notify their employees of the M&A as a good practice. The Market Law has clauses on the takeover of firms that affect entities operating in the financial free zones. Of these laws, the Competition Law sets higher standards for M&A than the previous laws.
The Competition Law
Mergers and acquisitions are defined as an economic concentration in the Competition Law (Gillespie, Milligan, and Stevens par. 5). Under the Companies Law, it is recognized as an amalgamation, which can happen in two ways. In an acquisition, the firms being acquired are dissolved, and their assets and liabilities are transferred to another firm. In a merger, the merging firms are dissolved, and a new firm is created, which takes over the assets and liabilities of the dissolved firms (Oufi par. 8). The main objectives of M&A include increasing the market share, expanding the geographic coverage, enlarging the product mix, and increasing the economies of scale (Zaplatinskaia par. 5). All the objectives aim at improving the financial position of the firms under M&A. The Ministry may approve firms with a higher market share of Economy if their due diligence report indicates benefits to the consumer, which matches the ministry’s assessment.
Competition Law is one of the laws that have a large impact on M&A. The Competition Law (Federal Law No. 4 of 2012) was published in the official gazette on 23rd October 2012 (Gillespie, Milligan, and Stevens par. 1). Its implementation started on 23rd February 2013 (Bowden and Samad par. 1). The law forbids actions that prevent competition, which results in higher prices or lower quality products for UAE nationals. The law affects all firms in the UAE and those located outside the UAE that may engage in business in the UAE (Gillespie, Milligan, and Stevens par. 4). The main consideration is that the result of the M&A affects UAE consumers negatively. The law does not provide descriptions about how the law may be enforced on companies located outside the UAE.
The Competition Law exempts business entities owned by the government at the Federal and Emirate level. It leaves out small and medium-sized businesses because they are unlikely to be dominant (Gillespie, Milligan, and Stevens par. 4). The financial free zone is also exempted from the Competition Law. Several sectors are exempted from the Competition Law because the large size of firms in these sectors is considered to increase efficiency that benefits UAE nationals. The sectors that are exempted include “telecommunications, financial services, cultural activities, pharmaceutical, utilities, waste disposal, transportation, oil and gas, and postal services” (Shah et al. 2). Firms wanting to form M&A under these categories do not need to seek approval from the ministry.
In Competition Law, a concentration that results in the reduced competition is prohibited. M&A needs approval from the Ministry of Economy when they are perceived to be enhancing a dominant position (Gillespie, Milligan, and Stevens par. 5). Enhancing a dominant position occurs when firms merge to form a larger firm with a larger market share, which increases the capability to control the market prices of their products. In such a case, the M&A firms should apply to the Ministry of Economy. The filing should occur at least 30 days before the completion of the M&A process. The Ministry of Economy is supposed to provide the outcome of the assessment within 90 days after the application. The ministry is allowed to extend the assessment process by an additional 45 days. If the ministry fails to decide within 135 days and does not issue a notification within the period, the M&A will be considered to have been approved. However, the ministry may recommend a second phase of an investigation that may last a maximum of 6 months (Gillespie, Milligan, and Stevens par. 14). A penalty may be imposed for going on with the M&A during the approval period.
The Competition Law prohibits restrictive agreements. Restrictive agreements are methods such as those that “fix prices, rig bids, divide markets, allocate customers, preclude or hinder entry into a business, and refuse to purchase from a supplier among others” (Shah et al. 3). The Competition Law disallows the use of a dominant position to exploit UAE nationals. A firm may be considered to have abused dominance when it “imposes resale pricing terms, predatory pricing, discriminatory pricing, and disseminating false information about products among others” (Shah et al. 3). The Ministry should approve M&A of Economy concerning its dominant position, which assesses the market share. It may be approved if the dominant position results in enhanced economic development and benefits to the consumer (Shah et al. 4). An M&A may result in higher consumer benefits, despite enhancing dominance.
The restrictive agreements and dominance violations are based on the relevant market. The relevant market is described as one that allows a product or service to be substituted by another based on price, characteristics, and use (King & Spalding 5). There were expectations that the ministry would outline the upper limit of the market share in the implementing regulation, which failed to occur as expected (Bowden and Samad par. 2). The assessment of a dominant position remains under the discretion of the Ministry of Economy.
The Commercial Companies Law
Commercial Companies provide less stringent requirements for the formation of M&A. Chapter 9, Part II, of the UAE Commercial Company Law covers M&A from Article 276 to Article 280 under the amalgamation of companies (Zaplatinskaia par. 6). In clauses (1) and (2) of Article 276, it defines a merger and a consolidation (“Federal Law No. (8) of 1984 as Amended” 78). Consolidation involves forming a new business entity when a merger involves the transfer of other firms’ obligations into an existing entity. Article 277 requires the resolution to be passed by the shareholders, evaluation of net assets, proportionate distribution of new shares, and a resolution to increase capital by the amalgamation (“Federal Law No. (8) of 1984 as Amended” 79). Article 280 states that the M&A formation shall be considered effective if three months elapse from the time the notification reached the Register of Commerce. If creditors file a complaint within the three months, the M&A process shall be suspended. The suspension may be removed by a court’s decision, settling of the debt or issuing a sufficient guarantee of payment to the creditors. If the M&A’s application occurs without complaints within the three months, the M&A shall remain as formed, despite complaints being raised afterward (“Federal Law No. (8) of 1984 as Amended” 79).
Under the Companies Law, M&A requires the approval of the Securities and Commodities Authority (SCA) when the M&A involves a publicly listed company (Oufi par. 9). The Companies Law allows companies to continue operating as separate entities after the merger (Oufi par. 9). The M&A of a publicly listed company can be obtained with the approval of shareholders. Shareholders have to approve the increase in capital. New shares or cash can be issued to the shareholders of the company being acquired. In the case of a public company owned by the government, the M&A will be approved through legislation (Oufi par. 10). The legislation will outline the legal position of the parties involved in the M&A of a government-owned company. There is a need for the disclosure of information that may affect the stock price of the firms undergoing M&A. An evaluation will be carried out to ascertain the value of the firms’ net assets, which is used to determine what shareholders should get (Al Tamimi & Company 46).
There should be a resolution through voting for a publicly listed company. Robinson (665) explains that the first condition of the Commercial Companies Law requires the resolution by voters to merge or be acquired. The approval vote must reach 75 percent of available shareholders, and the quorum for those present should be at least 75 percent of the shares. The second condition is the valuation of the net assets of the company being acquired. The third condition states a similar threshold of voters must be considered when resolving to increase capital. The fourth condition allows for an exchange of shares or cash from the acquiring company to shareholders of the acquired company.
Some restrictions affect foreigners who want to obtain ownership of shares that exceed 49 percent if the firms are not operating in the free zones. The law affects M&A that occurs outside the free zones. Firms undergoing an M&A must consider that they do not violate the law regarding 51 percent ownership of firms under M&A (Al Tamimi & Company 48). The result of an M&A should be that the UAE nationals own not less than 51percent of the newly formed company. An exception is made concerning regional agreements that allow GCC nationals to own at least 51 percentage of the resulting company. In the free zones, foreign firms undergoing M&A do not need to adhere to the 49-percent ownership limit.
The Labour Law
Another law that may need consideration in the UAE Labour Law, which requires that employees are notified about the takeover (Oufi par. 26). It is necessary, as a good practice, to notify employees that another business entity will adopt their employment contracts.
The Dubai International Financial Centre (DIFC)
The DIFC is the financial free zone. It operates under a new set of laws different from the general laws of the UAE. Largely, it follows the takeover laws found in the UK (Oufi par. 15). It is regulated by the Dubai Financial Services Authority (DSFA). In the UK, a firm needs to apply for approval concerning anti-competition when the result of the M&A results in a market share of 25 percent or the annual revenues exceed £70 million (Gillespie, Milligan, and Stevens par. 11). There is a need for disclosure of information that may influence making decisions, such as the sale or purchase of an asset by one of the firms (Oufi par. 17).
The Markets Law mainly targets disclosure of information to parties involved in M&A and the fair treatment of shareholders. The takeover rules that guide the DIFC are written in Part 7 of the Markets Law (DIFC Law No. 12 of 2004), as part of the DFSA regulations. It also requires the takeover to be conducted in the spirit of competition and disclosure of information, which will help shareholders and firm directors make informed decisions (DFSA 13). Shareholders should be treated fairly and reasonably. Section 34 (8) requires directors of an entity to seek independent advice regarding an offer that has been made regarding their firm. Clause (12) requires the parties involved in an M&A to provide all relevant information to the DFSA and to co-operate fully (DFSA 15). Section 35 (1) of Part 7 requires that an entity should not acquire 25% or more of the voting shares. If there is an entity that holds 25% or more of the voting shares, the entity shall not be allowed to increase its shareholding (DFSA 15). It may be allowed only if it was approved through notification of the takeover rules and when the 25% or more shareholding occurred as a result of acquiring a 5% share within the last 12 months (DFSA 15).
Under the DIFC, an entity that obtains shares that enables it to gain control of a firm should make a bid for the remaining shares to determine its value. It is a means of ensuring that the remaining shares will be bought at a fair price in case the entity decides to “squeeze out” the other shareholders (Oufi par. 27). Robinson (667) discusses that an entity that acquires 90% of another firm has the right to buy the remaining shares. The right to “squeeze out” other shareholders lasts four months after the takeover. However, the law does not clearly state the procedure for initiating the process.
The Consumer Protection Law
The Consumer Protection Law No. 24 of 2006 allows authorities to determine whether the action of a business entity has resulted in an abnormal increase in prices. It also prohibits the unlawful formation of a monopoly (Robinson, 673). The implementing regulations of the Consumer Protection Law are clearer on the business actions that increase prices.
Penalties for noncompliance
Two clauses describe penalties for noncompliance under the Competition Law. In one case, the firms that engage in an M&A without the approval from the Ministry of Economy will be charged from 2 percent to 5 percent of their most recent annual revenues (Shah et al. 4). If the courts cannot ascertain the revenue level, the firms in an M&A will be charged between AED 500,000 and AED 5 million (Shah et al. 4). The main weakness is that the law does not describe how the penalty will be shared where the M&A involves multiple firms.
Firms under M&A may also be considered to have abused dominance and restrictive agreements. Violation of any of these two categories will result in a fine amounting from AED 500,000 to AED 5 million (Shah et al. 4). The courts are also allowed to shut down businesses that break the law for periods between 3 months and six months (Gillespie, Milligan, and Stevens par. 17). The penalties may be doubled for separate offenses within the Competition Law.
Conclusion
Firms considering mergers and acquisitions should first investigate the scope of the Competition Law and the Commercial Companies Law because they have a large impact on M&A formation. Under the Competition Law, some sectors are exempted from filing M&A requirements with the Ministry of Economy. Small and medium-sized firms may go ahead with M&A without seeking approval from the Ministry of Economy because they lack a dominant position. There are many aspects of restrictive agreements, which require firms to be more cautious in their consideration of M&A. Forming a merger that results in a monopoly is unlikely to be approved. The UAE is considered to follow UK laws. In the UK, a concentration ratio of 25 percent of the market share needs approval before M&A.
Other GCC countries consider a concentration of not more than 40 percent as dominant. Firms considering an M&A should evaluate the combined market share of their firms. Firms that do not operate in the free zones should consider that 51 percent of the owner needs to remain with UAE or GCC nationals before the merger is approved. Under the Commercial Companies Law, the main consideration is the fairness of the process to shareholders. Several clauses require complete disclosure of information to the board of directors and shareholders. It should be relevant information, which may affect the stock price of the firms under M&A. There is a 75 percent voter threshold for approval from shareholders, which requires the quorum to be 75 percent of shares of the publicly listed companies. The shareholders’ approval allows the M&A process to increase the capital of the firm. There is a need to evaluate the firm’s net assets as part of the M&A process. The takeover rules of the DIFC target disclosure of relevant information and fairness to shareholders. It recommends that M&A should not target to reduce competition.
Works Cited
Al Tamimi & Company, n.d., Doing Business in the UAE. Web.
Bowden, James and Abdus Samad. UAE Competition Law – All Bark No Bite? 2014. Web.
DFSA 2004, Markets Law: DIFC Law No. 2004. Web.
Federal Law No. (8) of 1984 as Amended. n.d. Web.
Gillespie, Ben, John Milligan and Oliver Stevens. The New UAE Competition Law: Merger and Acquisition Control: Stay ahead of the Competition. 2013. Web.
King & Spalding 2013, New Competition Regulation in the United Arab Emirates: Considerations for Commercial Practices and Transactions. Web.
Oufi, Patrick. Public Mergers and Acquisitions in the United Arab Emirates: Overview. Web.
Robinson, Simon 2012, The Mergers & Acquisitions Review. Web.
Shah, Omar, Adeola Adeyemi, Will Seivewright and Alia Dajani 2013, The Impact of the New UAE Competition Law on Business. Web.
Zaplatinskaia, Larissa. Merger and Acquisition in the United Arab Emirates. Web.