UAE M&A Handbook

Global M&A Series

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Contents 1. Forms of entity 7

2. Management 12

3. Types of deals for private companies 15

4. Types of deals for public companies 26

5. Consents and approvals 28

6. Tax issues 32

7. Financial assistance 34

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The United Arab Emirates (UAE) is a Federation comprising seven individual Emirates – Abu Dhabi,Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. The UAE is a member of theUnited Nations, the World Trade Organisation, the Arab League and the Gulf Co-operation Council(GCC). The two largest cities in the UAE are Abu Dhabi, the capital and seat of government, andDubai, one of the leading financial hubs in the Middle East.

The UAE has a population of over 9 million people and a growing economy. With the UAE’s continued diversification into non-oil relatedsectors, Dubai’s successful bid to host Expo 2020, political stability and a favourable tax regime, it continues to be an attractivedestination for foreign investment.

The UAE was established in 1971 and exists as an independent sovereign state. Each individual Emirate has ceded part of itssovereignty to the Federal government, for example in matters relating to immigration, education, health, foreign affairs and defence,but retains sovereignty over matters which are not governed by UAE Federal law.

The UAE is a civil law jurisdiction. Under its constitution, the UAE was established as an Islamic state and Islamic Shari’a law forms partof the UAE’s guiding principles.

Mergers and acquisitions are primarily governed by the principles of contract and company law. The main law applicable to companiesin the UAE is the Federal Commercial Companies Law (CCL).

A new CCL is expected to be published in the Federal official gazette in the near future and come into force three months afterpublication. The current draft of the new CCL contains certain provisions that will have an impact on the subject matter of thispublication if fully enacted in its present form.

There are foreign ownership restrictions in most sectors in the UAE which require at least 51% of the shares in a UAE onshorecompany (outside of certain free zones) to be owned by UAE nationals or companies owned by UAE nationals. In certaincircumstances some or all of the UAE ownership requirement may be satisfied by nationals of other GCC countries (or companiesowned by them).

Introduction

Free zones are geographical areas in the UAE that promote inward investment and provide a market oriented legal and regulatoryalternative to the regime that exists elsewhere in the UAE. Free zone entities are generally not subject to the foreign ownership restrictions.

The Securities and Commodities Authority (SCA) regulates listed public companies in the UAE.

There are three public exchanges in the UAE: the Dubai Financial Market (DFM), the Abu Dhabi Securities Exchange (ADX) and theDubai Gold and Commodities Exchange (DGCX).

In addition to the onshore exchanges, the Dubai International Financial Centre (DIFC) has its own exchange, NASDAQ Dubai, which isregulated by the Dubai Financial Services Authority. The DIFC has a codified takeover regime based largely upon the UK Takeover Code.

This publication is designed to provide an overview of key considerations for M&A transactions outside of the various free zones and isprimarily focused on the law as applicable in the Emirates of Abu Dhabi and Dubai and refers to UAE Federal laws unless otherwisestated. Accordingly, references in this publication to laws and companies do not refer to the laws of, or companies established in, thefree zones unless expressly stated.

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The materials contained in this publication are provided for general information purposes only and do not constitute legal or other professional advice.The reproduction of the contents of this publication is prohibited without the prior written consent of Clifford Chance LLP. The position stated is as atJanuary 2015.

Copyright Clifford Chance LLP: 2015All rights reserved

1. Forms of entity

1.1 Common forms

It is possible to establish a place of business in the UAE either“onshore” in an Emirate under the CCL or in one of the freezones within an Emirate.

A foreign company seeking to establish a presence in the UAEoutside of a free zone will need to comply with the provisions ofthe CCL. The CCL requires at least 51% of the shares in a UAEcompany to be owned by UAE nationals or companies whollyowned by UAE nationals, although in some circumstances someor all of the UAE ownership requirement may be satisfied bynationals of other GCC countries (or companies owned by them).

The most common forms of entities available under the CCL arelimited liability companies, public and private joint stockcompanies and branches of foreign companies.

1.1.1 Limited liability company (LLC)An LLC is generally the preferred vehicle for onshore foreigninvestors seeking to establish a presence in the UAE. An LLCmay not carry out insurance, banking or investmentmanagement activities. Shares in an LLC may not be issued oroffered to the public.

An LLC is a separate legal entity, distinct from its shareholders. Itenters into contracts in its own name and is responsible for theperformance of the legal obligations in these contracts.

An LLC must have at least two and not more than 50shareholders (the maximum number is likely to be increased to 75shareholders under the new CCL) (referred to as “partners” in theCCL, although in practice the terms “partner” and “shareholder”are used interchangeably). An LLC must also have sufficient share

capital to achieve its purposes, as determined by itsshareholders, although the competent authority in each Emirateretains the discretion to prescribe a higher minimum capitalthreshold for specific types of activities. Shares in an LLC mustbe fully paid up on issue. In addition, an LLC must allocate 10%of its net profits each year to create a statutory non distributablereserve until the reserve equals half the company’s capital.

Shareholders have statutory rights of pre-emption on any transfer ofshares by another shareholder (which cannot be waived in advance)but no pre-emption rights on a fresh issue of shares. In addition, theconstitutional documents of the LLC may give its shareholdersmutual blocking rights by increasing the thresholds at whichresolutions may be passed. Management rights may be vested in aparticular shareholder (which may be a foreign shareholder).

Entitlements to distributions can be allocated disproportionately tothe shareholdings in an LLC by including a different ratio in thememorandum of association (the key constitutional document ofan LLC). In Dubai, the authorities have historically permitted a ratioof 80:20 in favour of a minority shareholder, and in Abu Dhabi aratio of 90:10 has been accepted by the authorities/court notary.

1.1.2 Public and private joint stock companies (PJSC)PJSCs are essentially the same form of legal entity, with theprincipal exception being that only a public joint stock companycan apply to have its shares listed on a UAE stock exchange andissue shares or debt securities to the public.

Like an LLC, a PJSC is a separate legal entity distinct from itsshareholders. It enters into contracts in its own name and isresponsible for the performance of the legal obligations inthose contracts.

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1. Forms of entity continued

PJSCs must have a minimum share capital of AED10 million (thisis likely to be increased to AED30 million under the new CCL) fora public joint stock company and AED2 million (this is likely to beincreased to AED5 million under the new CCL) for a private jointstock company. Shares in joint stock companies must be of anequal nominal value of between AED1 and AED100.

A private joint stock company must have at least threeshareholders (this is likely to be reduced to two shareholdersunder the new CCL) and a public joint stock company must haveat least 10 shareholders (this is likely to be reduced to fiveshareholders under the new CCL). The liability of shareholders islimited to the amount unpaid on shares held by them (if any).

There are no statutory rights of pre-emption on a transfer ofshares in a PJSC, although pre-emption rights do exist in favourof existing shareholders on an issue of new shares.

A PJSC must allocate 10% of its net profits each year to create astatutory non distributable reserve until the reserve equals half thecompany’s capital.

Regulations issued by the SCA require public joint stockcompanies to list their shares on a UAE stock exchange withinone year of their establishment, (although exceptions to this rulehave been granted).

1.1.3 Branches of foreign companiesBranches of foreign companies are permitted under the CCL. Theability to obtain a licence to establish a branch of a foreigncompany is at the discretion of the authorities in the relevantEmirate and, generally, branches are not permitted to carry outcommercial trading (as opposed to professional) activities in theUAE. It is also possible to obtain a more restrictive form of licence

to establish a representative office to perform marketing andadministrative functions on behalf of a foreign parent.

A branch of a foreign company must appoint a UAE national (or acompany wholly-owned by UAE nationals) as its national serviceagent or sponsor. The sponsor will normally be paid an annualfixed fee for his/her services and, except for this fee, is not entitledto share in the profits or to own any assets of the branch or toreceive any fees or commissions. The requirement to appoint anational service agent is likely to be removed in the new CCL.

Branches and representative offices are not separate legal entities.

1.1.4 Sole proprietorshipsA substantial amount of business in the UAE is conducted throughsole proprietorships. Generally speaking, only UAE nationals arepermitted to obtain a trade licence to conduct commercial (asopposed to professional) activities as a sole proprietor, but insome Emirates this right may be extended to GCC nationals.

1.1.5 Entities established in free zonesEntities established in free zones may be treated as being“offshore” as they are outside of the UAE for certain legalpurposes. Free zones may adopt their own rules and regulationsand can elect to disapply the provisions of the CCL but, with theexception of financial free zones, are otherwise subject to theprovisions of UAE Federal law.

Entities established in free zones usually take the form of: (i) abranch of a foreign company; (ii) a sole or multi-shareholderlimited liability company more commonly known as a free zoneestablishment (FZE) or a free zone company (FZCO); or (iii) anoffshore company.

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Establishing a presence in a free zone generally has certain advantages and disadvantages as set out below:

1.2 Less common forms

1.2.1 Civil companiesIn addition to companies that may be incorporated under theCCL, there are three types of civil company that may beestablished under the UAE Civil Code:

service/professional companies (similar to Englishpartnership arrangements)

speculative venture partnerships (a contract between two ormore persons to purchase property on credit, to sell it and tosubsequently share in the profits as agreed between them)

“mudaraba” arrangements (a contract whereby one partnercontributes capital/property and the other contributes its effortor work in order to make a profit).

1.2.1 Decree companiesDecree companies are established by a decree of the Ruler of therelevant Emirate (eg Emirates).

Following the implementation of the CCL, existing decreecompanies were required to convert to one of the types ofcompanies permitted under the CCL. The legal status ofcompanies which have not regularised their positions is a matterof some uncertainty (particularly as many of the remaining decreecompanies have some element of government shareholding).

1.2.3 Partnership companiesPartnership companies are split into general andlimited partnerships.

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Advantages Disadvantages

• 100% foreign ownership is generally permitted.

• Guaranteed exemptions from taxes and custom duties for aspecified period.

• The ability to lease properties for up to 10 years (or up to50 years in free zones that have been designated for foreignownership) under fully transferable renewable leases.

• In some free zones (which have been designated for foreignownership) the ability to own land freehold for a 99-year period.

• Relative speed and ease of establishment compared withnon-free zone companies.

• Licenses granted by a free zone authority only permit thelicensee to carry on business in the relevant free zone. If afree zone company wishes to sell its products and servicesoutside of the free zone, generally speaking it can only do soif it holds an appropriate licence issued by the competentauthority in the UAE or if it appoints a UAE national orappropriately licensed UAE company as its onshore agent.

• Share transfers and certain other corporate actions(e.g. charges to directors or share capital) are often subjectto the approval of the relevant free zone authority.

• It can be more expensive and more difficult to obtain officespace or other premises within the more popular free zones(e.g. DIFC/JAFZ).

In a general partnership, the partners (who must be UAEnationals) are liable jointly and severally to the extent of all theirassets for the liabilities of the partnership.

A limited partnership consists of one or more general partners(who must be UAE nationals), each of whom is liable for theobligations of the partnership to the full extent of his or their

assets, and one or more limited partners liable only to the extentof his or their respective share in the partnership.

The limited partners may be foreigners but they are not entitled tohave their name incorporated into the name of the partnership.

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1. Forms of entity continued

2.1 Management structure

2.1.1 LLCsManagement of an LLC is carried out by a single board ofbetween one and five directors (under the new CCL themaximum limit is likely to be removed) which has the authority toexercise all powers of the company that are not specificallyreserved for the shareholders. Directors may be removed by theshareholders in accordance with an LLC’s memorandum ofassociation, by unanimous shareholder resolution or court order.There is no general requirement that directors should be UAEnationals, although certain companies carrying out industrialactivities require a majority of the directors to be UAE nationals.There is no statutory requirement that directors be shareholders.

An LLC is required to have a general manager, who is named onthe trade licence application and may be one of the directors.The manager may have powers delegated to him/her by theboard of directors and/or specified in the company’smemorandum of association. The general manager mustgenerally be a UAE resident. The general manager can also bethe sole director.

Once a management structure has been chosen, a great degreeof flexibility can be given to the management under thememorandum of association, including the ability to change themanagement, alter procedures and delegate responsibility.

2.1.2 PJSCsManagement of a PJSC is carried out by a single board ofbetween three and 12 directors (under the new CCL themaximum number is likely to be reduced to 11) which has theauthority to exercise all the powers of the company that are notspecifically reserved to the shareholders. The Chairman and amajority of the directors (under the new CCL this is likely to beincreased to at least two thirds) must be UAE nationals.

The term of office of a director may not exceed three years.Directors may be re-elected when their term of office has expired.

A PJSC whose shares are listed on a UAE stock exchange isrequired to disclose in its annual reports whether it has compliedwith the SCA’s Corporate Governance Code, a mandatory set ofprinciples on corporate governance. The Corporate GovernanceCode provides, amongst other things, that for all listed PJSCs atleast half of the board should be non-executive directors, and atleast one third of the board should be independent directors. TheCorporate Governance Code further requires that the boardshould appoint certain committees to deal with particular matters.The key committees are the audit and nomination andremuneration committees.

Once a management structure has been chosen, a great degreeof flexibility can be given to the management under the articles ofassociation, including the ability to change the management, alterprocedures and delegate responsibility.

Directors are appointed by an ordinary resolution of theshareholders, although the board may appoint directors to fill avacancy, provided that this is ratified at the next general assemblymeeting. Decisions of the board are taken by majority vote.

Unless specifically permitted by the articles of association or byshareholder approval, directors do not have authority on behalf ofthe company to:

enter into loans with a term exceeding three years

sell or mortgage company assets (real estate or premises)

write off, absolve or compromise debts

agree to conciliation or arbitration, without ashareholders’ resolution.

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2. Management

2.2 Directors’ duties

2.2.1 Duty to companyAlthough not explicitly stated in the CCL, the directors’ duties aregenerally considered to be owed to the company, not directly tothe company’s members (i.e. the shareholders). Only thecompany can enforce these duties in the event of a breach butshareholders can bring derivative claims in the name of thecompany against directors in certain circumstances.

As set out in the SCA’s Corporate Governance Code, a directorof a listed PJSC must avoid actual or potential conflicts of interestand may not participate in any competing business withoutshareholder approval (renewable annually).

A director must declare to the other directors any interest inconflict with that of the company in respect of a proposedtransaction or arrangement with the company, and is notpermitted to vote on a resolution concerning the relevanttransaction or arrangement.

A director who accepts a bribe from a third party commits acriminal offence punishable by imprisonment for up to five years.No de minimis threshold applies and the offence is committedwhether or not the director intended to be influenced by the bribe.

2.2.2 Duty to shareholdersAny shareholder may bring a derivative action in respect ofalleged breaches of duty by directors. A shareholder is notrequired to hold any minimum number of shares in order to havestanding to bring a claim but must notify the company of theintention to initiate proceedings in advance.

2.2.3 Duty to creditorsThere is no specific requirement for directors to have regard tothe interests of the company’s creditors, whether in times offinancial difficulties or otherwise.

If a company has suspended payment of its debts, the directorsmust apply to a UAE court for a declaration of bankruptcy within30 days of the suspension. If the company fails to file within the30 day period, the directors can be found guilty of the criminaloffence of negligent bankruptcy. There are different rules settingout a separate procedure in the DIFC.

2.2.4 Duty to employeesThere are no provisions under UAE law specifically addressing thedirectors’ liability towards the employees of the company they aredirectors of.

2.2.4 Liability of directorsA director may be personally liable to the company, shareholders andthird parties for acts of fraud, abuse of power, violations of the CCLor the company’s constitutional documents and/or mismanagement.

A director may also be personally liable for misstatements orinformation disclosed to licensing and regulatory authorities orotherwise published (such as in offer documents) which causeloss or damage to third parties. Such loss or damage canencompass a broad range of harm, considered by the courts ona case-by-case basis.

In the event that the assets of a bankrupt company areinsufficient to meet at least 20% of the company’s debts, thecourt overseeing the bankruptcy may direct some or all of thedirectors to pay some or all of the company’s debts where thedirectors are held to be responsible.

In certain cases, a director’s liability may be covered by insuranceor by guarantee.

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3.1 Shares or assets?

An acquisition of a target business in the UAE can be achieved either by purchasing the shares in a company (a share acquisition) orthrough purchasing the assets which make up that business (an asset acquisition). The choice will depend on a number of factors. Theprincipal considerations are:

3.1.1 What assets are being acquired?

3.1.2 How are the assets transferred?

Shares Assets

In acquiring the target company’s shares, the buyer is indirectlyacquiring all the target company’s assets.

If the seller does not want to sell, or the buyer does not want tobuy, a particular asset, the asset has to be transferred out of thetarget company before completion of the sale.

The buyer or seller can cherry pick and choose the assets tobe acquired.

Assets not specifically included are not transferred unless a“sweep-up” provision is incorporated into the assetpurchase agreement.

Shares Assets

In a share acquisition, there is no need to transfer each asset ofthe target company. This is achieved indirectly by the transfer ofthe target company’s shares.

Existing trading arrangements continue unless they are subject tobreach or change of control clauses.

In a business acquisition, each asset has to be transferred whetherby delivery (e.g. moveable equipment) or by way of a documentedtransfer (e.g. real property).

The transfer of an entire business in the UAE is subject to specificrules and formalities.

Significant trading agreements (e.g. licensing or distributionagreements) may not be transferable without the consent of theother parties.

3. Types of deals for private companies

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3. Types of deals for private companies continued

3.1.3 Is security required for financing?

3.1.4 What happens to the liabilities?

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Shares Assets

The buyer takes on all the target company’s liabilities, even those itdoes not know about.

This difficulty can be mitigated by:i. warranties given by the seller to the buyer about the target

company and its businessii. indemnities in respect of specific liabilities which have been

identified before signing of the agreementiii. insurance.

However, these solutions may be unsatisfactory, as warranties maybe subject to limitations and difficult to enforce and the value ofwarranties and indemnities depend on the seller’s credit worthiness.

An indemnity may not be enforced in full by the UAE courts onthe basis that it could constitute unjust enrichment, which isprohibited under Islamic law. Consequently, an indemnity mayonly be enforceable to the extent that the indemnified party canshow actual loss.

As a business acquisition is the purchase of specified assets,liabilities would not ordinarily be transferred. However,acquiring certain assets may mean that liabilities are alsoacquired. For example:

i. the buyer may be liable for environmental problems associatedwith real property acquired

ii. where the assets being sold include the benefit of contracts,the buyer will also be taking on liabilities under those contractsas from the effective time of the transfer.

Shares Assets

In a share acquisition, it is unlikely that a lender will accept securityonly over the target company’s shares, because the targetcompany’s creditors will rank in priority in a claim over the targetcompany’s assets. However, lenders may wish to obtain thissecurity as well as security over underlying assets (if available).

It is not considered possible to take enforceable security overshares in an LLC. It is possible to take security over the shares in aPJSC. This may change when the new CCL comes into force.

If the buyer needs to borrow to pay for the acquisition, it can grantsecurity over the assets acquired for the sums borrowed.

3.1.5 Employees

3.1.6 Foreign ownership restrictions and execution

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Shares Assets

The employees will continue to be employed by the targetcompany post-closing and the transaction will not affect theexisting employment relationship between the target company andthe employees (unless otherwise provided in the respectiveemployment contracts).

Should the buyer decide to terminate the employment contracts ofany employees, the buyer should be aware that employees areentitled to an end of service payment under the UAE Labour Law ifthey have completed one year or more of continuous employment.

There is no mechanism under UAE law whereby the employeesengaged in the target business may be “automatically” transferredfrom the seller to the buyer in the case of an asset acquisition. Assuch, if the buyer wishes to take on the employees, the existingemployment relationship will have to be terminated and a newrelationship has to be established between those employees andthe buyer (subject to the consent of each individual employeeconcerned). This will give rise to a variety of issues.

Shares Assets

Careful consideration should be given to applicable foreignownership restrictions (see section 5.2.2).

When closing a share acquisition it is important to bear in mindthat a share purchase agreement should not generally provide forsimultaneous signing and closing due to the mechanical nature ofthe process to transfer shares in UAE companies (which can takeseveral days or weeks to complete).

Parties signing the documentation to transfer shares in an LLC(which must be in Arabic or in English/Arabic dual format) will needto attend in person at a UAE court notary. Evidence of a person’sauthority to sign on behalf of a company or another individual inthe form of a notarised power of attorney in Arabic (or inEnglish/Arabic dual format) is required. This can often beproblematic for parties located abroad (and can be timeconsuming to arrange) and the requisite authorisations should,therefore, be prepared at an early stage in the transaction.

Careful consideration should be given to applicable foreignownership restrictions relating to land.

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3.1.7 Other considerationsAs a general observation, a share acquisition is relatively easier toimplement from a deal implementation perspective than an assetacquisition. An asset acquisition tends to be more time-consuming and procedurally complicated and the seller’s strongcooperation will be critical to a successful closing.

3.2 Overview

The timing of a private acquisition depends on the cooperationbetween the parties, the progress of negotiations and othermatters specific to the transaction and requisite governmentapprovals and procedures.

Set out below is an overview of the steps generally involved in aprivate company acquisition in the UAE.

3. Types of deals for private companies continued

Exclusivity Agreement

Preliminary Enquiries

Legal Review

Draft Acquisition Agreement(seller for auction)

Buyer

Sta

ge 1

Heads of Agreement

Agree acquisition agreementand disclosure letter

Information Memorandum(auction)

Confidentiality Agreement(may be simultaneous to information

memorandum for auction)

Reply to Enquiries

Draft Disclosure Letter

Seller

Exchange acquisition agreement/seller delivers disclosure letter to buyer

Sta

ge 2

Sta

ge 4

Completion

Sta

ge 5

Post-completion matters

Sta

ge 3

Ensure compliance with conditions

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3.3 Good faith obligation

UAE law requires parties to perform their obligations under acontract in good faith. The existence of heads of agreement maygive rise to this obligation.

Depending on the drafting of the heads of agreement, theobligation could include keeping the other party informed,cooperating with a view to entering into a final bindingagreement, and not breaking off the negotiations without goodcause (including notifying the other party promptly if such acause arises).

Breach of the obligation to negotiate in good faith may result in aparty being ordered to pay damages for loss suffered by theother party resulting from the breach and any expenses that partyhas incurred in carrying on the negotiations.

3.4 Heads of agreement

3.4.1 GeneralHeads of agreement are a way of recording in writing anagreement in principle between the parties, although the partiesmay have different expectations as to their purpose. A buyer isunlikely to know enough about the target company to be willingto be bound to proceed, whereas the seller may wish to havesome commitment in order to provide further information.

It is possible to agree that the heads of agreement are governedby a law other than UAE law.

Careful attention must be paid to the wording of the heads ofagreement (and the parties’ conduct) if a party does not wish tobe legally bound to proceed. If the main terms are set out insufficient detail, the signature on the heads of agreement couldlead to a binding agreement which a UAE court might enforce.The existence of heads of agreement may create an obligation toperform the obligations set out in the heads of agreement in good

faith. Even if the parties are not obliged to proceed, some of theterms of the heads of agreement, such as confidentiality andexclusivity, should be made binding.

3.4.2 ConfidentialityA confidentiality undertaking in the heads of agreement or aseparate confidentiality agreement between the partiesimposes a duty to keep certain information concerning theproposed transaction and the target company confidentialpending completion.

If a confidentiality undertaking or agreement is breached, theinjured party can claim damages. A UAE court is unlikely to grantinjunctive relief.

However, as a matter of fact, it may be difficult to show that abreach of confidentiality has occurred due to the actions of thecounterparty and what damages such breach has caused to thenon-defaulting party. It may be a criminal offence under UAE lawto breach the terms of a confidentiality agreement.

3.4.3 Lock-outThe principle of negotiating in good faith should mean that theseller does not negotiate with third parties unknown to the buyer.However it is good practice to include a ‘lock-out’ clause.

3.4.4 Break feeA break fee is an amount payable by the buyer to the seller, orvice versa, if a specified event occurs which prevents thetransaction from completing.

Break fee arrangements are not common in private transactionsin the UAE.

3. Types of deals for private companies continued

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3.5 Legal review process

3.5.1 OverviewLegal review is the review of specific documents on a client’sbehalf in connection with an acquisition. Its purpose on a share orasset acquisition is to identify any potential legal problems beforethe buyer is contractually committed to proceed.

The legal review process will normally involve either the sellerproviding documents in response to preliminary enquiries draftedby the buyer, or, more usually, the seller placing all relevantdocuments in a data room. It is now common for virtual (online)data rooms to be used in the due diligence process. In eachcase, the buyer may raise further enquiries on the documentsand ask to see other relevant documents.

The legal review process normally culminates in the buyer’slawyers preparing and submitting to the buyer (and potentially itsfinanciers) the legal review report, which sets out the reviewresults and highlights any material issues.

3.5.2 Information gatheringIn addition to reviewing information provided by the seller, legalreview will involve conducting appropriate searches andinvestigations at public registries and authorities.

Onshore Dubai companies are registered at the DubaiDepartment of Economic Development, and onshore Abu Dhabicompanies at the Abu Dhabi Department of EconomicDevelopment. It is not possible to undertake a search of thesedepartments to see if a company is registered or is subject tocorporate or other insolvency procedures. Only the relevantcompany (or an individual authorised by a power of attorney fromthat company) can obtain a copy of the trade licence andcommercial registration certificate.

It is possible to carry out a limited search for a company inperson at the local Chamber of Commerce in Dubai and AbuDhabi. Practices differ between Emirates but a business reportproviding a brief company profile will generally be available.

3.5.3 ReportThe report can either take the form of a detailed, descriptivereview of the documents which have been considered or it canbe a “by exception” report where the buyer’s lawyers only reporton those matters which appear to be potentially material in thecontext of the particular transaction. A “by exception” report isusually preferred by financial investors, compared with tradebuyers who often prefer a detailed review for use as an on-goingmanagement tool after the acquisition has taken place.

3.5.4 Relationship to warranties/indemnitiesThe results of the legal review process should assist in draftingappropriate warranties to cover individual situations.

In addition, if specific issues or risks have been identified by thelegal review process, the buyer will often seek indemnities forthose from the seller or seek to exclude certain assets (includingsubsidiary companies) in order to carve-out those specific issuesor risks.

3.6 Documentation

3.6.1 Sale and purchase agreementGeneralThe principal contractual document for the acquisition of a UAEtarget is a sale and purchase agreement.

The sale and purchase agreement is traditionally drafted by thebuyer (except in the case of an auction sale). It documents theagreement between the parties to sell and purchase the entireissued share capital of the target company or the assets of thetarget business at a specified price.

As well as containing warranties and indemnities, it deals withhow the consideration is to be satisfied, what conditionsprecedent the purchase may be subject to, any restrictivecovenants which bind the parties, completion arrangements andother matters.

ConditionsWhere the sale and purchase agreement is subject to conditionsprecedent, the document will provide for a gap between signingand completion, during which time the party responsible mustfulfil the conditions by the specified date. Examples include:� obtaining consent of a landlord to the assignment of

leasehold premises

� the removal of security over assets being transferred.

Non-compete undertakingsIt is in the buyer’s interest to protect his investment byincluding express non-compete provisions in the sale andpurchase agreement to prevent the seller from using hisextensive knowledge of the target post-completion to thedetriment of the buyer.

Care must be taken in drafting non-compete covenants. Thebuyer must ensure that the duration of the restraint, thegeographical area of the restraint and the activities restrictedare reasonable.

The UAE courts will only enforce restrictive covenants which theyconsider to be fair in light of the respective bargaining positionsof the parties.

Auction salesSellers are increasingly keen to obtain a higher purchase price byattracting multiple buyers in an auction sale.

For an auction sale, the first step is usually for the seller (andits advisers) to prepare and circulate to interested parties aninformation memorandum about the target company, whichsummarises the key investment considerations for aprospective buyer.

Prospective buyers will be asked to sign a confidentialityagreement before receiving the information memorandum andmay be asked to mark up the seller’s draft sale and purchaseagreement and submit it with any indicative offer they may wishto make.

The seller will draw up a shortlist of bidders who may then begiven access to a data room. They will then be asked to submit afirm offer for the target company.

Once the seller has narrowed the field down to its chosen bidder,the procedure and documentation is the same as for a normalshare/asset purchase. However, because other shortlistedbidders often remain ‘in the wings’, the bargaining power of thebuyer is often significantly reduced.

In order to ensure equality of information between bidders, thesellers may organise a management presentation and/or providevendor due diligence for the prospective buyers.

In addition, in an auction sale, the sale and purchase agreementis the seller’s (rather than the buyer’s) draft and the buyer’snegotiating strength is often curtailed. The buyer may thereforeend up with more limited warranty and indemnity protection.

Governing lawIf all parties involved in a transaction are UAE nationals, it iscommon (although not compulsory) for the documents to begoverned by UAE law.

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3. Types of deals for private companies continued

3.6.2 Disclosure letter/processTransactions in the UAE are often structured on the basis ofextensive warranties against which the seller discloses certainmatters to avoid liability.

These disclosures appear in a separate document known as adisclosure letter.

The seller will make specific and general disclosures in thedisclosure letter.

Specific disclosures are particular facts about the business ofwhich the sellers are aware which could result in a claim under awarranty. Such disclosures will be made against the warranty orwarranties under which the claim could be made.

General disclosures, on the other hand, may cover all documentsprovided to the buyer and certain publicly available information(which information is deemed to be disclosed) and are not madeagainst any particular warranties.

3.6.3 Other documentationIn a share sale, a share transfer form (in Arabic or dualEnglish/Arabic) is required to transfer the shares to the buyer andmust be signed by the parties before a UAE court notary.

In an asset sale, each separate asset of the business must betransferred. This can cause complications, particularly whereconsents are required from third parties. For example, a landlord’sconsent to assign may be required for a leasehold property andcertain intellectual property rights require formal transfers of title.

A purchaser should also be aware that the transfer of shares in atarget company may be subject to the provisions of ashareholders’ agreement.

3.7 Warranties & indemnities

3.7.1 OverviewWarranties in a sale and purchase agreement by the seller infavour of the buyer will normally cover a whole range of aspectsof the target, including the information provided, accounts,subsisting contracts, employees, pensions, intellectual propertyrights and environmental matters.

Warranties have two main purposes:

to elicit information about the business from the seller, whichties in with the legal review process

to provide compensation to the buyer if the acquisition turnsout to be other than what was bargained for.

Warranties are terms of the sale and purchase agreement, and ifthey prove to be untrue the buyer will have a claim in damagesagainst the seller for breach of contract. The aim of contractualdamages is to put the buyer in the position he would have beenin had the contract not been breached. Damages for breach ofcontract are limited by the injured party’s duty to mitigate his loss.

If there is a gap between signing and completion, it is usual forthe seller to repeat some or all of the warranties immediatelybefore completion, so that the warranties cover the period duringwhich the contract is conditional.

If any statements which have been made by or on behalf of theseller prove to be untrue and the buyer had relied on them, thebuyer may also have a right to cancel the contract in certaincircumstances for gross misrepresentation.

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3.7.2 Who should give the warranties?Multiple sellersWhen there is more than one seller, the buyer will normally seekto obtain the warranties on a ‘joint and several’ basis. This willenable him to sue any one of the warrantors for the full amount ofthe liability.

DirectorsSometimes target directors are asked to give warranties becausethey have been running the company. However, directors areunlikely to have as many resources as the sellers and, if they areto remain directors after the sale, this may create internalproblems in the event of a claim for breach of warranty.

OthersThe parent company or controlling individual of the seller may beasked to act as the co-warrantor with the seller or the guarantor forthe seller, especially where the selling company is part of a group.

It is common for certain sellers such as trustees, venturecapitalists and insolvency practitioners to refuse to givewarranties, other than those relating to title and capacity, on thegrounds that they have no knowledge of the conduct of thetarget’s business, they are not allowed to do so by theirconstitutional documents or they are prevented from doing sobecause of duties owed to their investors.

In such circumstances, the buyer may seek protection by havingall or part of the sale proceeds go into a retention account, byseeking a reduction in the purchase price or through warrantyand indemnity insurance.

3.7.3 LimitationsA seller can seek to limit its potential exposure to liability bymaking appropriate disclosures against warranties.

Other limitations on warranty liability which are often included in asale and purchase agreement are de minimis and de maximusprovisions and limitations on the time period for making awarranty claim.

De maximus provisions will often cap a seller’s warranty liability atall or part of the price paid for the target.

De minimis provisions prevent the buyer from making a warrantyclaim if it is under a certain threshold.

3.7.4 IndemnitiesWhere the disclosure letter or the buyer’s legal review reveals anarea of particular concern, the buyer will usually seek anindemnity from the seller in order to gain specific protection.

Indemnities will not normally be subject to the limitations referredto above, which are applicable to warranties, but they will besubject to a cap.

A buyer should seek a specific indemnity where the seller disclosesa particular fact, or the buyer is otherwise aware of a particular fact,which may make a warranty untrue. In these circumstances thebuyer will not normally be able to rely on the warranty.

As noted previously, an indemnity may not be enforced in full bythe UAE courts on the basis that it could constitute unjustenrichment which is prohibited under Islamic law. Consequently,an indemnity may only be enforceable to the extent that theindemnified party can show actual loss.

3.7.5 Insurance/SecurityOne way for a buyer to ensure additional protection is to take outinsurance following the acquisition to protect against, forexample, damage or breakdown of an asset.

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3. Types of deals for private companies continued

It is also possible to take out warranty and indemnity insurance toback up the warranties and indemnities in the event of a claim toprotect against, for example, a seller’s insolvency. The insurer willnot cover for known issues or future events.

Where the selling company is part of a group, the seller’s parentcompany may be prepared to guarantee the seller’s obligationsunder the warranties.

Another method of securing the buyer’s position is for the saleand purchase agreement to provide for the buyer to retain part ofthe purchase price of the target for a certain period aftercompletion and for this sum to be used to pay any successfulclaims under the warranties or indemnities.

3.8 MBOs

3.8.1 OverviewA management buy-out (MBO) is the acquisition of a targetcompany or business by a consortium in which existing orincoming managers of the target have a stake. The otherconsortium members normally include private equity investorswho specialise in MBOs.

There are no typical structures for MBOs in the UAE althoughthey often involve debt financing and equity investment.

MBOs bring together a unique combination of commercial andfiscal factors which need to be addressed regardless of thejurisdictions involved.

3.8.2 Management conflictThis conflict of interest arises due to the fact that the directorsand senior management of the target owe duties to the target

(including a duty to act in good faith in the interests of the targetand a duty of confidentiality). In addition, the seller will beexpecting management to be working for the highest pricepossible for them. On the other hand, in an MBO, managementwill often be working as or alongside a potential buyer in order toobtain the lowest possible price.

While these conflicts may appear apparent, they should beexpressly disclosed to the parties involved. As a result of thisconflict, the seller will almost always insist that the managers on anMBO team agree to behave impartially throughout the process andagree not to make confidential information available to the buyerwithout his consent, or take a leave of absence from the target.

It is not an automatic breach of duty to be on the board of therival company so long as confidential information is not divulgedand the conflict is disclosed with the director abstaining fromvoting on matters to which he has a conflict.

3.8.3 WarrantiesWhere existing management is part of the MBO team, the seller islikely to try to resist extensive warranties being included in thesale and purchase agreement, on the basis that the managerswho are buying the target are likely to have more knowledgeabout the business than the seller.

Managers will also normally give warranties to the private equityproviders but for different reasons. These warranties are designedto ensure that the managers are fully committed to the businessplan and have disclosed all potential problem areas to investors.

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4.1 TakeoversThere are three stock exchanges in the UAE (outside of the DIFC)– the DFM, ADX and DGCX. NASDAQ Dubai and the takeoverregime applicable to companies listed on NASDAQ Dubai are notcovered by this publication.

Currently, the UAE does not have a codified takeover regime or aconcept of a scheme of arrangement and there are, therefore, noclear rules or guidance as to how an offer for 100% of a target’sshares would be made.

In principle, a tender offer could be made but the detail on howthis would operate in practice has not been thoroughly tested, andthere is limited precedent for an offer of this nature in the UAE.

In practice, any proposed structure would need to be discussedin advance with the SCA (which regulates public companies inthe UAE). Key issues would include: valuation and the amount and form of consideration payable

the conditions that could be imposed by the bidder (eg anacceptance threshold and any negative conditions)

the form and content of the offer document to be circulatedto shareholders and the level of disclosure required

whether and how a bidder might be able to achieve certaintyof obtaining 100% ownership, given that there is no ‘squeeze-out’ or equivalent legal mechanism to compulsorily acquirethe shares of a minority under UAE law.

Off-market block trades with identified sellers are permitted,subject to the rules of the relevant exchange.

4.2 MergersUAE law provides for a merger, or amalgamation, of two separateUAE companies whereby all rights, liabilities and assets aretransferred to the surviving company by operation of law. Thereare two forms of amalgamation: by merger, whereby one company ceases to exist and is

effectively absorbed into an existing company

by consolidation, whereby two or more existing companiesare dissolved and their assets and liabilities are transferred toa newly incorporated company.

The ability of companies established in free zones to mergedepends upon the rules and regulations of the relevant free zone.

4.3 Mandatory offerThere are no mandatory offer requirements under UAE Law.

4.4 DefencesPoison pills, whereby the target makes itself unattractive to abidder, or potential bidder, are uncommon in the UAE due to thelimited precedent for, and legal impediments to, a hostile takeover.

It is conceivable that a target might try to persuade the regulatoryauthorities to block the offer or intervene and require the bidder torevise its offer price.

4.5 Squeeze-out procedureThere is no “squeeze-out” or equivalent legal mechanism tocompulsorily acquire the shares of a minority under UAE law.

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4. Types of deals for public companies

5. Consents and approvals

5.1 Merger controlThe UAE enacted a Competition Law in December 2012, whichcame into force on 23 February 2013. Prior to the CompetitionLaw, there were no specific laws or provisions in existing lawsthat dealt comprehensively with the issue of merger control in theUAE. The Competition Law applies to enterprises, being anynatural or legal person or consortium of such persons, engagingin economic activity or holding intellectual property rights in theUAE. Where economic activity occurs outside the UAE but hasthe ability to affect competition in the UAE, these practices willalso be subject to the Competition Law.

Federal and local government entities are not subject to theprovisions of the Competition Law. This exception is broad andencompasses any entities acting upon the authority of Federal orlocal government as well as entities owned or controlled by Federalor local government. Entities operating in certain sectors includingtelecommunications, petroleum and gas and financial services arealso exempt from the provisions of the Competition Law.

The Competition Law requires any activity which will result in anenterprise attaining a dominant market position (such as a merger oracquisition) to obtain the prior approval of the Ministry of Economy.

If approval is not sought, an enterprise may be subject to a finerepresenting between 2% and 5% of annual revenues of thebusiness undertaken in the resultant dominant position. If annualrevenues cannot be determined, a financial penalty of betweenAED5,000 and AED5 million may be imposed.

Applications are to be made at least 30 days prior to the relevanttransaction taking place. The Ministry of Economy has 90 days toapprove an application which may be extended by a further

45 days where additional information has been requested. Anenterprise is not permitted to execute transactions which result ina dominant market position being obtained whilst the approval ispending with the Ministry of Economy. A fine of betweenAED10,000 and AED50,000 may be imposed for non-compliance.

While the Competition Law is now in effect, the Competitionregulator is yet to be established and the relevant thresholds havenot yet been introduced.

In addition to the provisions of the Competition Law, specificindustries may impose certain controls, for example, a mergeroccurring in the banking sector requires the approval of the UAECentral Bank.

5.2 Foreign exchange and investment controls

5.2.1 Foreign exchangeThere are no foreign exchange control regulations in the UAE.

However, the UAE is a party to the Arab-Israeli boycott, whichplaces restrictions on dealings with Israeli parties and currency.

5.2.2 Foreign ownershipThere are foreign ownership restrictions in most sectors in theUAE which require at least 51% of the shares in a UAE onshorecompany (outside of certain free zones) to be owned by UAEnationals or companies owned by UAE nationals. In somecircumstances some or all of the UAE ownership requirementmay be satisfied by nationals of other GCC countries (orcompanies owned by them).

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It is anticipated that a new Foreign Investment Law may beissued which will provide a framework for relaxing the foreignownership restrictions in certain market sectors. The timing forpublication and extent of the regulations is currently unclear.

As previously noted, free zones are geographical areas in theUAE that promote inward investment and provide a marketoriented legal and regulatory alternative to the regime that existselsewhere in the UAE.

The main benefits of free zones include 100% foreign ownershipof companies and exemptions from taxes and custom duties.Land and property may be leased for a specified period of timeunder fully transferable renewable leases and ownership of land ispossible for a 99 year period. The free zones also facilitate speedand ease of establishing a presence.

There are a large number of free zones in the UAE, each with adifferent industry or sector focus and its own legal and regulatoryregime. Examples of some of the larger free zones include theDIFC, the Jebel Ali Free Zone, Dubai Media City and the DubaiAirport Free Zone (all of which are located in Dubai) and MasdarFree Zone, Abu Dhabi Global Market and Abu Dhabi Airports FreeZone (all of which are located in Abu Dhabi).

5.3 Regulated industriesInvestments and acquisitions in a number of industries aresubject to the prior approval of relevant government authorities.

Common sectors that are subject to approval requirements orrestrictions include financial services, education,telecommunications, healthcare and utilities.

5.4 Stock exchange requirementsAny person (the First Person) who wishes to acquire a number ofshares in a company listed on ADX or DFM must, where theproposed transaction would result in the shareholding of the FirstPerson, when aggregated with the shareholdings of itsAssociated Group, exceeding 30% of the target company’sshares, notify the SCA before submitting a buy order. The SCAmay veto such a transaction where it considers that thetransaction would be detrimental to the interests of the market orthe national economy.

For the purposes of this section, “Associated Group” includes: (i)where the First Person is an individual, his or her minor children;(ii) where the First Person is a company, any corporate entitiesthat are under common Control with the first person (e.g. anysubsidiary or sister company); and (iii) any other person withwhom the First Person has an agreement or arrangement for thepurposes of acquiring a controlling stake in the listed company.

For the purposes of this section, “Control” means the ability todirectly or indirectly control or influence the appointment of themajority of members of the target company’s board of directors,the ability to directly or indirectly control or influence the decisionsissued by the target company’s board, or the ability to directly orindirectly control or influence a majority of votes in the GeneralAssembly of the company, in each case through the ownership ofa percentage of shares or stocks or under some other agreementor arrangement providing for such influence.

A bank or financial institution carrying on banking business mustobtain the UAE Central Bank’s approval before it enters into anytransaction which would result in it acquiring 5% or more of theshares of any listed company.

29

Listed companies are subject to continuing obligations and arerequired, in particular, to notify and provide the SCA and therelevant exchange with certain information including: any price sensitive information (subject to exemptions relating

to transactions under negotiation)

details of off-market transactions in the company’s securities,before entering them in the register of shareholders

the number of securities owned by the company’s directors,within 15 days of the acquisition and also at the end of eachfinancial year, and all trades effected by directors and thecompany’s executive management

details of the sale or purchase of major assets which affectthe position of the company

any changes to the company’s board of directors or itsexecutive management

short form final accounts (preliminary financial statementswhich are unaudited and not reviewed) within 45 days fromthe end of the financial year

interim financial statements (quarterly and half-yearly) whichhave been reviewed by the company’s auditors, within 45days from the end of the relevant financial period

annual audited financial statements (presented in both Arabicand English in accordance with the rules of the InternationalAccounting Standards Board), within 90 days from the end ofthe financial year.

5.5 Employee issues

5.5.1 GeneralThere is no specific legislation that addresses the obligation toinform and consult with employees in the event of any businessor share sale.

The UAE labour and the immigration authorities should be notifiedwhere the business or share sale is to have an effect on theemployee’s residence visa (e.g. if the employer entity is changing,thereby resulting in a change of sponsor for immigration purposes).

5.5.2 Information and consultation requirementsThere are no information or consultation requirements underUAE law.

5.5.3 Notification of authoritiesIf the business or share sale results in a change of employer(whether by transfer of employment or as a result of merger), theUAE labour and immigration authorities should be notified, as itwould be necessary to transfer the sponsorship of the employeeto the new employer.

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5. Consents and approvals continued

6. Tax issues

6.1 Capital gains taxThere is currently no tax on capital gains in the UAE.

6.2 Transfer taxesNotary fees are payable in connection with the execution ofagreements to transfer shares, real estate and other assets.

There are no property taxes in the UAE, however a fee is payableto the relevant Emirate’s lands department when registeringdealings relating to real estate. The registration fees applicable inAbu Dhabi and Dubai for the most common dealings (indicativeonly) are set out below:

6.3 Withholding taxThere is currently no withholding tax on interest or dividends inthe UAE.

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Registration Fee

Dealing Abu Dhabi Dubai

Transfer 2% of property value,up to a maximum ofAED1 million.

4% of theconsideration paid.There is no cap onthe fee payable.

Mortgage 0.1% of amountsecured, up to amaximum of AED1million.

0.25% of the amountsecured.

Lease 1% of annual rent. 4% of total rent underthe lease, if the leaseis for a term of 10years or greater,otherwise a nominalfee applies.

7. Financial assistance

There is no statutory prohibition on financial assistance by aUAE onshore company for the purchase of shares in itself or aholding company. However, other considerations such asdirectors’ general duties and the volatility of transactions at anundervalue are still relevant.

Under the new CCL, it is likely that a statutory prohibition onfinancial assistance in relation to joint stock companies willbe introduced.

Companies in the DIFC are subject to a prohibition on financialassistance by the company for the purchase of shares in itselfor a holding company. A whitewash procedure is available.

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Clifford Chance Global M&A SeriesThe Clifford Chance UAE M&A Handbook is part of our Global M&A Series. Thepublications in this series currently include M&A Handbooks in relation to Australia, China,Czech Republic, Germany, Italy, Japan, Poland and Spain as well as detailed overviews ofthe takeover regimes of public companies in key jurisdictions including the UK, the UnitedStates, France, Germany, Italy, Poland and Singapore. We are adding new publications tothe series regularly.

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