As reported in our last Competition Update, a new competition law (Federal Law No. 4 of 2012, the Competition Law) came into effect in the UAE on 23 February 2013. The Competition Law seeks to regulate market behaviour, particularly in relation to abuse of a dominant position, merger control and the regulation of restrictive agreements. However, since coming into effect there has been uncertainty over the enforcement of the Competition Law. This was mainly due to the fact that the Competition Law envisaged further regulations setting out more detail on a number of critical points, including:
- the relevant market share thresholds for the definition of "dominant position" and the triggering of economic concentration pre-approval (Merger Approvals) requirements;
- the scope of the "weak agreement" exception applicable to certain restrictive agreements; and
- the applicable exemption / clearance procedures for relevant practices and transactions.
The UAE Cabinet has now issued implementing regulations relating to the Competition Law (Cabinet Decision No. 37 of 2014 (the Regulations)), which came into force on 27 October 2014. The Regulations are to be welcomed in that they clarify the applicable exemption / clearance procedures. Significant gaps do, however, remain which (as will be seen below) means that there is continued uncertainty regarding the application of the Competition Law.
This article looks at the key provisions of the Regulations and considers their potential effect on M&A transactions in the UAE.
The Regulations set out the procedures relating to:
- exemptions from the rules prohibiting restrictive agreements and abuse of a dominant position;
- Merger Approvals; and
- investigation of complaints relating to violations of the Competition Law.
In broad terms, applications for exemptions and Merger Approvals should be made to the competition department of the UAE Ministry of Economy (the Department). Certain specified documents must be provided along with the application. The Department will examine the application and submit a recommendation to the UAE Minister of Economy (the Minister). The Minister shall then either approve the application (with or without conditions) or reject it. In terms of timeframes, the Minister must issue his decision within 90 days of notifying the relevant parties of receipt of the application, although this period may be extended by a further 45 days.
Any stakeholder may submit a complaint to the Department concerning any violation of the Competition Law. The complaint must be accompanied by certain specified documents. The Department will either reject the complaint or accept it for further investigation. If the latter, the Department will notify the relevant parties, allow them to defend the allegations and issue a report and recommendation to the Minister. The Minister will then issue a decision on the matter within 30 days of receipt of the report.
There are certain key matters which are not addressed in the Regulations and which remain subject to separate determination by the UAE Cabinet. Such matters include:
- the relevant market share thresholds for the definition of "dominant position" and for triggering Merger Approval requirements;
- what constitutes a small and medium-sized enterprise (these enterprises are not caught by the Competition Law); and
- what constitutes a "weak agreement" for the purposes of the restrictive agreements exception.
In the absence of this information, uncertainty remains. For example, it is unclear whether parties can be said to have breached the Merger Approval regime when the relevant market share threshold trigger has not been specified. Further, it is uncertain how the procedures referred to above will be implemented in practice while these issues remain open.
Will the Regulations lead to competition approvals becoming conditions precedent?
In jurisdictions with actively enforced merger control regimes, obtaining competition approval is a fundamental step of many M&A transactions. Typically the sale and purchase agreement (SPA) is signed and the obtaining of the competition approval is included as a condition precedent (CP) to completion. The SPA will set out who is responsible for making filings, the obligations of each party in the approval process, and the like.
Such CPs have not ordinarily been contained in UAE SPAs up to now due to the fact that it was not apparent from the Competition Law in what circumstances a notification had to be made, to whom a notification should be submitted and what information needed to be provided. The Regulations now at least clarify who the notification should be made to, and the information required, but the thresholds for notification and some questions of form (i.e. hard copy or electronic) still have to be decided. Following the issue of the Regulations each transaction will now need to be considered on a deal-by-deal basis. In some instances it may be clearer than others that an acquisition will have a negative or adverse effect on competition (by, for example, creating or strengthening a dominant position) - in those circumstances the parties will need to investigate whether the Department will accept a notification and then assess whether a CP should be included, and if so what it should say, in light of the feedback received from the Department. In other instances it may be clear that an acquisition will not have a negative or adverse effect on competition, in which case the parties may be more comfortable with not consulting with the Department and not including approval as a CP.
Submission of "draft contract or agreement"
The Regulations provide that a "draft contract or agreement" must be submitted as part of the Merger Approval application. It is unclear what this term means. One view is that it means a draft of the long form SPA which includes all the commercial terms agreed between the parties. Another view is that it means the short form sale agreement that is submitted to the Department of Economic Development as part of the share transfer approval process (and which does not include the commercial terms). As a result of this uncertainty it is unclear whether or not the parties are permitted, prior to submission of the application, to enter into a long form SPA which provides that completion is conditional on approval.
Other SPA provisions
In other jurisdictions there are various other merger approval concerns which are commonly addressed in SPAs. Some examples are set out below.
- Warranties commonly address merger approval requirements, typically by one of the parties warranting to the other that the performance of the agreement does not require third-party approvals (including merger approvals) except as specified. This provides contractual comfort regarding the required approvals and the possibility of bringing a claim if the warranty turns out to be untrue.
- The parties to an SPA will not want to be held to their agreement indefinitely and therefore a "long stop date" will typically be included, after which one or both of the parties may terminate the agreement if the CPs (including merger approvals) have not been satisfied. The relevant date is a matter for negotiation but in general it should take account of the period of time the parties expect will be required to obtain the merger approvals.
- In seller-friendly documents, the strongest possible commitment may be sought from the buyer by including a "hell or high water" clause where the buyer agrees to undertake any actions (including divestitures) that are required to obtain the merger approval. This has the effect of increasing the likelihood of the deal closing, which is usually a key seller concern. In this regard it is interesting to note that Article 9(3)(c) of the Regulations provides that the Minister may approve a merger subject to the concerned establishments implementing certain specified conditions and obligations - this may result in sellers in strong bargaining positions pushing for such "hell or high water" type clauses.
These types of provisions have not historically been seen in UAE SPAs due to the uncertainty of the Competition Law referred to above. However, given that grey areas continue to exist and the possibility that the open issues discussed in this article could be clarified between signing an SPA and completion, a prudent approach would be for parties to UAE M&A transactions to start considering the inclusion of such provisions going forward.
The Regulations are undoubtedly a positive step but we await the UAE Cabinet's further clarification on key issues such as the dominant position and Merger Approval thresholds. Until such time, the full extent of the effects of the Competition Law will not be completely understood and the competition-related provisions referred to above are unlikely to appear in UAE SPAs.