How would you describe the general state of equity capital markets in your jurisdiction, including notable recent activity and deals?
There have only been a few initial public offerings in the United Arab Emirates since the issuance of Federal Law 2/2015 on Commercial Companies (the Companies Law) in 2015. For the time being, few entities are considering initial public offerings. However, it is anticipated that such public offerings may be executed in 2019.
As for other equity capital market transactions, the UAE market is active in relation to several rights issues and secondary offerings. On the other hand, there is a possibility that some of the listed entities may undergo capital restructuring or reduction during 2018 and 2019.
In terms of dual listings, two foreign entities listed their shares on UAE onshore financial markets (specifically, the Dubai Financial Market (DFM)) during 2017 and 2018. Only one delisting transaction has taken place since the inception of the Companies Law.
In conclusion, equity capital markets are active, yet transactions are scarce. The UAE markets have the capability to increase the number of equity capital market transactions; however, both issuers and investors are being cautious due to general market risk factors.
What recognised exchanges operate in your jurisdiction, and what are the pros and cons of listing in each?
The United Arab Emirates has three financial exchange markets, two of which are onshore – that is, the Abu Dhabi Exchange (ADX) and the DFM. The third financial market is NASDAQ Dubai and it is located within the Dubai Financial Centre.
The DFM facilitates diversified trading and investments to a large number of investors by setting listing requirements using disclosure, transparency, trading, settlement and governance systems. In fact, most investors trade on NASDAQ Dubai and the DFM seamlessly, using the same investor number on the same trading platform.
This changes slightly in terms of the ADX, as it usually sets a few different listings, while still using systems that are similar to those used by the DFM.
The DFM and the ADX are subject to the same federal rules and regulations; therefore, they have the same cost and fees.
Reforms and case law
Are any regulatory reforms envisaged or underway with regard to equity capital markets? Has there been any recent case law affecting the markets?
The laws and regulations that directly regulate capital markets in the United Arab Emirates have seen some significant changes recently. Since 2016, the Securities and Commodities Authority (SCA) has issued new regulations that have had a major impact on equity capital markets – for example, regulations on:
- corporate governance (7/RM of 2016);
- issuing and offering publicly listed companies (11/RM of 2016);
- promoting and marketing securities (3/RM of 2017); and
- mergers and acquisitions of publicly listed companies (18/RM of 2017).
Further, a significant reform may be on the cards for the first time, which will have a tremendous impact on UAE exchange markets and businesses. In particular, this reform relates to the limitation of foreign ownership restrictions. However, few details of the scope of this change are available, other than those published in the media by the UAE Cabinet, which declares that a new regulation in relation to the same will be issued during 2018.
In relation to case law, few cases have confirmed the legal position of the application of the laws and regulations to UAE equity capital markets.
Have there been any notable recent developments in financial technology (fintech) which affect equity capital markets in your jurisdiction?
No; however, the DFM and the ADX currently features all-electronic trading systems. Notably, the above entities recognise the need for more investor-friendly trading platforms and thus are constantly undergoing developments directed towards this initiative.
What primary and secondary legislation governs the issue and trade of equity securities in your jurisdiction?
The Abu Dhabi Exchange (ADX) and the Dubai Financial Market (DFM) are subject to the supervisory authority of the Securities and Commodities Authority (SCA). That said, the primary legislation for these markets is Federal Law 2/2015 on Commercial Companies (the Companies Law) and applicable regulations and resolutions issued by the SCA in this regard. The regulations issued by the SCA and are considered as secondary legislation such as the different SCA regulations for trading, settlement, disclosure, transparency, corporate governance, listing and delisting. The ADX and the DFM have their own separate rules for operating their new and ongoing listing requirements that must derive from and comply with the Companies Law and the applicable SCA regulations.
Which authorities regulate equity capital markets in your jurisdiction and what is the extent of their powers?
The ADX and the DFM are subject to the SCA’s supervisory authority, which has absolute power over both exchange markets. As the supervisory regulator, the SCA has absolute discretion, in accordance with the applicable laws and regulations, to accept or reject applications for:
- initial and secondary offerings;
- promoting and marketing securities;
- listing and delisting; and
- capital restructuring whether by way of capital increase or reduction.
Further, the SCA can regulate and monitor the markets and intervene in case of manipulation or volatility of the markets by:
- suspending trading;
- imposing fines; or
- cancelling licences, consents or approvals for markets, brokers, market makers, issuers or investors.
The SCA also regulates the requirements for trading, settlement, disclosure, listing and corporate governance in accordance with the applicable laws and regulations. In summary, the SCA has absolute and general powers and authority to develop the UAE onshore equity capital markets.
What eligibility and disclosure requirements apply for primary listing of equity securities on recognised exchanges in your jurisdiction (eg, aggregate share value, free float requirements, trading record, working capital)?
First, all UAE onshore companies that wish to undergo a primary listing must be incorporated as a public joint stock company. All public joint stock companies should:
- have a minimum capital of Dh30 million (there are higher capital requirements for some regulated activities such as banks and insurers); and
- be listed on a regulated UAE onshore financial market (ie, either the Abu Dhabi Exchange (ADX) or the Dubai Financial Market (DFM)).
Second, in terms of eligibility requirements for listing UAE onshore companies, a differentiation between greenfields (ie, newly established public joint stock companies) and brownfields (ie, companies converting into a public joint stock company) must be made.
For greenfields, the following requirements must be met:
- The prior approval of the Securities and Commodities Authority (SCA) must be obtained.
- The subscription for shares must be restricted to qualified investors, except for banks, financial institutions and insurers.
- The minimum subscriptions are Dh5 million.
- The greenfield’s senior management must have the adequate qualifications and expertise to manage the business.
- An appraiser of the value of any in-kind contributions and a listing adviser must be appointed for a two-year period from the date on which the company is listed on the market.
- The greenfield must have a working capital sufficient for a 12-month period following the SCA’s approval of the prospectus. This is carried out based on a feasibility study.
For brownfields, the following requirements must be met:
- The value of the company’s issued shares must be paid in full.
- The company must have been incorporated for at least two financial years prior to the listing.
- The company must have realised net operational profits that are distributable to shareholders or partners of an average of no less than 10% of the capital within the two financial years preceding the approval of the conversion application.
- The shareholders must pass a special resolution approving the conversion of the company into a public joint stock company.
- The company must comply with any other conditions, as and when specified by the SCA.
Companies listed on the ADX or the DFM must follow the disclosure regulations issued by the SCA and the relevant market. For example, companies must disclose:
- resolutions taken during board and general meetings;
- financial statements on a quarterly basis; and
- any other material information that affects business operations or the listed shares’ market price.
Are there any exemptions from the listing requirements?
Exemptions can be granted in exceptional circumstances and on a case-by-case basis.
Procedure and timeframe
What is the procedure and typical timeframe for listing?
A company usually submits a listing request accompanied by supporting documents to the concerned exchange market, in accordance with the listing regulations set out by the governing authorities. The procedure and timeframe for listing varies according to the accuracy and completeness of the supporting documents and fulfilment of all other requirements. In all cases, the listing of UAE onshore companies must, by law, take place within 15 days from the date of incorporation or conversion of the new public joint stock company.
What fees apply for an application to list equity securities?
Fees for the ADX and the DFM are as follows:
- SCA fees – Dh2,000;
- capital of Dh500 million or less – Dh30,000;
- capital of more than Dh500 million and less than Dh2 billion – Dh50,000; and
- capital of more than Dh2 billion – Dh100,000.
Listing versus admission to trading
Is there a distinction between listing and admission to trading in your jurisdiction?
No, the concept of admission to trading is not recognised separately from listing in the United Arab Emirates.
Are there any differences in the rules, restrictions and procedures for secondary listings of equity securities?
Secondary listings are generally considered to require less paperwork. However, certain fundamental documents (eg, the prospectus) are required in every listing, irrespective of the number of listings a company may undergo. That said, the content requirements of a prospectus differ depending on whether it relates to a primary or a secondary listing.
Are there any differences in the listing rules and procedures for foreign issuers?
The requirements for foreign issuers are different. For example, foreign issuers must have a minimum capital of Dh40 million (or equivalent) to list on the ADX or the DFM.
Under what circumstances can a company be delisted? What rules and procedures apply?
A company may delist its shares for any reason it deems fit. In such cases, the company should:
- convert its legal form from a public joint stock company to any other legal form;
- obtain approval from its board of directors and shareholders at a general assembly; and
- obtain SCA approval.
It should also notify its shareholders and creditors via announcements made in two public newspapers, one of which must be in Arabic.
A company’s shares may be involuntarily delisted by the SCA if:
- a decision has been taken to liquidate or dissolve the company;
- trading on the company’s securities has been suspended for more than six months;
- there is a fundamental change in the company’s business and activities;
- the company has been merged with another entity in a manner that results in loss of its legal personality;
- the company has ceased to carry out its activities; or
- the company has converted its legal form to another form.
In all cases, Federal Law 2/2015 on Commercial Companies and the SCA regulations will apply in respect of the delisting.
Initial public offerings
What are the most common structures used for IPOs in your jurisdiction, and what are the advantages and disadvantages of each?
Only public joint stock companies can undergo an IPO if they wish to list onshore.
Procedure and timeframe
What is the procedure and typical timeframe for launching an IPO?
The IPO process for onshore UAE companies slightly varies according to:
- the business and structure of the company (ie, whether the company is a newly established public joint stock company or a company undergoing a conversion process to become a public joint stock company);
- which emirate the company’s place of business is located;
- which market the company will be listed on.
Accordingly, the two different procedures and steps for each company structure are detailed below.
Newly established public joint stock companies
First stage: initial approvals
In the first stage, the following activities must be undertaken:
- The founders committee of the (to be established) new company must apply to the Department of Economic Development (DED) for initial approval to establish the company as a public joint stock company.
- After obtaining the DED’s approval, the founders committee must apply to the Securities and Commodities Authority (SCA) for preliminary approval to establish the public joint stock company. This application must be accompanied by all necessary documentation – namely:
- a memorandum of association;
- the articles of association;
- an economic feasibility study for the venture;
- the SCA application form requesting incorporation of a public joint stock company;
- the draft prospectus;
- the subscription application form; and
- evidence of payment in respect of the subscription.
- If the company has in-kind shares, the SCA will choose one or more financial advisers to assess the value of these shares. These advisers will either:
- be SCA accredited; or
- have technical and financial expertise in the subject of valuation and be approved by the SCA.
- The SCA will then consider the application for incorporation and notify the founders committee of its observations within 10 working days from the date of submission of the application in full.
- The founders committee must complete any deficiencies or make any amendments deemed necessary by the SCA to complete the application for incorporation within 15 working days from the date of notification. If these actions are not completed in the timeframe, the SCA may consider this a waiver of the application for incorporation.
- The SCA will then send a copy of the documents to the DED after they have been completed. The SCA’s review must be finished 10 working days following completion of the application.
- A meeting is then held between the SCA and the DED to study the application for incorporation and its documents. The meeting must be held within 10 working days from the date on which the SCA and DED submitted the documents.
- If the DED has any comments, the SCA will notify the founders committee. Any amendments must be made within 10 working days of the date on which the founders committee was informed.
- The SCA will then ensure that the application and all documents and observations are completed and that the amended versions are sent to the DED. No particulars may be amended in the application after submitting it to the DED during any stage of incorporation, either in respect of the company’s capital, its objectives, the names of its founders or any other data in the application for incorporation.
- Once the incorporation application has been approved, the DED will issue a decision to license the incorporation of the company. This will be announced in the Official Gazette at the founder’s expense.
Second stage: public subscription/public offering
In the second stage, the following activities must be undertaken:
- The founders committee must commence the subscription process for the shares, as per the template provided by the SCA, within 15 days of issuance of the abovementioned decision. The founders must subscribe for no less than 30% and no more than 70% of the company’s issued capital prior to the invitation to public subscription and offering for the remaining percentage of the share capital. In this regard, the founders may not subscribe for the shares offered to the public for subscription.
- Once the SCA’s approval on the prospectus has been obtained, the prospectus must be published in two local Arabic daily newspapers at least five days prior to commencement of the subscription period. This is the invitation to the public offering.
- The subscription must be kept open for no less than 10 and no more than 30 days. This may be extended by an additional 10-day period, subject to SCA and DED approval.
- Companies issuing shares in an IPO process and wishing to use the bookbuilding process must comply with the following:
- An application must be submitted to the SCA in the form prepared for such purpose in order to obtain approval for the bookbuilding process.
- The company cannot announce or disclose, by any means whatsoever, its intention to issue or sell shares through the bookbuilding process before obtaining the SCA’s approval.
- A percentage of no less than 20% from the subscription shares must be offered to retail investors and a percentage of no less than 60% must be offered to qualified investors – excluding offerings in newly established companies, in which case the subscription is restricted to qualified investors only.
- The shares unsubscribed by the retail investors must be allocated to qualified investors, based on the subscription applications submitted by them.
- The price set for retail investors may be discounted compared to the one set for qualified investors in accordance with disclosures made in the final prospectus.
- Retail investors must pay the full value of their subscribed shares on subscription. Qualified investors may pay the value of their subscribed shares after allocation.
- The allotment of shares and refund of the surplus funds must be completed within five working days from the date of subscription. In the event that the subscription applications exceed the number of the shares offered, the shares will be distributed to subscribers proportionally to their subscribed amounts, or as determined in the prospectus and approved by the SCA, and the distribution will be made to the nearest whole share.
- After the allocation has been made, the company must send the shareholders register to the UAE financial market (ie, the ADX or the DFM) on which the shares will be listed.
- The entities receiving the subscription keep the payments made by subscribers. Any returns gained in relation thereto are for the account of the company under incorporation. The receiving entities will not deliver such amounts to the board of directors until the incorporation certificate has been issued and the company has been registered before the commercial registrar at the DED.
Third stage: incorporation announcement
In the third stage, the following must take place:
- The company must invite the subscribers to attend the constitutive general assembly meeting (after obtaining SCA approval). This meeting must be held within 15 days from the date of the subscription closure. The agenda of the first constitutive general assembly must include certain matters prescribed by the SCA.
- If the quorum has not been met at the first meeting, the meeting must be held within five to 15 days from the date of the first meeting. The second meeting will be deemed to satisfy the legal quorum regardless of the number of attendees.
- Within 10 days of the constitutive general assembly, the founders must apply to the SCA requesting the issuance of the incorporation certificate and must enclose the documents required by law.
- The SCA will then issue the incorporation certificate within five working days.
Fourth stage: registration before competent authorities and SCA
In the fourth stage of the process, the following must be completed:
- The board of directors of the newly incorporated company must complete the registration procedures before the DED in anticipation of its listing on the financial market within 10 days from the date of issuance of the incorporation certificate.
- The DED must then register the company before the commercial registrar and issue the company’s trade licence within five working days.
- Afterwards, the chair of the board of directors of the newly incorporated company has five working days from the date of issuance of the company’s trade licence to provide the memorandum of association, articles of association and company licence to the company registrar in order to register the company in the companies register.
Fifth stage: listing on UAE financial markets In the final stage, the board of directors of the newly incorporated company has 15 working days from the date of the company’s registration on the commercial registrar to:
- list its shares on any of the UAE financial markets (ie, the ADX or DFM) and
- provide the financial market with a listing request in accordance with the listing regulations adopted by the SCA and the financial market on which the shares will be listed.
Newly converted public joint stock company
Existing companies wishing to convert into public joint stock companies must follow the same rules and steps applicable to newly established public joint stock companies, except in relation to the following:
- Companies wishing to convert into a public joint stock company must:
- ensure that the value of the issued shares of the company wishing to convert has been paid in full;
- complete at least two fiscal years prior to the application;
- have realised, within the two fiscal years preceding the approval of the conversion application, net operational profits that are distributable to shareholders of no less than an average of 10% of the company’s capital; and
- pass a special resolution – depending on the legal form of the company and its constitutional documents, this should be passed by no less than three-quarters of either:
- the share capital of the company; or
- the shares being represented in a general assembly meeting issued by the shareholders of the company approving its conversion into a public joint stock company.
- The founders may sell, by way of an IPO, up to 30% of their share capital. The founders may not subscribe to the shares offered for public subscription.
- The remaining IPO process is similar to the IPO of a newly established company.
What due diligence is required and advised in the IPO process?
Notwithstanding any risks, liabilities and pitfalls relating to the company’s business or any market risks occurring during the IPO process, the IPO is a multi-pillar process and therefore should involve no potential legal risks, liabilities or pitfalls. Any negligence on the part of the company or its advisers may expose the company and its founders to risk.
Usually financial due diligence would cover the financial statements for the previous two years and working capital for the 12 months following the IPO. Legal due diligence should cover the corporate, finance, material agreements, dispute resolution (ie, litigation, arbitration and administrative proceedings) and any red flag issues that would or may have a material adverse effect on the company applying for an IPO. Commercial due diligence would be also required for the prospectus, early look presentations and the bookbuilding process (if applicable).
Pricing and allocation
What rules and standards govern share pricing and allocation in the context of an IPO?
Share pricing and the allocation process in an IPO are governed by Federal Law 2/2015 on Commercial Companies and the SCA’s regulations. That said, the share nominal price can be no less than Dh1. In order to have a share price of less than Dh1, an approval should be obtained from the UAE Cabinet; approval will be granted only for justified reasons.
Types/pros and cons
What types of follow-on offering are commonly used in your jurisdiction, and what are the advantages and disadvantages of each?
The concept of follow-on offering is recognised as a secondary offering.
Applicability and exemptions
When must a prospectus be filed? Are there any notable exemptions?
A prospectus must be filed simultaneously when obtaining approvals from the relevant authority (ie, the Securities and Commodities Authority (SCA)). To ensure transparency in the market, all companies are subject to the same rules and procedures, and no exemptions are available. The final draft of the prospectus must be approved prior to the offering.
What must the prospectus contain?
Among the many items that a prospectus must contain according to the relevant onshore regulations, they must typically include:
- a brief on the company’s historical financial statements;
- the company’s working capital and future forecasts;
- a business description;
- risk factors;
- material agreements and litigation; and
- corporate governance structures.
Filing and approval procedure
What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?
A prospectus is usually filed simultaneously when obtaining approvals from the SCA. A draft prospectus is usually submitted to the relevant authority for comments and approval prior to commencing the offering.
What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?
Statutory liabilities typically arise out of the prospectus. The parties that may be held liable in this regard are usually the management and IPO advisers (limited to the type of services provided) of the company.
What defences are available for liable parties?
Liable parties can claim that:
- they were unaware of any inaccuracy or incompleteness of the information contained in the prospectus; or
- such information had been correct when it was included in the prospectus and that:
- it had changed due to circumstances beyond these parties’ control and without their knowledge; and
- they had exercised due care when they announced such information and included it in the prospectus.
However, there is no guarantee that the SCA or the competent court will accept such defences.
What methods are commonly used to market equity security offerings in your jurisdiction?
Typical marketing methods include announcements, the prospectus and early look presentations. These are announced in public newspapers, media and exchange markets websites and through roadshows. A press release agency is usually engaged to market the securities – especially in IPOs.
Rules and restrictions
What rules and restrictions (if any) apply to the marketing of equity securities?
Any entity carrying out the marketing of equity securities must be licensed to undertake such action, except in relation to marketing directed at qualified investors (excluding high-net-worth individuals). Additionally, such equity securities cannot be subject to confidentiality restrictions and such securities must be approved by the Securities and Commodities Authority and other relevant regulators, unless they are marketed to qualified investors (excluding high-net-worth individuals).
To what extent is bookbuilding used in your jurisdiction, and how does the process customarily play out? What are the advantages and disadvantages of using this process?
Bookbuilding is common in the United Arab Emirates and is regulated by Federal Law 2/2015 on Commercial Companies and the SCA’s rules and regulations.
Role of advisers
Adviser roles and responsibilities
Describe the role and responsibilities of the following advisers in the context of equity securities offerings, including how their relationship with the issuer is formalised (eg, through terms of agreements):
Banks and underwriters usually lead and arrange the entire offering process. They also raise investment capital from investors on behalf of companies issuing equity securities and may undertake to underwrite the unsubscribed securities.
- audit the financial statements of issuing companies, financial projects and forecasts;
- determine pricing methods and calculate pricing during the offering process; and
- prepare the working capital report.
Lawyers are usually responsible for overseeing the entire offering process from a legal perspective and ensuring that it complies with the applicable laws and regulations. In particular, lawyers are responsible for the accuracy and legality of information contained in the prospectus, as well as ensuring that the company follows the steps required by the relevant authorities in respect of the offering process. In light of this responsibility, lawyers prepare the necessary drafts and documents.
(d) Any other relevant advisers?
Appraisers may be enlisted, as they will evaluate the in-kind contributions, if any.
What continuing obligations apply to issuers of equity securities? What are the penalties for non-compliance?
Issuers of equity securities must ensure the accuracy of information provided and announced in the prospectus and comply with the applicable laws, regulations and exchange market rules. Penalties for non-compliance vary depending on the type of breach. In particular, a company’s securities may be delisted from the exchange market; however, this has never happened before.
Market abuse provisions
Rules and restrictions
What rules and restrictions are in place to combat market abuse and insider trading? What are the penalties for breach of these rules?
The Securities and Commodities Authority (SCA), as well as the Abu Dhabi Exchange (ADX) and the Dubai Financial Market (DFM) have rules and regulations prohibiting insider trading and market abuse. The penalties imposed vary according to the type of breach.
The board of directors typically sets out written rules regarding the trading of board members and employees of the listed company in relation to the securities issued by the company or its parent company, subsidiaries or sister companies. The board of directors will also prepare a special and comprehensive register for all insiders, including persons who could be considered as insiders on a temporary basis and who are entitled to, or have access to, inside information on the publicly listed company prior to publication. The record will also include prior and subsequent disclosures of the insiders. An insider trading committee must be formed and it will be responsible for:
- the management, follow-up and supervision of insiders' trading and their ownership; and
- maintaining the insider trading register and submit periodic statements and reports to the relevant financial market.
The chair, board of directors’ members, chief executive officer, general manager and any employees of a publicly listed company who have knowledge of fundamental data cannot deal – by themselves or for others and in any capacity – in the company’s securities or the securities of the company’s mother, sister or affiliate during the following periods:
- 10 working days prior to the announcement of any significant information which would result in the share price increasing or decreasing, unless the information was a result of sudden unforeseen circumstances; or
- 15 days prior to the end of the financial quarterly, semi-annual or annual period until the disclosure of the financial statements.
With regard to market abuse, the SCA or the relevant financial market (ie, the ADX or the DFM) must take all necessary measures to control any abuse and have discretion to impose any penalty that they deem appropriate, including referring the matter to public prosecution or delisting the securities, subject to SCA approval.
What tax liabilities arise in relation to the issue and trade of equity securities in your jurisdiction?
How can these tax liabilities be mitigated?