Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The most common way of acquiring a private company is through a share purchase. An asset purchase exists but is less common because it is not regulated and does not automatically transfer by operation of the business of the company. A private company can also be acquired through a statutory merger, although this is not very common.
The main advantage of a share purchase is that the target company remains as is, with ownership of the shares simply transferring to a new owner. There is no need to transfer the underlying assets and liabilities of the company, which are automatically transferred by operation of law. However, the transfer is subject to UAE authority approval(s) as part of the share transfer process. Business contracts are largely unaffected and remain in place with the target company, unless they contain change of control provisions that are triggered by the sale. This means they do not need to be assigned individually, which would leave room for counterparties to attempt to renegotiate them.
The only disadvantage of a share purchase is that all assets and liabilities remain with the business unless specifically carved out in the relevant sale and purchase documentation.
The only advantage of an asset purchase is that a buyer can pick the assets and liabilities it wants. This can help to avoid potential unknown liabilities and the main disadvantage of an asset purchase is that the assets must be transferred individually. Depending on the assets involved, there may be significant time and effort required in having to register the individual transfers. If only some of the assets are being transferred, this would be implemented through an asset transfer agreement which would not generally need to be notarised (subject to any specific requirements in respect of the transfer of specific assets).
A typical share purchase transaction would involve entering into a long form share purchase agreement (SPA) that would include conditions precedent and closing mechanics, among others. As part of closing, the shareholders would enter into a share transfer instrument and an amendment to the memorandum or articles of association of the company before the notary. Finally, transfer of title takes place by updating the licence or commercial register of the company held with the relevant department of economic development. The involvement of an escrow is usually required to keep the purchase price in escrow until the records held by the authorities are updated.
In free zones, the transfer is generally more simplified and closing can usually take place simultaneous to the execution of the share purchase agreement as transfer of title takes place once the register of members of the target is updated and subsequent recordal of the transfer with the relevant authorities is only a formality.
The amount of time it takes to effect a typical transaction will largely depend on the parties. Administrative procedures are, where the target is not engaged in sectors that require additional approval (see question 6), limited to the above process. Both actions can be handled with rather short notice. Where foreign investors are involved additional time will be required legalising documents issued by foreign authorities.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The vast majority of onshore companies - that is, companies registered in the UAE outside the free zones - are regulated by the UAE Commercial Companies Law (Federal Law No. 2 of 2015) (CCL). Part 7 of the law sets out the rules for transformation, merger and acquisition of companies. Yet, some onshore companies, such as companies wholly owned by UAE federal or local governments, follow regulations that may differ from the CCL.
In addition to the CCL, private joint stock companies (PrJSC) are also regulated by additional ministerial decrees, namely Decree No. 539 for 2017 (as amended). This decree has specific provisions that govern the acquisition of shares in PrJSCs.
Companies registered in a free zone also are not necessarily governed by the CCL. Where corporate regulations have been issued for a free zone, the CCL applies only where a matter is not covered in the free zone corporate regulations. Certain free zone authorities (ie, those of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Markets (ADGM)) have been provided with comprehensive regulatory powers with an explicit exemption of the CCL. Other free zone authorities have less legislative authority, however, while their scope may vary, corporate regulations exist for all free zones.
Aside from corporate legislation, in the CCL, Civil Code and Commercial Code, sector-specific rules may also impact M&A activity in certain industries,
Share purchase agreements can provide for a foreign governing law. Parties in the UAE generally have freedom of contract, save for certain mandatory matters or matters of public policy. One exception to this is where a Dubai government entity or department is a party to a contract. In these circumstances, a contract must be governed by UAE law unless a special exemption is obtained (Law No. 6 of 1997 regarding Contracts of Governmental Departments in the Emirate of Dubai).
In most instances where parties do not choose UAE law as the governing law, they tend to choose English law. However, for the purposes of effecting the transfer of shares, the share transfer document must be subject to UAE law. This document must be drafted in or translated to Arabic and signed before a notary.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Upon acquiring legal title to shares, the buyer acquires voting rights as well as rights to profits and liquidation or sale proceeds pro rata to its shareholding in the company unless otherwise agreed in the memorandum of association of the company or the shareholders’ agreement. However, a shareholder cannot be fully deprived of any profits onshore. In an asset deal, legal title to a business or assets of a company differs depending on the type of assets being transferred.
In a share acquisition, legal title to a business or assets of a company transfers automatically by operation of law. However, since business or asset transfers are not explicitly regulated under applicable law, each asset of the company in question will have to be transferred individually according to the procedures applicable to the asset, based on its type.
There is no difference between legal and beneficial title onshore; however, in free zones that are governed by legislation that follows common law principles, beneficial ownership is generally acknowledged.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
In the case of a limited liability company (LLC), all sellers must agree to sell owing to the existence of statutory pre-emption rights; further, in practice, in order to enter into a notarised share transfer instrument all shareholders of the company must execute such document, including exiting and non-exiting shareholders. However, in the case of PrJSC, the share transfer instrument is only signed between buyer and seller unless otherwise mentioned under the articles of association. The same generally applies in the free zones. Minority shareholders that refuse to sell cannot be squeezed out or dragged along unless they have signed a shareholder’s agreement to that effect (though these types of provisions are difficult to enforce onshore).Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Generally, any assets or liabilities can be excluded in an asset sale and purchase. Business or asset transfers are not explicitly regulated under applicable law, that is, each asset of the company in question will have to be transferred individually according to the procedures applicable to the asset based on its type. For example, employees do not automatically transfer to a buyer in the sale and purchase of assets (see question 33).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Under the CCL, shareholders of LLCs enjoy statutory pre-emption rights on a transfer of shares. These rights cannot be waived, unless agreed by all the shareholders at the time of transfer. There are no statutory pre-emption rights for shareholders of private joint stock companies. Similarly, shareholders of free zone entities do not have the benefit of statutory pre-emption rights on a transfer of shares. However, shareholders can agree such restrictions between themselves, either in the company’s articles, memorandum of association or shareholders’ agreement.
A transfer of shares normally requires pre-approval from the relevant mainland or free zone authority. Also certain activities require special approvals such as health. With both mainland and certain free zone companies, the share transfer is not completed until an updated licence is issued by the relevant licensing authority. However, in certain free zones recordal with the relevant authority is only a formality.
Article 10 of the CCL sets out the foreign ownership restriction which requires that 51 per cent or more of the shares in a mainland company established in the UAE be owned by one or more UAE nationals or a company that is itself wholly owned by one or more UAE nationals. The only exception to this is for nationals of other Gulf Cooperation Council (GCC) countries. In September 2017, the UAE government amended the CCL, by issuing Federal Decree Law No. 18 of 2017 allowing the UAE Cabinet the flexibility to permit increased levels of foreign ownership in certain companies and sectors of the economy.
In November 2018, the new Foreign Direct Investment Decree Law No. 19 of 2018 (FDI) was issued introducing, among other things, the framework under which the UAE Cabinet will exercise its powers in respect of permitting increased levels of foreign ownership.
The FDI Law establishes a ‘negative list’ of sectors in which no changes will take place and refers to a ‘positive list’ of sectors of the economy in which greater levels of foreign investment will be permitted than is currently the case. This positive list was recently released (July 2019) to include the sectors of the economy where foreign ownership can be increased to up to 100 per cent, subject to other conditions, such as, minimum capital requirements.
In addition to the restrictions on share ownership, certain business activities are reserved for UAE nationals or increased percentages of local ownership. These activities are established by the FDI Law in the ‘negative list’, which includes, for instance, oil exploration and production and banking and financing activities.
A free zone entity, on the other hand, can be 100 per cent owned by non-UAE nationals. The main disadvantage of free zone entities is that generally, they can only do business within the free zone designated area. This restriction has different implications depending on the type of company, activity and free zone in question and therefore must be considered on a case-by-case basis.
Are any other third-party consents commonly required?
Shareholders need to be informed in order to give them the opportunity to exercise their pre-emption rights if the company is an LLC or a PrJSC that provides for pre-emption rights under its articles of association. Also most finance, lease and material business agreements include change of control or change of shareholding provisions that either require notice or consent. If the process set out under these agreements is not followed it may result in termination of the relevant agreement. Further, if there is a pledge over the shares of the company, the transfer of shares cannot take place without the consent of the lender to which such security was given.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
A share transfer requires filings and payment of fees (see question 31), however, an asset transfer would depend on the type of asset that is being transferred (some require registration such as land, others do not such as most fixed assets).