Think about a kid who must complete a 20-page Math homework before hitting the fields to play some ball. However, this lazy kid realizes that it would be impossible for him to dribble some ball due to the quantum of homework he is assigned with. Ergo, the now intelligent kid asks his sister to help him after noticing that Math was her forte. Lucky kid, got an extra couple of hours to play in the sunny field after he dumped a significant portion of his assignment on her. However, the eager kid in our story ended up paying a heavy cost of five out of the six chocolates he had in order to effectuate this deal with his clever sibling. Well, the idea is the same; pool your resources, and meet your goals! A similar story exists behind the curtains of one of the largest mergers between H.J. Heinz Company and Kraft Foods Group, Inc. However, the pooling of resources in the latter deal resulted in the creation of the fifth largest food and beverages company in the world and not just the completion of some algebra. However, the main difference between the two tales is that Kraft's shareholders received a considerable stake in the resulting Kraft Heinz Company; whereas, our lazy kid was not left with any dessert after that day's dinner. Therefore, one should be able to comprehend the importance of structuring a merger and acquisition deal after taking into consideration all the relevant factors and the underlying rights of the shareholders of both, the acquirer and acquiring companies.

The structure may differ depending on the type of business to be acquired. Where the buyer wishes to limit the transaction to the purchase of certain assets of the company, this transaction will be a mere asset acquisition. However, if the buyer purchases the shares of a company, the transaction will be structured as a share acquisition. Therefore, the structure of a merger or acquisition deal is selected after scrutinizing the relevant factors, parties and jurisdiction of the companies. This gives rise to certain complications and irregularities in transactional structure as the benefit of a structure for one party may work to the disadvantage of the other party, as the case of our lazy kid. Hence, this article will seek to discuss share sale and asset sale, the main differences between the two structures and highlight some of the advantages & disadvantages of both the structures in the context of private company acquisition in the UAE.

Status quo in the UAE

M&A in the United Arab Emirates (the UAE) are primarily governed by the principles of contract. However, Federal Law Number 2 of 2015 regarding Commercial Companies (the Companies Law) plays a vital role in mergers and acquisitions since it is the primary piece of legislative framework. As per article 22 of the Companies Law, at least 51% of the shares in a UAE onshore company (outside of free zones) is to be owned by UAE nationals or companies owned by UAE nationals. In case of a branch office, an expat shall appoint a local registered agent. Accordingly, any transfer of shares must comply with these foreign ownership restrictions.

However, to mitigate some of the hardships of the local ownership restriction, a foreign investor can enter into a nominee arrangement with the local partners and shareholders of the target company. This will allow an expat to acquire an economic ownership of shares in the target company above the allowed registered shareholding threshold.

Transaction structures for private companies

An acquisition of a target business in the UAE can be achieved either by buying the shares in a company (a share acquisition) or the assets which make up that business (an asset acquisition). The choice will depend upon the various factors which have been elucidated below:-

Share Sale

If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those unknown to the buyer). On a share purchase, the buyer acquires a company owning a business and running it as a going concern. When the share sale completes, the target company stays exactly the same, its assets and liabilities unchanged but with a new owner. The seller loses his connection with the company following the disposal of enforceable against it.

However, as the buyer indirectly assumes all the liabilities of the company, it is important for the buyer to conduct a proper due diligence of the target to identify these liabilities. Further, in order to mitigate this difficulty, the buyer should also negotiate with the seller warranties; insurance; and indemnities in respect of specific liabilities identified prior to signing the share purchase agreement.

However, these solutions may not be satisfactory for the buyer, as warranties may be subject to limitations and difficult to enforce. This is because the value of warranties and indemnities depend on the seller's credit worthiness. An indemnity may also not be enforced in full by the UAE courts on the basis that it could constitutes unjust enrichment, which is prohibited under Sharia Law. Consequently, an indemnity can be enforceable to the extent that the indemnified party can show actual loss. Another solution for the buyer may be to acquire only some of the shares but it is more likely that the buyer will purchase all of the issued shares. A buyer who is unable to acquire 100% of the shares will be left with minority shareholders who may prove difficult. In addition, both the buyer and seller shall comply with any restrictions on transfers, including pre-emptive rights provisions in the company's constitution or shareholders' agreement.

However, the advantage of the share sale is that there is no need for the buyer to transfer each asset of the target company. This is achieved indirectly by the transfer of the target company's shares. In other words, the entire registration of the target company is transferred into the name of the buyer. Contracts with third party customers and suppliers are also transferred automatically. However, the buyer shall bear in mind that contracts may be subject to change of control provisions or other termination rights, which may require third parties' consent for the transfer to take place. Accordingly, the buyer shall ensure that the seller will obtain such consents prior to completion of the transaction. In addition, regulatory consents will also be required prior to commencing any transfer of the shares. Particularly, a buyer shall ensure that the Department of Economic Development (the DED) or the relevant free zone authority approves the share transfer and will issue an amended license reflecting the change in ownership of the company. Without a valid license, the target company will not be permitted to conduct its business in the UAE.

Asset sale

On an asset sale only the assets (and liabilities) which the buyer agrees to obtain and which are identified are acquired. In other words, the buyer can cherry pick and choose the assets he desires to be acquired. Acquiring certain assets may mean that liabilities are also acquired for those assets. However, the buyer may be liable for environmental problems associated with real estate acquired; and where the assets that are sold include the benefit of contracts, the buyer will also be taking liabilities under those contracts from the date of the transfer. Assets not specifically included are not transferred.

The complexity on an asset sale lies in that each asset has to be transferred separately whether by delivery (e.g. moveable equipment) or by way of a documented transfer (e.g. real estate). As a result, every piece of real estate owned by a company being acquired is to be conveyed by documentary transfer of title. When an asset sale completes, ownership of the selling company (i.e. the shares in the company) does not change hands. The shareholders for the selling company continue to own the company.

Another difficulty associated with the asset sale is that if a buyer wishes to have the benefit of any contract or license, they will need to be assigned or novated. The buyer shall bear in mind that commercial contracts usually contain a non-assignment clause which will not allow for assignment without obtaining a third party's consent. Accordingly, where there is a clause which prevents an assignment or novation of the agreement without the consent of the other party, the buyer should cause the seller to obtain such consent prior to completion.

Further, the Federal Law Number 18 of 1993 has set out some of the procedures and requirements to be followed in a transfer of a company's property. Article 42 of the said law provides that any sale contract involving the transfer of a business must be signed before a notary public and subsequently entered in the commercial register. In addition, pursuant to article 45 (1), the buyer must cause the publication of a summary of the sale contract in two Arabic daily newspapers in the UAE with an interval of one week between them. This advertisement period is intended to provide creditors time to object to the sale.

Miscellaneous

Generally, no transfer tax is payable on transfers of shares in UAE companies. However, a transfer charge of 4% may be levied on a transfer of shares of a company established in the Jebel Ali Free Zone that owns real estate in the Emirate of Dubai. A transfer charge between 1-4% is generally levied on transfer of real estate on an asset sale as per the Dubai Land Department Policy Sale Services. The percentage payable may vary from Emirate to Emirate and the nature of the real estate interest being transferred.

Further, in a share sale, employees will continue to be employed by the target company post-closing and the share acquisition will not affect the existing employment relationship between the target company and its employees. However, the above rule is not applicable on foreign employees. Pursuant to Law Number 8 of 1980, as amended (the Labour Law) and Ministerial Order Number 13 of 1991, a foreign employee's sponsorship to a new employer is not allowed. This is despite the fact that the employer remains with the target company. Accordingly, the buyer has to enter into a new employment contract with foreign employees of the target, by using the prescribed forms to be filed with the Ministry of Immigration and Labor. One the other hand, in an asset sale, the human resources of the company are not transferred automatically. However, the buyer may retain any employee by cancelling their current employment contract and effectuating a new contract in the name of the resulting company. Therefore, corporates ought to ensure that their transactional structures are best suited to their working conditions in order to ensure that the rights of all the parties in the deal are equally dealt with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.