Mergers and acquisitions (M&As) is a general term that refers to the consolidation of companies through various types of transactions. In the Middle East and Africa (MENA) region, M&A deals remain most relevant in the Oil & Gas industry. Investors engaging in M&A deals in the United Arab Emirates (UAE) should consider the effects of such transactions in light of the Abu Dhabi National Oil Company's (ADNOC) In-Country Value (ICV) program. This legal briefing gives an overview of the impact M&A transactions have from an ICV perspective.

1. What are M&A deals and how do they take place in the Oil & Gas Industry?

Mergers and acquisitions (M&As) is a general term that refers to the consolidation of companies through various types of transactions. In a merger, the acquiring company takes over the target company which in most cases ceases to exist. An acquisition, however, permits the acquiring party to obtain the majority stake of the target company (usually smaller in size). This transaction does generally not change the name or legal form of the acquired company.

M&A transactions are typically divided into share and asset deals. In a share deal, the purchasing company will typically acquire all of the shares of the target company, making it the new owner. In an asset deal, the acquirer buys all – or part of – the target company's assets (e.g. buildings, products, inventory, patents, etc.). One of the main differences between a share and an asset deal is that a share deal forces the purchasing party to acquire all inherent liabilities (including tax liabilities), whereas, in an asset deal, the acquiring party can choose which particular liabilities it wants to take over. Apart from that, M&A transactions may also be carried out as a consolidation. In this case, a new company will be created, whereby stockholders of the involved parties must approve the consolidation, and, subsequent to the approval, will receive common equity shares in the new company.

In the Oil & Gas industry, it is a common business strategy to rely on M&A deals. Besides creating a better market position, it allows investors to extend their portfolio and know-how. While it is estimated that the majority of transactions in the UAE are carried out as share deals (approx. 75%), a minority of deals are dealt with by way of asset deals (approx. 25%).

2. How are ICV and M&A deals related?

In the United Arab Emirates (UAE), the Abu Dhabi National Oil Company (ADNOC) has launched its In-Country Value (ICV) program, which took effect in April 2018. ADNOC's ICV program requires suppliers to increase their respective ICV score as much as possible in order to increase their chances of being granted the right to match the best commercial offer of an ADNOC tender.

The ICV score is obtained through self-assessment by filling out the supplier submission template form and certification by one of the certifying bodies. Suppliers will also be asked to hand in an ICV Improvement Plan, showing how the investor intends to increase its ICV score in the future.

3. What impact do M&A transactions have on (existing) ICV scores?

There will be different impacts on the ICV score, depending on the type of transaction:

a. Share Deal

With share deals, investors will acquire an additional corporate vehicle that already has its own ICV Certificate (assuming that ICV Certification has been followed through). Share deals will, therefore, not have a negative effect per se on the investor's ICV score.

The investor would need to assess, however, the degree to which the target can benefit the supplier's overall ICV strategy. In case the acquired company has a high ICV score, it may be utilized for intercompany transactions within the UAE. Such transactions will not be subject to the arm's length principle in the UAE since the UAE generally do not levy any corporate income tax.

b. Asset Deal

Transactions in which individual assets (e.g. production lines, buildings, facilities, inventory, etc.) are transferred to the acquiring company will eventually have an impact on the ICV score, as well.

Investors should act proactively and (re)consider the transaction's effects on the acquiring company's ICV score. If the transaction dilutes the overall ICV score this may decrease potential chances in upcoming ADNOC tenders. Besides this, the company may not be able to fulfil its ICV Improvement Plan related obligations that have been put into place prior to the transaction (in this regard see below under 4.b.).

c. Consolidation

Under consolidations, typically a new company will be created. For such corporate vehicles, suppliers would need to obtain a new ICV Certificate.

4. ICV Due Diligence: What needs to be considered?

In order to know which deal is in the investor's best interest, due diligence – in which the target company is examined thoroughly – is highly recommended. Legal and financial due diligence is more challenging to conduct in the UAE than in other jurisdictions. This is mainly due to the lack of publicly available information and audited accounts. Apart from the potential legal, business, human resources, intellectual property, and financial issues, M&A transactions should be considered from an ICV point of view, by assessing the respective target's ICV Certificate.

b. Impact on ICV Improvement Plan

Suppliers that have committed to an ICV Improvement Plan should keep in mind that restructuring measures may have an impact on the ability to reach the outlined goals. In this context, suppliers will need to make an assessment of the respective risks they face considering ADNOC's remedies in respect of the ICV Improvement Plan.

As a rule, it should be kept in mind that the more advanced the suppliers' ICV Improvement Plan obligations are, the more difficult it will be to carry out extensive ICV restructuring measures without impacting these obligations. Suppliers need to show caution in this matter, as failure to comply with an ICV Improvement Plan will be considered a breach of contract, which in turn means that ADNOC can terminate the respective contract. Failing to comply with its own commitments can also lead to fewer payments, given the fact that ADNOC introduced a milestone payment plan under ICV 2.0. Up to 5% of the total contract value can be withheld by ADNOC in case of non-compliance with the ICV Improvement Plan.

c. Impact on Vendor Registration

Finally, it should be kept in mind that M&A transactions may also have an impact on vendor registrations with ADNOC. This is relevant when new entities are established (i.e. consolidation) since such entities would need to undergo ADNOC's vendor registration process from the outset. It should be noted that ADNOC's vendor registration process is quite complex and time-consuming. Therefore, the impact of any M&A transaction should always be assessed against the additional hurdles encountered when having to undergo the vendor registration.

5. Conclusion

M&A transactions are complex procedures. In the Oil & Gas industry, investors will need to carry out ICV due diligence to assess the impact on ICV-related obligations. Transactions (share and/or asset deals) can make sense to boost suppliers' ICV scores. It should be noted that an increased ICV score is a cornerstone for winning ADNOC tenders. Investors should consider the following aspects:

  • Taking over a company includes taking over a (potential) ICV score. Suppliers interested in working for ADNOC should keep an eye out for the certified ICV score of the target company (e.g. through ICV due diligence);
  • The companies involved in an M&A transaction might already be committed to an ICV Improvement Plan. The more ambitious the plan, the more difficult it will be to comply with that plan in connection with an M&A transaction; and
  • Before consolidating, the responsible party should be aware of the fact that the new legal entity will have to apply (again) for vendor registration.

Originally published 12 September 2019

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.