Kuwait: The road ahead

In the wake of the recent financial crisis the global volume of M&A activity fell sharply. By and large the response of many governments (including that of Kuwait) to the financial crisis was to introduce new, and in certain instances long overdue, legislation which would serve to further regulate the financial markets and M&A sector. One such example of Kuwaiti legislation was the introduction of Law No. 7 of 2010 on capital markets (CML).

The CML creates a new capital markets regulatory authority, the CMA, which will overhaul the rules and regulations of the Kuwait Stock Exchange (KSE). The CMA is tasked with issuing executive bylaws (CML Bylaws) in respect of the execution of the CML within six months of the constituting of the CMA on September 19 2010. The CML Bylaws were promulgated into law on March 13 2011 when they were published in the Kuwait Official Gazette. This article provides an overview of certain select sections of the CML Bylaws as they relate to Chapter 7 of the CML.

Chapter 7 of CML

Chapter 7 of the CML aims to regulate acquisitions and the protection of minority rights. It outlines certain rules governing acquisitions with a view to protecting minority shareholders in acquisition transactions. Pursuant to the CML, any person making an acquisition offer of a Kuwait listed company must apply for the prior approval of the CMA whose decision must be provided within 10 business days from the date of submitting an acquisition application to the CMA (Article 72 of the CML).

An acquisition offer is defined in the CML as an "offer, attempt or demand of ownership" for (i) all of the shares of a target or shares of a specific class (excluding shares already owned by the offeror, its affiliates or alliances on the date of the acquisition offer); and (ii) all the other shares in the target that are offered to all other shareholders as a result of the offeror (its affiliates or alliances) acquiring control of the board of directors due to ownership of a majority of the target's shares (Article 71 of the CML read with Article 247 of the CML Bylaws).

It is not clear from either the CML or the CML Bylaws what percentage threshold will constitute a "majority" of the target's shares as this has neither been defined in the CML or in the CML Bylaws.

The CML also provides that the CML Bylaws (discussed further below) are to provide the rules regulating the acquisition of the KSE-listed companies in respect of minority shareholders who own between 5% and 30% of the listed target (Article 73 of the CML). An acquirer of more than 30% of a Target is required to submit a mandatory offer for all the remaining shares in the target pursuant to conditions to be stated in the CML Bylaws, unless the CMA rejects the original acquisition offer, in which case such original offer will not proceed (Article 74 of the CML).

The CML expressly provides for the right of minority shareholders to contest decisions of the board of directors and/or the target's general assembly if the "decision harms the minority" and it gives them the opportunity to submit complaints to the CMA within 15 days from the decision of the board of directors or the general assembly of the target (Article 73 of the CML).

If the CMA fails to reply to the complaint of the minority shareholder within 20 days, then the complaint is deemed to be rejected. The minority shareholder can then appeal the CMA's decision to the Stock Exchanges Court, a new court established under the CML (Article 108 of the CML). The CML Bylaws are silent on whether the acquisition can proceed during this time.

The CMA may reject an acquisition offer in the interest of the public and in the interest of the remaining shareholders in writing including its reasons for such rejection (Article 74 of the CML). Furthermore, the target has an obligation to notify the CMA within seven days from the date of receipt of an acquisition offer together with its response thereto as well as the target's opinion and recommendations which it proposes to provide to its shareholders (Article 75 of the CML).

A violation by any person of the provisions of Chapter 7 of the CML may render such person liable to a minimum fine of KD5,000 ($18,000), or a maximum fine of KD100,000 or 20% of the value of the "violated shares", whichever is higher.

Chapter 7 of the CML Bylaws

It is a requirement that the prior approval of the CMA be obtained in order for an acquisition offer to be made to a target. The board of directors of the offeror and that of the target are obliged to act in the best interests of their respective shareholders (Article 250 of the CML Bylaws).

Article 251 of the CML Bylaws provides that an offeror is obliged to treat as equal all shareholders of the target. In addition, neither the offeror nor the target (or any of their respective advisers) are permitted to provide information to only some shareholders without equally making such information available to all remaining shareholders during the acquisition offering period (the period prescribed by the CMA) or while studying the acquisition offer. This is a welcome development as the CML was initially silent on this issue. It will appear that, for instance, while there is no express reference to price in Article 251 of the CML Bylaws, the requirement to treat shareholders equally would appear to suggest that there may be no disparity in offering price between the shares of a majority or minority shareholder of a Target.

Article 254 of the CML Bylaws also prescribes that the board of directors of the offeror and the target must provide their respective shareholders, at least 15 business days before the general assembly meeting (where a decision in respect to the acquisition offer is to be decided upon), with sufficient information and recommendations in respect to the acquisition offer so as to enable the shareholders to decide whether or not to accept or reject the acquisition offer. Article 255 of the CML Bylaws obliges the board of directors of the offeror and the target to consult a (CMA-licensed) independent investment adviser in respect to the acquisition offer, and the shareholders of the offeror and the target should be informed of the details of the consultation with such investment adviser.

Article 256 of the CML Bylaws prescribes that, before starting acquisition procedures, the offeror must obtain the approval of the competition protection authority (CPA) established pursuant to the Kuwait Competition Law (Law No. 10 of 2007). Pursuant to the Competition Law, acquisitions which result in an increase in control over an economic sector/market must obtain the prior approval of the CPA. The Competition Law defines "control" as possessing, whether directly or indirectly, more than 35% of local market share in the relevant economic sector/market.

The difficulty at the time of writing is that the CPA has not been established and as such it will not be possible for an offeror to obtain the requisite approval under the Competition Law. Although it may be that the CMA itself will provide a waiver of this requirement, it is not clear from the CML Bylaws whether in fact the CMA may do so; it remains to be seen how this issue will be resolved.

Article 259 of the CML Bylaws requires that it be disclosed in the acquisition offer document (which must contain some specific minimum information and must also be submitted to the CMA for its approval) whether or not there exists any agreement or arrangement between the offeror (or its affiliates or alliances) and any member of the board of the target or any of its shareholders. If so, the details of any such agreement or arrangement must be disclosed in the offering document. In addition, Article 260 of the CML Bylaws requires that the offering document include a statement which highlights whether or not any shares to be acquired in the target shall be transferred to any third party; if so, the identity of such third party and details of any shares already held in the target by such third party must be disclosed.

Upon submission of the offering document to the CMA for its approval, the CMA may approve or reject the acquisition offer within a maximum period of 10 business days from the date of receiving the offering document (together with all supporting documentation thereto). The acquisition offer will be rejected if:

(i) the acquisition offer does not comply with the provisions of the CML (and the CML Bylaws);

(ii) the fees relating to the acquisition offer have not been paid;

(iii) the offeror fails to submit the relevant information required under the CML (and the CML Bylaws); or

(iv) the acquisition offer includes an incorrect statement or was submitted in an incomplete manner that affects the decision of the shareholders of the target.

Where the acquisition offer is approved by the CMA, the acquisition offer document must be published by the offeror pursuant to the instructions of the CMA (Articles 264 and 265 of the CML Bylaws).

Recommendation of the board of directors

Article 266 provides that the board of directors of the target furnish to the CMA (within a period of seven business days from the date of receiving an acquisition offer) its views and recommendations which it intends to provide to the shareholders of the target. The recommendations of the target's board of directors may only be made available after first obtaining the approval of the CMA.

Disclosure obligations

Article 269 of the CML Bylaws prescribes that the share disclosure laws outlined in Chapter 10 of the CML Bylaws be complied with in the event that a person comes to own, solely or jointly with its affiliates or alliances, 5% or more of the shares of a target, and such person wishes to increase the percentage of his ownership, provided it does not exceed 30% of the total share capital of the target.

Mandatory offers

Article 271 of the CML Bylaws prescribes that any person (or his affiliates of alliances) who within 30 days from the date of obtaining an ownership interest (whether directly or indirectly) in excess of 30% of the total shares of a KSE-listed company, must make a mandatory offer – that is, submit an offer to purchase the remaining shares of the KSE-listed company in accordance with the provisions of the CML and instructions of the CMA. It is important to note that the above shall not apply in the instance of any takeover which the CMA decides to exempt in consideration of public interest and the interest of the remaining shareholders of the KSE-listed company in question. Any such exemption will be issued in writing and the reasons for such exemption will also be provided.

A mandatory offer must be submitted directly to the shareholders of the target and there will be no requirement to hold a general shareholders meeting to consider the mandatory offer (Article 273 of the CML Bylaws). The mandatory offer must be a cash offer (as opposed to an acquisition offer which, importantly, also provides for payment by way of shares as consideration) and must not be lower than the average price-per-share of the target (as determined by the KSE) for a period of six months before the date of submission of the mandatory offer. It is not clear from the CML Bylaws whether the six-month average price-per-share of the target will be a simple average or a weighted average.

Dealing in confidential information

With the exception of the acquisition offer of an offeror, no other person who holds confidential information that may affect the share price of the target may engage in any transaction concerning the shares of the target or the offeror during the period extending from the date of commencement of the initial negotiations until such time as the disclosure of the initial negotiations or the acquisition offer (Article 275 of the CML Bylaws). In addition, any person who holds confidential information in the target is prohibited from making any recommendations to a third party who holds a share interest in the target.

Limitations in dealing with the shares of a target

Pursuant to Article 277 of the CML Bylaws, an offeror (including its affiliates or alliances) is prohibited during the offering period from selling any shares in the target unless the prior approval of the CMA has been obtained. In all instances, any sale of shares in the target by an offeror may not be less than that which has been offered in an acquisition offer. It should also be noted that neither the target nor any of its affiliates or alliances are permitted during the offering period to purchase any shares in the target. In the event where an offeror or any of its affiliates or alliances purchases shares in the target during the offering period in excess of the price of the acquisition offer, then the offeror shall be obliged to increase the acquisition offer to an amount equal to that paid by the offeror for the shares so purchased by the offeror.

Restrictions on the board of directors of a target

Article 281 of the CML Bylaws provides that the board of directors of a target is not permitted during an offering period, or during the period of initial negotiations, to undertake any of the following (except after obtaining a shareholders general assembly approval or pursuant to an existing contractual agreement):

(i) issuing any authorised unissued shares;

(ii) issuing or granting options relating to any unissued shares;

(iii) creating or permitting to be created or issued any securities convertible to shares or rights of subscribing to shares;

(iv) disposing of or approving disposal of any assets of significant value;

(v) concluding any contracts outside the scope of the normal business of the target;

(vi) taking any action or procedure relating to the target in such a manner that may result in rejecting the acquisition offer or depriving the target's shareholders from the opportunity of taking a decision in relation to the acquisition offer; or

(vii) encumbering the target with any significant financial liabilities.

Conflicts of interest of board members

Pursuant to Article 282 of the CML Bylaws, no board member of the offeror or target, whether in a meeting of the board or of any committee reporting to the board, or in the shareholders general assembly, may vote in respect to any decision or issue concerning an acquisition offer where such decision or issue will trigger a conflict of interest on the part of any such board member, a relative in the first degree or spouse. This includes the instance where such board member is a shareholder in the offeror and also a member of the board of directors or a manager in the target, or vice versa.

Acquisitions by controlling parties

Pursuant to the provisions of Articles 283 to 286 of the CML Bylaws, in the event of an acquisition offer by a person which controls both the offeror as well as the target, the interest of such controlling party must be disclosed to the shareholders of both the offeror and the target before the conclusion of the acquisition transaction, and the disclosure of any acquisition offer that includes a controlling party must include the following:

(i) That the acquisition offer shall be subject to the shareholders' voting pursuant to the requirements set out under the CML Bylaws, and that the controlling party undertakes not to vote in respect to any decision concerning the acquisition offer due to be taken at the shareholders general assembly meeting of the target (and the controlling party must also confirm that its affiliates will not vote in respect of any decision concerning the acquisition offer);

(ii) The identity of the controlling party and its affiliates or alliances;

(iii) Ownership details of the controlling party in the offeror and the target, including any shares owned or controlled by the controlling party or any of its affiliates or alliances, or which the controlling party, its affiliates or alliances have an option to purchase;

(iv) Details of the employment position of the controlling party in the offeror or the target;

(v) Details of the derivatives in the securities of the offeror or the target, or any of their affiliates, to which the controlling party has committed itself; and

(vi) A statement reflecting the opinion of the members of the board of directors of the target regarding the acquisition offer and whether it is fair and reasonable for the remaining shareholders (excluding the controlling party), and that the members of the board of directors of the target have reached such opinion without any role or input by the controlling party.

The board of directors of the offeror and target are obliged to ensure that the votes of a controlling party are not taken into consideration in respect to any decisions concerning an acquisition offer (Article 286 of the CML Bylaws).

Target shareholders' decision

An acquisition offer must not be accepted unless a resolution has been passed by a majority of the general assembly of the target resolving to accept the acquisition offer (Article 291 of the CML Bylaws). An offeror is obliged to disclose the decision of the shareholders of the target at least one hour before the time fixed for opening of the KSE, provided that such disclosure is not delayed until after the day following the date fixed for expiry of the offering period (Article 292 of the CML Bylaws).

About the author Rob Little specialises in general corporate commercial work, capital markets, projects and financial transactions. He received his education at the University of Saskatchewan in Canada and was admitted to both the Law Society of Upper Canada (Ontario) and the Law Society of Saskatchewan in 1993. Before joining ASAR in 1997, Little practised law in Canada, lectured at the Bar Admission Course and published papers on various aspects of commercial law.

Contact information Rob Little ASAR - AL RUWAYEH & PARTNERS Salhiya Complex, Gate 1, 3rd Flr P. O. Box 447, Safat 13005, Kuwait Tel:  +965 2292 2700 Fax: +965 2240 0064 Email: asar@asarlegal.com Web: www.asarlegal.com

About the author John Cunha is an admitted Attorney in the High Court of South Africa (2000) and Solicitor of the Senior Courts of England and Wales (2007). He received his law degree from the University of the Free State in South Africa and thereafter also obtained his MBA at the same university in collaboration with De Paul University, Chicago. He has also obtained a Masters degree in International Trade Law from the University of Stellenbosch in South Africa. In Johannesburg, South Africa, he primarily focused on corporate/commercial transactions and commercial litigation. John joined ASAR in 2006. He is a member of the banking and finance, capital markets and M&A department.

Contact information John Cunha ASAR - AL RUWAYEH & PARTNERS Salhiya Complex, Gate 1, 3rd Flr P. O. Box 447, Safat 13005, Kuwait Tel:  +965 2292 2700 Fax: +965 2240 0064 Email: asar@asarlegal.com Web: www.asarlegal.com