As a general rule, all trades in or transfers of title to shares of a Kuwaiti joint stock company (KSC) listed on the Kuwait Stock Exchange (KSE) must occur on the trading floor of the KSE in accordance with the applicable trading rules. There are specific prohibitions against the trading or transfer of shares listed on the KSE at the account level (between clients of a bank or investment company holding shares for the benefit of its clients, for instance) based on KSE Committee decisions and Central Bank of Kuwait (CBK) instructions to banks and investment companies that manage accounts for clients. This ensures that no off-market trades are conducted through the execution of intra-account transfers where shares are held on behalf of various parties by banks or investment companies.
In order to acquire shares in such KSCs, a buyer is required to submit an order to purchase the shares through a local licensed broker. Sellers of shares in such KSCs are similarly required to submit orders to sell their shares through a local licensed broker, together with the delivery of the share certificates for the applicable shares, which are deposited with the Kuwait Clearing Company (KCC).
Orders are submitted by the brokers to the KSE and are matched electronically by the KSE's trading system. Executed trade information and data is then sent by the KSE trading system to the KCC, which is responsible for the clearing and settlement of the trades. The KCC validates the trade data against its own database, calculates and settles obligations on a gross level (calculations are made at a gross level for changes in cash balances and securities holdings in accounts held with the KCC).
Shares in companies listed on the KSE can only be traded or transferred off-exchange (off the trading floor of the KSE market) in the case of inheritance thereof or legacies in relation to the shares, in which case an application with supporting documentation is submitted to the KSE management.
Block Trading Decision
Where 5% or more of the shares in a company listed on the KSE are to be sold, there are special rules applicable to such sales under KSE Committee Decision 2 of 2006 (Block Trading Decision).
There are no rules applicable in Kuwait or the KSE with respect to a general offer. As noted above, the only regulations in Kuwait relating to acquisition of shares in listed companies (other than through normal trading at the KSE) are the rules set forth in the Block Trading Decision. Under such rules, parties cannot privately complete a transaction that would amount to a transfer of 5% or more of the capital of a listed company. Such sales are required to proceed in accordance with the Block Trading Decision. Below is a summary of the requirements and procedures in this regard.
- A potential seller of such shares must issue a sale order to a broker at least seven business days before the proposed trading date of the shares and deliver the share certificates (if the same have not already been deposited in the seller's name with the KCC) to the broker.
- In the event that the shares certificates are delivered by the potential seller as outlined above, the broker must deliver the same to the KCC and obtain a statement to this effect from the clearing department operated by the KCC.
- The broker must notify the trading department of the KSE regarding the transaction details as soon as it receives the same but, in all cases, before 10am.
- The KSE trading department will announce the number of shares being offered for sale on the trading screen of the KSE within the KSE market and the initial sale price (as agreed upon between the seller and the purchaser) at least five business days before the trading date. The trading date is fixed by the trading department.
- The potential purchaser must deposit a certified cheque for an amount equal to 10% of the proposed purchase price, or the market price of the applicable shares, whichever is higher. If the required deposit of 10% is available in the potential purchaser's cash account with the KCC, a certified cheque is not required. Once the potential transaction is announced at the KSE, the seller and the purchaser may not withdraw their offers or otherwise cancel the transaction.
- On the trading date (which will be at least five days following the announcement to the KSE market over the trading screen as outlined above), the transaction shares will be auctioned after the closing of the market (after 12:30pm). Any investor may offer a higher price to acquire the shares provided that such investor deposits the 10% referred to above (accordingly, the shares will be sold to the highest bidder).
- If no higher bid is offered by third parties, the transaction would be concluded between the seller and the purchaser during the last 15 minutes of trading time (after 12:45pm). If a higher price is offered before or at 12:45pm, the transfer of the shares would be concluded with the higher bidder after the expiry of five minutes, provided that no higher offer is submitted.
- The purchaser must settle the price during a period determined by the trading department or risk forfeiting its 10% deposit.
- The KCC will collect the trading fees. Such fees are paid by the buyer and the seller. The parties may agree to allocate the transaction cost and fees in a different manner, though the same would not be enforceable in relation to the KSE or KCC. In this regard, we note that the Block Trading Decision is silent on the specific commissions that must be paid for such a trade, but we believe the commissions will be calculated on the same basis governing trades generally in the KSE market: KD1.250 ($4.698) per KD1,000 if the transaction amount is KD50,000 or less and KD1 per each KD1,000 if the transaction amount is in excess of KD50,000. However, it may be possible to conclude an arrangement with a broker regarding the broker's portion of commissions and trading fees.
- Investment companies are allowed to participate in block trading transactions on behalf of more than one client provided that the names of the beneficial clients are disclosed.
- If the purchaser is a listed company, the same must notify the KSE of the impact of the transaction on its financial position or the price of its shares. In addition, given that a block trading transaction involves 5% or more of the shares in a company listed on the KSE, this will require compliance with Kuwaiti disclosure rules (as discussed further below).
Transfer of treasury shares
A KSC is permitted under certain conditions to purchase up to 10% of its issued shares (Article 115 [repeated] of the Commercial Companies Law). According to Article 4 of Ministerial Resolution 10 of 1987 as amended by Ministerial Resolution 11 of 1988 and Ministerial Resolution 273 of 1999 (MR 11), the KSC must notify the KSE in advance of its intention to purchase or sell any treasury shares and follow the instructions of the KSE management in this regard.
As noted above, all transfers of shares of KSCs listed on the KSE must be traded over the board of the KSE (subject to exemptions such as the large block trade exemption outlined above). This general rule would apply to the transfer of treasury shares.
In the absence of a contrary provision in the articles of association of the seller or otherwise, no shareholder approvals should be required in relation to the transfer of the treasury shares by a seller.
If the seller does not have a sufficient number of treasury shares, it may be able to purchase some of its shares from the market in order to complete the transaction. In order to be able to do so, the following main requirements (among others) should be satisfied.
- The seller's articles and memorandum of association must allow it to own treasury shares.
- The prior approval of the shareholders' assembly authorising such purchase is required, within the applicable limits of the Kuwaiti law (up to 10% of its issued shares). Additionally, the shareholders' resolution approving the buyback must delegate to the board of directors the powers and authorities to acquire the treasury shares. Such delegation can only be valid for a maximum period of 18 months from the date of the approval of the shareholders' assembly. A company cannot issue new shares and reserve them as treasury shares. It can only acquire treasury shares from issued and allotted shares.
- The approval of the KSE is required and usually issued and renewed every six months. In addition, a notice should be sent to the KSE five days before the sale or acquisition of the treasury shares: such sale or acquisition would be governed by special rules and regulations established by the KSE (Article 4 of MR 11). The KSE requires five days prior notice from the listed company of its intention to buy or sell treasury shares.
- The seller may not finance the purchase of its shares from its share capital, and the funds used to purchase the shares must not exceed its total reserves, consisting of net profit distributions, profits brought forward and share premiums (Article 5 of MR 11).
- The nominal value of the shares to be purchased by the seller must be fully paid (Article 6 of MR11).
- Listed KSCs may not buy their own treasury shares, in accordance with the Block Trading Decision. However, it is possible for such companies to sell their treasury shares in accordance with such procedures.
Article 9 of Ministerial Resolution10 of 1987 provides that, in the event of a KSC selling its shares, it must do so for cash consideration, the only exception being a swap of shares "with a company whose shares are listed on the Kuwait Stock Exchange".
Based on the above, parties normally approach the acquisitions as follows.
Acquisition through the block trade rules
Where the acquisition is through purchase of shares held by existing shareholders, such shareholders would be requested to form a consortium whereby they transfer all of the offered shares into investment portfolio accounts (by way of direct transfer and not through block trading, as they remain the owners of the shares through beneficial ownership in this case) with one bank or investment company as a portfolio manager. The portfolio manager can then enter into the block trading process and sell the shares to the purchaser on their behalf.
Having said this, we note that the main risk associated with the Block Trading Decision relates to the existence of potential higher bidders. Indeed, as noted above, any investor may offer a higher price to acquire the offered shares provided that such investor deposits the 10% of the purchase price. Notwithstanding this auction process, in practice we believe that the intended purchaser may have some advantages over a potential higher bidder. For example, such purchaser can conduct its own due diligence, set out representations and warranties and formulate a letter of intent with the pre-selected shareholders or the seller (as the case may be, depending on the amount of shares offered). There would be ample time to conduct market research, collect information about the seller and determine the offer price carefully, whereas bidders from the rest of the market would only have five business days to come up with a higher bid of at least a minimum tick over the announced block trade price. Such bidders would not be privy to the representations and warranties made between the announced block trade partners and would have to make their bid with respect to the sellers' shares "as is". This may constitute a disadvantage to such other bidders who would have limited time to conduct their own studies and due diligence exercises and arrange financing with regard to the transaction.
Acquisition through the KSE
When proceeding with the acquisition of 5% or more of the shares through a series of transactions, each of which is less than 5% of the seller's capital, the buyer would be able to purchase such shares from the market in accordance with the normal trading procedures of the KSE. However, as the trade is done automatically over the KSE market through the matching of orders (as noted above), the seller and the buyer would have to agree with two brokers in order to procure that they cooperate and execute the sale/purchase transaction simultaneously. We are aware of instances where acquisitions have been achieved using this method. Having said this, we note that while it may be possible to find two brokers who are willing to cooperate to essentially execute the sale and the purchase simultaneously, there is still a risk that this may not succeed. However, such risk is much lower than the risk associated with block trading rules.
There are a number of other considerations that will need to be addressed by the parties in structuring the transaction as outlined above. The following comments stand in this regard.
Conflicts of interest
Article 151 of the Commercial Companies Law provides that the chairman and any director of a KSC may not participate in any transaction with the KSC except where authorised by the general assembly of the company. This may only be an issue if the acquisition involves purchasing shares from pre-selected existing shareholders and some or all of them happen to be on the board of directors of the seller (or have the right to appoint such a director).
Board member interests
Under Article 19 of the KSE bylaws, every listed KSC is required to deliver a statement to the KSE of the shares or securities held by any member of its board of directors within one month of their appointment or the effective date of any dealings in such shares. As such, the seller will need to disclose any portion of its shares sold by the members of its board as part of the transaction in this time period. In the event that the board of the seller is changed after the transaction, such a notice will also need to be provided.
KSE Committee Decision 1 of 2000 Concerning Trading of Listed Shares (Insider Trading Decision) applies to directors, officers, employees of members of the KSE (including listed companies), brokering agencies, portfolio managers, the KCC and any other person who, by virtue of their position, has access to confidential information about a listed company that is not known to the public (insiders). Every insider intending to trade in listed shares is required to notify the KSE management of such intention on the prescribed form at least one day before the trade, and this will be announced to the market. Clients are required to notify their representatives of their insider position, and portfolio managers are responsible for providing notice to the KSE where such clients are involved in a potential trade. Therefore, if any of the pre-selected shareholders are in the position of an insider in relation to the seller, they will have an obligation to inform the KSE of the potential trade in shares at least one day before the closing of the transaction and the KSE will announce the potential trade by such insider to the market.
Disclosure requirements under Kuwaiti law
Direct and indirect interests in 5% or more of the shares of the seller, and any change in such interests, must be disclosed under Law 2 of 1999 Concerning Interest Declarations in Shares of Shareholding Companies (Law 2) and KSE Committee Decision 5 of 1999 Concerning Declarations of Interest in Shareholding Companies (Decision 5).
These disclosure requirements not only relate to legal title or beneficial title to such shares but also to any direct or indirect interest in 5% or more of the shares of the seller. The same also require notification of any change in position in relation to a party that became subject to the disclosure requirements.
Both Law 2 and Decision 5 outline a very broad range of indirect interests in listed KSCs that must be disclosed. The outline of such interests in Article 3 of Law 2 and Article 4 of Decision 5 includes the following:
- joint ownership of shares of such a company;
- decreasing (5% or more) such proportion, mortgaging such interest or agreeing to mortgage such interest, termination of such a mortgage, and pledging such interest as security for a loan;
- offering the proportion referred to above as a share in another company or restoring that share from that company;
- entry into agreements with third parties restricting or limiting the rights of the owner of such shares to dispose of the same;
- entry into agreements providing third parties rights to exercise voting rights in relation to the shares;
- purchasing or arranging to purchase such shares through forward sale or option transactions;
- direct or indirect ownership or interest of 20% or more of an entity or nominee which holds 5% or more of the capital of the listed company;
- legal ownership of the relevant proportion on behalf of another party (holding the proportion as a portfolio manager, for instance); and
- any other interest in such shares reaching the relevant proportion or increasing or decreasing such interest.
The required disclosures must be made to the seller's board of directors as well as to the KSE management by registered mail. The same should be made immediately upon the relevant acquisition or change in position.
As a general rule, the Law of Commercial Companies (Law 15 of 1960) provides that ownership of Kuwaiti companies by foreign investors is limited on aggregate to a maximum of 49%. In other words, Kuwaiti nationals are required, generally speaking, to own at least 51% of the capital of all Kuwaiti companies.
There are certain exceptions to the general rule. A foreign investor may, for example, acquire a licence under Law 8/2001 Regulating Direct Foreign Capital Investment in the State of Kuwait to obtain certain exemptions from Kuwaiti laws, including an exemption permitting the foreign investor to own more than 49% of a Kuwaiti company. The licence is issued following an order from the Minister of Commerce. Acquiring such a licence requires that an application and supporting materials, including a business plan, be submitted to the Kuwait Foreign Investment Bureau. The Kuwait Foreign Investment Committee will ultimately make a decision in respect of the application on an ad hoc basis and make a recommendation to the Minister of Commerce.
There are also certain exceptions to the general foreign ownership limitations that permit companies established in member states of the GCC that are wholly owned by GCC nationals or GCC individuals to acquire shares in Kuwaiti companies in excess of general foreign ownership limitations. This position was provided for by Ministerial Order 141 of 2002 as amended and is now provided for under Ministerial Resolutions 269-272 of 2008, which allow GCC citizens to practice all economic activities and professions in Kuwait save for: (i) pilgrimage and omra services; (ii) commercial agencies; (iii) establishing printing presses and publishing houses; and (iv) establishing newspapers and magazines. It is notable in this regard that GCC citizens are now permitted to engage in real estate services including land and buildings lease, re-lease and management.
Where companies are listed on the KSE, we are of the opinion that these general foreign ownership restrictions have been lifted. We are aware of a number of transactions in which a foreign investor acquired in excess of 49% of a KSC listed on the KSE. Officials at the KSE have also advised us that they do not monitor foreign ownership of KSC listed companies except in relation to banks.
In relation to banks listed on the KSE, it is arguable that foreign investors can acquire up to 100% of such shares, as with any other company listed on the KSE. Notwithstanding the above, for any party to acquire in excess of 5% of the capital of a Kuwaiti bank, it must first obtain the approval of the CBK. For a party to acquire in excess of 49% of the capital of a Kuwaiti bank, it must first obtain the approval of the Council of Ministers (the cabinet). The KSE monitors compliance with such approval requirements and will block trades where such approvals have not been obtained.
Foreign investors may not acquire shares in brokerage companies, in accordance with Article 21 of the Executive Regulations of the KSE issued by Ministry Resolution 35 of 1983, as amended.
Law 74 of 1979 (the Law Regarding Real Estate Ownership by Non-Kuwaitis) contains a general prohibition against the creation of ownership interests in real property in Kuwait by foreign nationals.
The Law Regarding Real Estate Ownership by Non-Kuwaitis specifically prohibits the ownership of Kuwaiti real property by Kuwaiti companies that have foreign national ownership. Any ownership by the company of real property in such circumstances is null and void. The only exception is outlined in Article 8, which provides that a KSC with foreign national ownership may acquire real property for the purposes of headquarters or as may be required in pursuit of its objects. In order to rely upon this exception, the company would be required to obtain an Amiri decree. KSCs obtaining such a decree are prohibited from trading in real property in Kuwait as one of its objects.
Law 1 of 2004, which provides for some exceptions to the Law Regarding Real Estate Ownership by Non-Kuwaitis, became effective on January 27 2004. Law 1 of 2004 provides for the ownership of real property in Kuwait by GCC nationals (including legal entities such as companies) provided that there is reciprocal treatment for Kuwaiti ownership of real property in the relevant GCC state. In practice, such reciprocity has only been established in relation to the Kingdom of Saudi Arabia and the Kingdom of Bahrain and will permit the same to hold up to 49% of the shares of a Kuwaiti company that owns real property in Kuwait.
Please note, however, that in practice the Law Regarding Real Estate Ownership has not prevented foreign investors from purchasing shares in companies listed on the KSE which own real property in Kuwait.
With regard to acquisitions of 5% or more of the shares of listed companies, the Block Trading Decision creates uncertainty for potential purchasers given that a third party may interpose itself by making a higher bid than the intended purchaser and successfully acquiring the shares. As discussed, the risk is mitigated by the fact that a potential bidder has a limited time of five business days to obtain comfort regarding the acquisition and to mobilise funds. Similarly, the alternative of purchasing shares through several transactions of less than 5% carries the same risk of third parties interposing themselves. The KSE should consider reforming the Block Trading Decision to allow greater certainty for investors. This can be achieved by allowing for exemptions from the provisions of the Block Trading Decision that would eliminate the requirement for five business days' notice and the need for an auction, which would permit a direct and instant transfer of the shares from the selling broker to the buying broker through the clearing and settlement system. These measures would create certainty for investors and boost mergers and acquisitions in Kuwait.
Ahmed Barakat is a senior partner in Al Sarraf & Al Ruwayeh. He received his education at Cairo University (Bachelor of Law, Honours, 1981) and at New York University (Masters of Law in International Law and Business Transactions, 1984). He is admitted to the New York and the Egyptian Bars. Before joining Al Sarraf & Al Ruwayeh, he worked as a lead counsel at the Kuwaiti Authority for Assessment of Compensation Resulting from Iraqi Aggression and at Baker & Mckenzie in New York.
Ahmed specialises in commercial and tax litigation, as well as local and international arbitration. He also advises clients on corporate and commercial matters, as well as Islamic banking and investment. Ahmed has recently been selected by Best Lawyers as being among the best lawyers in Kuwait in various specialties.
Ezekiel Tuma is of counsel to Al Sarraf & Al Ruwayeh. He joined the firm in March 2008. He received his LLB from Makerere University, Kampala, in 1997 and obtained a Master of Commercial Laws degree from the University of Cambridge in 2000. Ezekiel was admitted to the Uganda Bar in 1999. He practised with a leading law firm in Uganda from 1997 and became a partner in that firm in 2004.
Ezekiel has been recognised by the reputable Chambers and Partners Global and the IFLR 1000 as a leading lawyer in Uganda. He also worked as a part-time lecturer at Makerere University, Kampala, for eight years. He has lectured on company law and trusts law and has published several articles in reputable law journals. He practises in the areas of banking and finance, commercial and corporate law, international transactions, securities, mergers and acquisitions projects, privatisation law and Islamic finance. Ezekiel is fluent in English, French and Swahili.