Kuwait: Emerging M&A

Author: | Published: 1 Jun 2009
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M&A transactions are possible under Kuwaiti law. But, as with all such transactions, their successful completion depends on how the parties to the transaction navigate their way through the transaction process when dealing with country-specific legal considerations. This is particularly true when dealing with an emerging market economy such as Kuwait.

Exchanges and regulatory authorities

The only exchange for securities in Kuwait is the Kuwait Stock Exchange (KSE). Kuwaiti joint stock companies (KSCs) may be listed on the Exchange and traded in the KSE market. This market also provides for listing and trading of shares in non-Kuwaiti companies (which, to date, consists of a limited number of companies established in other Arab jurisdictions).

The KSE is the primary regulatory authority for the conduct of its own affairs. It is governed by a committee (Committee) comprised of: the Director of the KSE; three members representing the Ministry of Commerce and Industry, the Ministry of Finance and the Central Bank of Kuwait; two experts appointed by the Council of Ministers upon nomination by the Ministry of Finance; and four members of the KSE (listed companies and licensed brokers) selected by the Kuwait Chamber of Commerce.

The Committee issues decisions from time to time to supplement laws, regulations and ministerial resolutions relating to the affairs of the KSE. The Director is responsible for the implementation of decisions of the Committee.

The Kuwait Clearing Company (KCC) is a Kuwaiti joint stock company that has been delegated responsibility to manage the Clearance Chamber of the KSE and, therefore, act as clearing agent responsible for the clearance and settlement of all trades in the KSE market. The KCC also maintains a central depository of share certificates for Kuwait shareholding companies listed on the KSE.

Ownership of shares

Kuwaiti law indicates that foreign investors may acquire shares in companies listed on the KSE in the same manner as Kuwaiti nationals. As a general rule under Kuwaiti law, foreign nationals are not entitled to acquire more than 49% of shares in Kuwaiti companies.

Though there is no express wording to such effect, where companies are listed on the KSE, we are of the opinion that the above general foreign ownership restrictions have been lifted in relation to Kuwait shareholding companies listed on the KSE. Officials at the KSE have advised us that restrictions (with the exception of specific foreign ownership restrictions relating to banks) are no longer applied in relation to the shares of companies listed on the KSE.

In the case where an acquirer (whether a Kuwait national or a foreign person) wishes to acquire more than 5% of a Kuwaiti bank then the acquirer must apply for approval from the Central Bank of Kuwait. In considering such an application from the acquirer, the Central Bank of Kuwait may request that the acquirer provides certain additional information or clarification. If an acquirer wishes to acquire more than 49% of the shareholding in a Kuwaiti bank, then an application for the approval of the Cabinet will be required. Pursuant to submitting such an application to the Cabinet, it may revert to the applicant with a request that further information or additional documentation be provided to the Cabinet until it has finally approved or rejected the application. The KSE closely monitors compliance with such Cabinet approval and will block all trades where the relevant party concerned has not obtained such approvals.

Block trading rules

As the acquisition of shares of a company in a takeover will normally involve the sale of at least 5% of the shares of a company listed on the KSE, the consideration must be given to the block trading rules of the KSE. Pursuant to these rules, the sale of a block of shares amounting to 5% or more of the shares of a company listed on the KSE must be traded in accordance with the procedures outlined in the rules, explained below.

  • A potential seller of such shares must issue a sale order to a broker at least seven business days prior to the proposed trading date for the shares and deliver the share certificates to the broker.
  • Where shares certificates are delivered by the potential seller, the broker must deliver the same to the KCC and obtain a statement to this effect from the Clearing Department operated by KCC.
  • The broker must notify the Trading Department of the KSE of the transaction details as soon as it receives the same, but in all events, before 10am.
  • The 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 at least 5 business days prior to the trading date to be fixed by the Trading Department.
  • It is possible to have an agreement with a potential purchaser that it will purchase the applicable block of shares subject to the procedures and rules outlined in the Block Trading Rules. The potential purchaser must deposit a certified cheque in an amount equal to 10% of the proposed purchase price, or the market price of the applicable shares, whichever is higher.
  • 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 six days following the announcement to the KSE market over the trading screen as outlined above), the applicable block of shares will be sold pursuant to an auction process from 9am to 12:30pm.
  • Any investor may offer a higher price to acquire the shares than may have been agreed with a potential purchaser provided that such investor deposits the 10% deposit with KCC. We are not aware of any manner in which an agreed sale of shares to a particular purchaser can be locked-in without the bid being lost to a third party making a higher bid.
  • The applicable block of shares will be sold to the highest bidder.
  • If no higher bid is offered by third parties, the potential sale between a seller and purchaser pursuant to an advance agreement will be concluded in the last 15 minutes of the trading time (i.e., after 12:15pm). If a higher offer for the applicable block of shares is offered prior to or at 12:15pm, the transfer of the shares will be concluded with the higher bidder after the expiry of 5 minutes provided that no higher offer is submitted.
  • The purchaser must settle the price during a period determined by the Trading Department or the purchaser will forfeit its 10% deposit.
  • KCC will collect the trading fees or commissions payable by the buyer and seller in relation to the transaction. In the event of a sale between a seller and a purchaser under the Block Trading Decision, we are of the view that the parties may agree to allocate the transaction cost and fees in an agreed manner though the same would not be enforceable vis-à-vis the KSE or KCC. The Block Trading Decision is silent on the specific commissions that must be paid for such a trade, but the commissions will be based on the rules for a general trade in the KSE market. It may be possible to come to an arrangement with a broker engaged to execute the block trade with respect to the broker's portion of commissions and trading fees.

Please note that investment companies are allowed to participate in a block trading transaction on behalf of more than one client provided that the names of the beneficial clients are disclosed. Also, if the purchaser or the seller is a listed company, the same must notify the KSE of the impact of the transaction on their financial position or the price of their shares.

In addition, as a block trading transaction involves 5% or more of the shares in a company listed on the KSE, this will require compliance with Law No. 2 of 1999 Concerning Interest Declarations in Shares of Shareholding Companies and KSE Committee Decision No. 5 of 1999 Concerning Declarations of Interest in Shareholding Companies. Where there is an agreement reached between a seller and potential purchaser for a sale of shares subject to the rules, this would require a disclosure to the KSE once the agreement is executed.

Trades of shares pursuant to the block trading rules have become common in the Kuwaiti market. However, the disadvantages of structuring the transaction through the block trading system are that settlement would have to be in cash and would trigger an auction for the target company's shares (thus allowing third parties to make a higher offer for the target company's shares). This would create an execution risk to the acquirer. Having said this, we are not aware of any instance where a third party has triggered an auction process by offering a higher price per share, but that is not to say it cannot happen in relation to a target company.

Tender offers

It is important to note that there is no regulation that deals with tender or general offers to the shareholders of a KSE listed company. Until recently, the position of the KSE was that it was not possible to make a tender offer and only trades made pursuant to the block trading rules could be made.

More recently however, the KSE in 2008 allowed for a tender offer to be executed and the parties did not have to follow the rules applicable to block trades. But with respect to a tender offer there are no predetermined rules regarding minimum offer periods, thresholds or withdrawal rights. The KSE will, in its sole discretion, determine the terms of a tender offer on an ad-hoc basis. In the case where the KSE allowed the tender offer the same was concluded by way of a simple announcement by the board of the KSE noting that the acquirer offered to purchase all the outstanding shares of the target company for a set price and within a set time. No other information was provided to the market.

Lack of takeover rules

Of interest to potential acquirers is the lack of takeover rules in Kuwait. There are no specific protections available to minority shareholders of a target company in the case where its majority shareholders wish to sell their shares. For example, the minority shareholders of a target company cannot force the majority-selling shareholders to include their shares in a sale. Conversely, the majority shareholders cannot force a minority shareholder to sell as well, even in the instance where a minority shareholder is the last shareholder and only holds one share.

Competition law

Also relevant to acquiring a company in Kuwait is the recently passed competition law. On April 29 2007, Kuwait adopted Law No. 10 of 2007 Regarding the Protection of Competition (Competition Law). Implementing regulations to the Competition Law were published in the Kuwaiti Official Gazette on February 22 2009, which, by their terms, is also the effective date of the regulations.

The Competition Law requires that the prior approval of the Competition Protection Body be obtained if any contemplated acquisition may result in or increase control over the market. Control is defined by the Competition Law as possessing more than 35% of the volume of the intended market. The approval process includes the filing of a detailed application at least 60 days prior to the anticipated closing of the acquisition and publication of the intended acquisition in Kuwait's Official Gazette as well as in four Arabic newspapers. During the publication process, objections to the transaction may be filed and the Competition Protection Body will consider such objections when deciding whether or not to approve the transaction.

The new regulations contemplate disclosure to the Competition Protection Body, by May 20 2009, of any agreement that is subject to the provisions of the Competition Law and that was in existence on the date the regulations were published in Kuwait but that presumably had not yet closed. The Competition Protection Body will then make a decision on whether or not the agreement is acceptable under the laws of Kuwait.

We believe that, even if the Competition Protection Body were to decide that an existing agreement is in violation of the Competition Law, the only remedy would be a prohibition from going forward and that there will be no penalties to the parties as long as they disclose the agreement to the Competition Protection Body by May 20 2009. Of course, due to the lack of precedents and other authority on point, there can be no assurance that a court will agree with our interpretation.

The Competition Law provides for a number of penalties for non-compliance. First and foremost, the non-compliant conduct can be enjoined. In addition, monetary penalties may be imposed amounting to the higher of KWD 100,000 ($344,212) or the monetary benefits from the non-compliant conduct. These monetary penalties are doubled in case of a repeating offence. Individual members of management may also be held liable and the monetary penalties may be imposed on them, provided it can be shown that the person concerned was familiar with the law. The law is not very clear in this regard. It is also not clear if any penalties on individual managers would be in addition to or instead of penalties on the company or companies.

Kuwaiti income tax

The Kuwaiti income tax is imposed under the Kuwaiti Tax Decree No. 3 of 1955, as recently amended by Law No. 2 of 2008 (Tax Law). Law No. 2 of 2008 (Law No. 2) is generally effective for taxable years commencing after February 3 2008, the date of its publication in the Official Gazette. Law No. 2 has been supplemented by regulations issued on July 20 2008 (Regulations). The Regulations do not contain a separate effective date but it could be assumed that they are effective for taxable years commencing after the publication of the Regulations. Both Law No. 2 of 2008 and the Regulations lack clarity and require further official guidance.

The Tax Law applies to any corporate body, whereby the term corporate body is broadly defined to include all entities, including partnerships, that are formed outside the GCC (non-GCC company) and that are considered to be conducting business in Kuwait.

The Kuwaiti tax department has taken the view that non-GCC companies that own shares in a publicly traded Kuwaiti joint stock company are conducting business in Kuwait and hence are subject to the Kuwaiti income tax. Law No. 2 lowered the Kuwaiti income tax to a 15% flat rate applicable to all types of income. Law No. 2 and the Regulations clearly exempt any gain from the sale of shares of publicly traded Kuwaiti joint stock companies from Kuwaiti income tax.


The Tax Law does not contain a clear statement about the taxability of dividends and other distributions by listed Kuwaiti joint stock companies to their shareholders.

The Regulations contain a provision to the effect that mutual funds, custodians and the like are now required to withhold Kuwaiti income tax from dividends and other distributions paid by Kuwaiti listed companies to Non-GCC Company shareholders. They must also pay the withheld tax to the Kuwaiti tax department and provide to the Kuwaiti tax department a list of the names of the non-GCC company shareholders. It remains to be seen how mutual funds and custodians will interpret and comply with this new requirement. The effect of this provision in the Regulations on non-GCC company shareholders that directly own shares in Kuwaiti listed companies also remains unclear.

Nevertheless, non-GCC companies should be aware that there is a strong likelihood that dividends or other distributions from publicly traded Kuwaiti joint stock companies will be subject to Kuwaiti income tax. In theory, non-GCC company shareholders are subject to Kuwaiti income tax on their allocable share of the profits of Kuwaiti listed companies, irrespective of any distributions in the form of dividends or otherwise. In practice, however, the Kuwaiti tax department has not enforced this liability and no such tax has been levied.

Kuwait has also entered into income tax treaties with a number of countries. These treaties may lower the Kuwaiti tax rate on dividends.

Lack of formal rules

Acquisitions in Kuwait in some respects can be conducted on a much more simplified basis than in other more developed jurisdictions as evidenced by the lack of formal rules other than the Block Trading Rules. However, the lack of rules also can introduce some uncertainty to the process as well as provide obstacles to acquiring 100% of a company as evidenced by the lack of mechanisms to squeeze out minority shareholders. All of this combines to make the acquisition process quite interesting and highlights the need to engage competent local counsel to assist the acquirer.

Author biographies

Rob Little

Al Sarraf & Al Ruwayeh

Rob Little is a partner with Al Sarraf & Al Ruwayeh. He was born in 1963 and received his education at the University of Saskatchewan in Canada. He was admitted to both the Law Society of Upper Canada (Ontario) and the Law Society of Saskatchewan in 1993.

Prior to joining Al Sarraf & Al Ruwayeh, Rob practiced law in Canada. While in Canada, he lectured at the Bar Admission Course and published papers on various aspects of commercial law. Rob specializes in general corporate commercial, capital markets, project work and financial transactions and regularly advises both banks and other financial institutions.

John Cunha

Al Sarraf & Al Ruwayeh

John Cunha is an associate with Al Sarraf & Al Ruwayeh. John is a qualified attorney in the High Court South Africa and solicitor in the High Court of England and Wales. He received his law degree from The University of the Free State in South Africa and thereafter obtained his Masters degree in Business Administration (MBA) at The University of the Free State, South Africa in collaboration with De Paul University, Chicago, in the US.

John also holds a Masters degree in International Trade Law from the University of Stellenbosch, South Africa. John joined Al Sarraf & Al Ruwayeh in April 2006 and practices in the areas of securities laws, mergers and acquisitions, banking and finance.