M&A Report 2021: Kuwait
John Cunha, Ezekiel Tuma and Brenda Ntambirweki, ASAR-Al Ruwayeh & Partners
A small increase in M&A activity was expected in Kuwait following a strong start to 2020. However, the COVID-19 pandemic had a significant negative effect on transaction volumes, with deals almost coming to a standstill during the second quarter of the year.
While it was expected that the gap between public and private M&A would continue to narrow over the recent Morgan Stanley Capital International (MCSI) upgrade reclassification of Kuwait from 'frontier market' to 'emerging market', public M&A transaction volumes also reduced on account of the pandemic.
Moreover, the proposed takeover of Bahrain-based Ahli United Bank by Kuwait Finance House (KFH), the country's largest Islamic bank, was provisionally put on hold. The transaction had been expected to create the world's largest Islamic banking entity by asset value and continues to generate debate in GCC region. This transaction was visibly affected by the COVID-19 pandemic, as shareholders of both companies resolved to pause the transaction.
An uptick will be seen especially in tech start-up commercial activity, given the encouragement and support provided by the Kuwait government
Despite the interruption to the transaction's timetable, an issue presented by the deal is the management of the regulatory aspects given that the banks involved are regulated entities and are listed. Identification and sequencing of the required approvals and disclosures was always expected to pose complexities.
Additionally, the transaction involves an Islamic acquirer and a conventional target, which has generated debate as to which requirements would satisfy the regulators and KFH's Shari'ah board that post-deal transformation and integration would be feasible.
Once lockdown measures were gradually eased, M&A activity picked up particularly in relation to start-up activity and investment exits. Cross-border transactions have resumed at a pace slower than expected, however the trends are projected to change in Kuwait during the next 12 months.
COVID-19 and recovery plans
In line with global M&A activity, transactions in Kuwait almost came to a standstill during the second quarter of 2020. Once pandemic-related lockdowns were lifted, M&A activity slowly picked up by the last quarter.
The pandemic notably changed the operating position of a lot of companies, with parties increasingly preferring completion accounts as opposed to locked-box mechanisms. Additionally, there is increased interest in warranty and indemnity (W&I) insurance across Kuwait.
Sellers are increasingly negotiating earn-outs into transaction documentation
There have also been noticeable differing trends seen in the impact of financing considerations on deal structuring, particularly in relation to the providing of security for financing. Foreign ownership restrictions have also had an impact on M&A transactions and have to be catered for accordingly. Furthermore, antitrust and competition legislation (including the new Competition Law No. 72 of 2020) have also impacted deal structuring and transaction timetables.
It is expected that activity will continue to pick up in the next 12 months and that an uptick will be seen especially in tech start-up commercial activity, given the encouragement and support provided by the Kuwait government to small- to medium-enterprises. Alongside government encouragement, the upgrade reclassification for Kuwait will likely fuel some increased public M&A activity.
Entrepreneurial incubators are also likely to continue to play a significant role in private M&A, particularly with their reach with strategic investors and buyers.
Legislation and policy changes
The regulatory bodies relating to M&A in Kuwait are primarily the Ministry of Commerce and Industry (MOCI), the Kuwait Capital Markets Authority (CMA), the Boursa Kuwait, the Competition Protection Body (CPB) and other sector-specific regulators, as applicable.
The key legislation governing public M&A in Kuwait is Law No. 7 of 2010 as amended (CML) and its executive CML Bylaws, together comprise the CML Rules, particularly Book IX (Mergers and Acquisitions) of the CML Bylaws.
The CML Rules apply to M&A transactions, where there is an acquisition or consolidation of control of, (a) a Kuwait incorporated company listed on Boursa Kuwait (formerly known as the Kuwait Stock Exchange); (b) a listed or unlisted company in the event of a reverse acquisition; or (c), a listed company by way of a partial purchase offer (resulting in an acquirer holding no less than 30% and no more than 50% of the shares of a listed company).
A hot topic in cross border transactions continues to be the increased presence of the local competition regulator, the CPB
The CML Rules provide a statutory framework for public M&A in Kuwait where there is a takeover offer for 100% of the share capital of a company listed on Boursa Kuwait, and a mandatory takeover offer which must be made to remaining shareholders when the offeror acquires more than 30% of the shares of a listed company. Private M&A is largely governed by the Companies Law, Law No. 1 of 2016.
A new bankruptcy law (Law No. 71 of 2020) (the New Bankruptcy Law) has recently been passed by the Kuwait Parliament, assented to by the Emir of Kuwait, and published in the Kuwait official gazette on October 25 2020, but is not yet in full force and effect. The executive regulations to the New Bankruptcy Law must still be published within six months of publishing the New Bankruptcy Law in the Kuwait official gazette. Thereafter, the New Bankruptcy Law will come into full force and effect three months after the publication of the executive regulations. As such, the New Bankruptcy Law may not take effect until July 2021, at the earliest, and this provided that the executive regulations are promulgated in April 2021.
A hot topic in cross border transactions continues to be the increased presence of the local competition regulator, the CPB. The CPB has recently become more active and has been actively surveilling the market (including surveilling social media channels) to ensure compliance with the competition regulations, such as to the newly enacted Competition Law.
The recently enacted Competition Law (which repealed the previous Law No. 10 of 2007) provides additional regulation in relation to merger control in Kuwait. Under the Competition Law, persons participating in 'economic concentrations' are required to apply to the CPB for approval in certain circumstances.
The Competition Law considers the following circumstances to be 'economic concentrations': (a) a merger between two persons or more by way of absorption or combination that may lead to 'control' or increased 'control'; (b) an acquisition of direct or indirect 'control' by one person in all or parts of another person or persons, whether by the acquisition of assets, ownership rights, beneficiary or by the purchase of shares, stock, or liabilities or by any other way; and (c) the existence of partnership between two persons or more that leads to a permanent and independent economic or commercial activity, regardless of the legal form or activity exercised.
Notably, the new Competition Law does not presently provide for notification thresholds. A notification is required if the value of the parties' registered assets or relevant annual sales in Kuwait, according to audited financial statements for the last financial year before 'economic concentration', exceeds the total and individual thresholds according to the terms and controls which are yet to be set down by the CPB. It is expected that notification thresholds will be clarified in the executive regulations, once these are enacted.
As there is still little clarity on which approvals are required by the CPB in the absence of the enactment of the executive regulations to the Competition Law, parties are increasingly taking into account the time required to ascertain CPB approvals required for their transactions and obtaining approvals from the CPB when negotiating their transaction timetables. It is expected that the executive regulations to the Competition Law once enacted, will provide more clarity on notification thresholds.
Investors should be aware that the GCC states including Kuwait, have agreed to the implementation of a GCC-wide value added tax (VAT) framework, to be introduced at a rate of 5% VAT on goods and services, which was to take effect from January 1 2018.
However, Kuwait has recently announced that it would postpone the implementation of VAT. In addition, the Kuwait government is considering implementing fiscal reforms that include the possible introduction of corporate income tax. The national legislation in Kuwait implementing the VAT framework has yet to be promulgated and no Kuwait-specific details of the new tax regime have been released as this time.
Some of misconceptions with regard to the Kuwaiti market include: poor disclosure processes because sellers are sometimes inexperienced in the M&A processes, and targets do not keep track of all the documents needed to be disclosed to the buyers; and misconceptions about the regulatory processes, which are often more complicated than expected.
A further common mistake made by practitioners is to import legal structures and documentation developed in other jurisdictions without a proper adaptation to the peculiarities of the Kuwait legal system. This can lead to complications in the execution phase of the transaction and in the enforcement of rights arising under M&A transaction documentation.
An area that is often overlooked and/or paid less attention to, is due diligence. In particular, appropriate translation of due diligence findings into contractual protections, whether by means of pre-closing remedial actions, associated variation of commercial terms, special indemnities or other methods is deficient. This often arises because the legal practitioners that carry out the due diligence do not always lead the negotiation of transaction documentation.
Parties involved in an M&A transaction also often overlook certain aspects of the Kuwait competition law, however, a more serious consideration is being provided to competition law considerations and the impact these may have on M&A transactions. Furthermore, the rendering of M&A and investment advisory services with respect to securities onshore of Kuwait is a regulated securities activity under the CML Rules. As such, foreign services providers should be aware of the restrictions applicable in connection with the rendering of such services onshore of Kuwait.
Technology is playing an ever more significant role in the Kuwait's M&A deal-making process. It is also key in identifying the latest trends, benchmarking and further enhancing the knowledge system databases of M&A practitioners. The great advances made in cognitive technology – such as artificial intelligence (AI) software – also enable the rapid identification and extraction of key provisions through review of thousands of transaction documents within a relatively short space of time.
The general conditions for a public M&A transaction have been outlined above, yet there are some key factors that specifically concern takeovers. In such cases, parties must obtain all relevant regulatory consents from the applicable regulatory body, such as for example, the CMA for licensed companies and/or (as applicable) the Central Bank of Kuwait (CBK) vis-à-vis financial institutions that are subject to supervision by the CBK. Disclosure of the transaction is also required as per the CML Rules.
Kuwait has recently announced that it would postpone the implementation of VAT
Parties must also abide by the laws and regulations of each sector. For example, pursuant to the CML Rules, for companies listed on the exchange of Boursa Kuwait, a mandatory tender offer (MTO) must be launched by the bidder, once the bidder has come into possession of more than 30% of the voting shares of a target company listed on the exchange.
Hostile bids are not common in Kuwait, although the law provides for competitive bids during the mandatory takeover process. In addition, during a block trade, there is a public auction during which a person could instigate a hostile bid. Hostile bids would be treated as takeover bids, and therefore there are no special conditions that would attach to one.
A MTO must not be subject to conditions that can only be satisfied at the discretion, and in the subjective judgment, of the bidder or the target company, or where their satisfaction is within the control of the bidder or the target company. Only voluntary takeover offers (VTOs) may be subject to conditions required by the bidder. However, in the case of a MTO takeover offer, the bidder may impose no conditions. There has been a decrease in number of public takeover offers over 2020, possibly attributed to the pandemic.
Otherwise, the terms of an M&A agreement are generally left to the discretion of the parties. There are no specific rules in Kuwait dealing with break fees and parties are free to agree specific arrangements to this effect.
Locked-box mechanisms are common in Kuwait, though there has been an increased use of completion accounts in recent times. This is mainly due to the disruption caused to many target companies' operating positions on account of the pandemic. Sellers are increasingly negotiating earn-outs into transaction documentation and there has been an increase in interest in W&I insurance over the past 12 months in Kuwait.
The use of foreign governing law and/or jurisdiction (for example English law and English courts/arbitration in London) is more common in the case of mid to upper tier M&A transactions involving at least one foreign party, and less so in relatively small or purely local M&A transactions.
Exits in the market are generally structured as trade sales. As noted above, the last quarter of the year saw relatively lower trade sales in 2019 because of the pandemic.
Taking a closer look at the M&A world of Kuwait, one can expect:
The market becoming more active, once parties have had the opportunity to better assess their positions following the interruptions caused by the COVID-19 pandemic;
Significant inflows into Boursa Kuwait and increased public M&A activity in Kuwait, on the account of the upgraded reclassification of Kuwait from the frontier market to the emerging market;
More consolidation activity in the financial sector and more activity in the tech start-up field, alongside an increased role from entrepreneurial incubators in private M&A; and
Increased activity in merger control and further clarity on the competition law, particularly regarding notification thresholds, once its executive regulations are published.
ASAR-Al Ruwayeh & Partners
T: +965 2292 2700
John Cunha is a partner at ASAR-Al Ruwayeh & Partners and has been with the firm since April 2006. He practices in the areas of banking and finance, capital markets and M&A.
John has extensive experience advising on debt capital markets transactions in Kuwait and regularly advises issuers, arrangers and underwriters in relation to a wide range of debt and liability management transactions. He also has a multi-faceted international banking and finance practice and has acted for both banks and borrowers, on domestic and cross-border deals.
John holds a law degree and a MBA from the University of the Free State, South Africa, with the latter attained in collaboration with De Paul University in Chicago. He also holds a LLM degree in international trade law from the University of Stellenbosch. He is admitted to the South African bar and is also qualified in England and Wales.
ASAR-Al Ruwayeh & Partners
T: +965 2292 2700
Ezekiel Tuma is a partner at ASAR-Al Ruwayeh & Partners and has been with the firm since March 2008. He has extensive experience in public and private M&A and has led numerous cross-border and local transactions.
Ezekiel regularly advises on private equity and venture capital transactions and is routinely engaged by founders and investors alike in connection to start-up businesses. He also advises on financing and acts for both borrowers and lenders with regard to their financing transactions ranging from local bilateral deals to complex cross-border syndicated facilities and project financing. He also advises on acquisition financing, which dovetails seamlessly with his corporate work.
Ezekiel holds a bachelor's degree from Makerere University Kampala and a LLM degree from the University of Cambridge. He is admitted to the Ugandan bar.
ASAR-Al Ruwayeh & Partners
T: +965 2292 2700
Brenda Ntambirweki is a senior associate at ASAR-Al Ruwayeh & Partners.
Brenda has extensive experience in corporate/M&A, representing clients in processes involved with corporate acquisitions and corporate restructuring, and advising on structuring corporate vehicles for undertaking acquisitions. She also routinely advises on venture capital transactions, advising founders on launching emerging companies across industries, and investors who invest in early and growth-stage companies.
Brenda holds a bachelor's degree from Makerere University Kampala a BCL awarded by the University of Oxford. She was admitted to the Ugandan bar in 2008.