M&A Report 2022: Kuwait
Ezekiel Tuma, John Cunha and Brenda Ntambirweki, ASAR-Al Ruwayeh & Partners
M&A activity rebounded in 2021 particularly in the FMCG (fast moving consumable goods), health, education and the TMT (technology media and telecommunications) sectors. Cross-border transactions are almost at the pre-pandemic pace.
A hot topic in cross-border transactions continues to be the increased presence of the local competition regulator, the Competition Protection Authority (the CPA). The CPA is increasingly active in merger control to ensure compliance with the new Competition Law (Law No. 72 of 2020). As a result, transaction parties are now more aware of competition regulation issues. Financing considerations continue to impact on deal structures, particularly in relation to the provision of security for financing. Additionally, Kuwait law foreign ownership restrictions also continue to impact M&A transactions and must be catered for accordingly.
The Kuwaiti market remains primarily driven by private M&A. Previous years saw a slight narrowing between private and public M&A, and this may continue if public M&A activity continues at its current pace in Kuwait in 2022.
A recent transaction of note is the recent listing of Jassim Transport and Stevedoring Company KSCP on the main market of Boursa Kuwait. The initial public offering was a secondary offering by way of private placement of up to 40% of JTC’s ordinary shares. This transaction is significant because it is one of the few successful IPOs in Kuwait in the last five years and also doubles as one of the rare exits-by-IPO by private equity investors in Kuwait. This transaction has had an impact on Kuwait’s mergers and acquisitions market, particularly for investors looking to exit.
Economic recovery plans
M&A activity in 2021 rebounded compared to 2020, when pandemic related restrictions were in place.
This information is not publicly available, however private M&A activity picked up significantly in 2021 and we expect the trend to continue through 2022. The positive change is largely being driven by accelerated growth arising out of companies focusing on resolving the challenges caused by Covid-19, such as supply chain and labour related disruptions being resolved with digital technologies. Increased activity is also being driven by acquisitions that align with long term corporate strategies of purchasers, for both cross-border and local transactions.
There has been significant activity in the FMCG, health, education and the TMT sectors and more consolidations in these sectors is expected in 2022.
“More consolidation activity in the FMCG, health, education and TMT sectors is expected as a continuing trend in Kuwait”
Financing considerations continue to impact on deal structuring, particularly in relation to the providing of security for financing. Additionally, Kuwait law foreign ownership restrictions also impact on M&A transactions and have to be catered for accordingly. Further, anti-trust/competition legislation has also impacted on deal structuring and transaction timetables.
Financial and strategic investors continue to have a limited impact on the M&A market in Kuwait.
Legislation and policy changes
The regulatory bodies are primarily the Ministry of Commerce and Industry (MOCI), the Kuwait Capital Markets Authority (CMA), the Boursa Kuwait, the CPA 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).
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 an 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.
The recently enacted Competition Law provides additional regulation in relation to merger control in Kuwait. Under the new Competition Law persons participating in ‘economic concentrations’ are required to apply to the CPA 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.
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 the ‘economic concentration’, exceed thresholds ranging between KD500,000 (approximately $1.6 million) and KD2.5 million (approximately $8.2 million).
As noted above, the CPA recently published notification thresholds for transactions recently, ranging between KD500,000 and KD2.5 million of the turnover or assets of the parties (as applicable). Kuwait’s new bankruptcy law, Law No. 71 of 2020 (the New Bankruptcy Law), is now in full force and effect, following the publication of its executive regulations in 2021. The changes to this legislation were not, to our knowledge, influenced by Covid-19.
There has been an increase in firms committing to improve their environmental, social and governance (ESG) positions in their corporate strategies in the aftermath of the pandemic. However, ESG is not yet a big deal driver in Kuwait, and there have been limited instances in which deals have been assessed from an ESG perspective.
Having said this, it is worth noting that the CMA in February 2022 issued extensive amendments to Module 11 (Dealing in Securities) of the CML Bylaws which now expressly recognises and puts in place a regulatory regime for the issuance of ESG instruments (as well as short term bonds). As such, it is expected that ESG instruments may increasingly become part of the M&A landscape in the coming few years.
From a business impact perspective, we have noted an increased use of earnouts, as parties acknowledge that EBITDA for 2020 to 2021 may not be an accurate reflection of a company’s position, due to the extraordinary strain on businesses as a result of Covid-19.
Investors should be aware that the GCC states, including Kuwait, have agreed to the implementation of a GCC-wide VAT framework, to be introduced at a rate of 5% VAT on goods and services, which was to take effect from January 1 2018.
Kuwait has recently announced however that it would postpone the implementation of VAT in Kuwait. 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. In addition, the Kuwait government is considering implementing fiscal reforms that include the possible introduction of corporate income tax.
Investors should also be aware of the impact of merger control regulations on transactions, particularly in relation to the impact that the approval process is having on transaction timetables.
Some of misconceptions with regards 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.
Another 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 regulations, however, more serious consideration should be given the competition regulations and the impact these may have on M&A transactions.
Furthermore, providing M&A/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 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 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 but there 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 CBK vis-à-vis financial institutions which are subject to supervision by the CBK. Disclosure of the transaction is also required as per the CML Rules.
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 currently provides for competitive bids during the mandatory takeover and voluntary 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.
An 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 (VTO) may be subject to conditions required by the bidder. However, in the case of an MTO takeover offer, no conditions may be imposed by the bidder. We have noted a decrease in number of public takeover offers, 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. Break fees are being seen more frequently.
Over the last 12 months, we noted significant use of locked box mechanisms, although completion accounts have also been popular. Sellers continue to negotiate earn-outs into transaction documentation and the use of warranty and indemnity insurance has remained consistent over the past 12 months.
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 usually structured as trade sales. There was an increased number of trade sales in 2021 on account of the pandemic. There was at least one exit by IPO in 2021 that we are aware of.
Taking a closer look at the M&A world of Kuwait, one can expect:
The market will continue to rebound in 2022, as companies focus on resolving the challenges caused by Covid-19 and continue to acquire companies that align with purchasers’ corporate strategies.
More consolidation activity in the FMCG, health, education and TMT sectors is expected as a continuing trend in Kuwait.
Increased activity in merger control, particularly following the recent publication of notification thresholds by the Competition Protection Authority.
ASAR-Al Ruwayeh & Partners
T: +965 2292 2700
About the author
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
About the author
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.
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
About the author
Brenda Ntambirweki is a senior associate at ASAR-Al Ruwayeh & Partners and has been with the firm since January 2014.
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 in law from Makerere University and a bachelor of civil law degree (BCL) from the University of Oxford.