M&A Report 2024: Kuwait

There was a significant uptick in M&A activity in Kuwait during 2023, particularly in the healthcare, aviation, banking, education, financial services (including fintech), and utilities sectors.

Hot topics in cross-border transactions include the ultimate beneficial ownership rules recently issued by the Ministry of Commerce and Industry (MOCI), which came into force during 2023. The new rules require companies to maintain a register of ultimate beneficial owners and the submission of this register to the MOCI.

Additionally, the Competition Protection Authority (CPA) has continued to be increasingly active in merger control, to ensure compliance with the 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 deal structures, particularly in relation to the provision of security for financing. Increased attention has also been paid to material adverse change clauses, driven by, among others, conflicts in nearby jurisdictions.

The Kuwaiti market remains primarily driven by private M&A.

A transaction that has gained much publicity in the region was the conclusion of the acquisition by a client of ASAR, Jadwa Investment, of a 35% equity stake in Kuwait's Gissah Perfumes Company, which is slated for a listing in Riyadh. While headquartered in Kuwait, Gissah has operations across the region and is one of the fastest-growing fragrance companies in the region.

ASAR also advised on the IPO of 30% of Americana Restaurants International Plc’s total issued share capital. This was the first concurrent dual listing on the Abu Dhabi Securities Exchange and the Saudi Exchange. The business of Americana Restaurants International PLC was historically owned and operated by Kuwait Food Company (Americana) KSCC and, accordingly, the pre-listing reorganisation and the listing itself were substantially connected to Kuwait. ASAR advised on the reorganisation and on aspects of the listing process, particularly the migration of former shareholders of Kuwait Food Company (Americana) KSCC to Americana Restaurants International Plc.

This transaction featured one of the largest dividends in specie issuance in Kuwait and set a precedent for the collaboration of exchanges, securities regulators, and clearing agencies across Kuwait, the UAE, and Saudi Arabia.

M&A activity in 2023 increased compared with 2022. This was no doubt due to the world exiting the previous restrictions arising from the pandemic, and the resulting appetite for expansion drives the activity we are seeing.

Private M&A activity is increasing and the trend is expected to continue through 2024. The positive change is largely being driven by accelerated growth arising out of companies focusing on resolving the challenges lingering from COVID, and increased activity from investors based in Saudi Arabia. Increased activity is also being driven by acquisitions that align with the long-term corporate strategies of purchasers, for cross-border and local transactions.

Financing considerations continue to impact deal structuring, particularly in relation to the providing of security for financing. Kuwait’s foreign ownership restrictions also affect M&A transactions and have to be catered for accordingly. Furthermore, antitrust/competition legislation has also impacted deal structuring and transaction timetables.

While financial and strategic investors have had a limited impact on the M&A market in Kuwait in the past, there has been an uptick in their involvement in recent times.

The regulatory bodies are primarily:

• The MOCI;

• The Kuwait Capital Markets Authority (CMA);

• 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 comprising 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 Kuwait incorporated company listed on Boursa Kuwait (formerly known as the Kuwait Stock Exchange);

• A listed or unlisted company in the event of a reverse acquisition; or

• 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 (MTO) must be made to the 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.

The Competition Law provides additional regulations 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 merger between two persons or more by way of absorption or combination that may lead to control or increased control;

• 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, a beneficiary, or by the purchase of shares, stock, or liabilities, or by any other way; and

• The existence of a 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 economic concentration, exceeds thresholds ranging between KWD 500,000 and KWD 2,500,000.

Other laws/rules that may be of particular significance include:

• The Boursa Kuwait Rule Book, which was also issued under the CML and impacts the sale and acquisition of listed companies, and how this is processed;

• The Promotion of Direct Investment Law No. 116 of 2013 and its regulations, which regulates certain investments from abroad and the possible exemption from local ownership requirements; and

• The Tax Law No. 3 of 1955 and its regulations, which requires certain actions to be taken in relation to, and that would impact the structures used in, such M&A activity, and the payment of profits on such transactions.

As touched on above, the MOCI recently issued Resolution No. 4 of 2023 on the Procedures for the Identification of the Actual Beneficiaries, which requires corporate persons in Kuwait to identify and register “actual beneficiaries”. Actual beneficiaries have been defined as any natural persons who possess or exercise definitive and final control, whether directly or indirectly, over the person on whose behalf the transaction is being conducted, and who exercises actual and definitive control over a corporate person or a legal arrangement.

Certain reforms are being mooted to the Kuwaiti tax rules. There has also been a steady drive to relax Kuwaiti rules on foreign parties doing business in Kuwait. Most recently, the Kuwaiti Commercial Law No. 68 of 1980 was amended (i.e., under Law No. 1 of 2024) to allow for foreign companies to establish a Kuwaiti branch of its activities. Although this is not expected to significantly impact acquisitions (where an equity purchase of a Kuwaiti company is involved), it is indicative of a paradigm shift.

There has been an increase in firms committing to improve their ESG positions in their corporate strategies in the aftermath of the pandemic. While ESG is not yet a big deal driver in Kuwait, there has been an increase in the number of instances in which deals have been assessed from an ESG perspective. In February 2022, the CMA issued extensive amendments to Module 11 (Dealing in Securities) of the CML Bylaws, which now expressly recognise and put in place a regulatory regime for the issuance of ESG instruments (as well as short-term bonds), and, as such, ESG instruments may increasingly start to become part of the M&A landscape in the coming years.

Some of the 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/protracted than expected.

Another common mistake made by practitioners is to import legal structures and documentation developed in other jurisdictions without proper adaptation to the peculiarities of the Kuwaiti 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.

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 service 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 dealmaking 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 AI software, also enable the rapid identification and extraction of key provisions through the 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 are some key factors that specifically concern takeovers. In such cases, parties must obtain all the relevant regulatory consents from the applicable regulatory body, such as the CMA for licensed companies and/or (as applicable) the Commercial 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.

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, an MTO must be launched by the bidder once the bidder has come into the 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. Off-market trades are also now provided for under the Boursa Rule Book, facilitating transfers of listed shares between parties (although certain qualifications apply, including in relation to the minimum value of the trade, but there is added value where contracting parties are not exposed to the risk of competing bids).

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, no conditions may be imposed by the bidder. There has been a decrease in the number of public takeover offers, possibly attributable 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 starting to be seen more frequently.

Over the past 12 months, there has been a 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 limited over the past 12 months.

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 VTOs may be subject to conditions required by the bidder. However, in the case of an MTO, no conditions may be imposed by the bidder.

The use of foreign governing law and/or jurisdiction (for example, English law and English courts/arbitration in London or Dubai) 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 share sales. Given licensing and transfer issues, trade sales are becoming less attractive but remain relevant when corporate divisions are being sold (as opposed to the whole of a seller’s enterprise).

Continuing from 2023, the market is looking exceptionally positive as companies focus on resolving outstanding issues caused by COVID and look to acquire companies that align with purchasers’ corporate strategies.

An increase is expected in firms committing to improve their ESG positions in their corporate strategies in 2024 to address ESG-related concerns from potential acquirers.

Continued activity in merger control, in compliance with notification thresholds by the CPA.

The use of hitherto popular UAE incorporated holding vehicles for Kuwaiti businesses may start to decline due to the enactment of new corporate tax legislation in the UAE, which may, in certain cases, increase tax exposure.