M&A Report 2024: Bahrain

Bahrain's economy is experiencing a positive upswing after a period of consolidation. This growth is driven by a significant increase in foreign direct investment.

In the public M&A space, the Central Bank of Bahrain (CBB) has implemented new regulations for professional advisers. An independent adviser must assess the fairness of an offer for shareholders. Their advice and reasoning should be included in relevant communications. Also, the regulations now provide for use of a voluntary offer by a company to acquire treasury shares.

Bahrain has taken steps to simplify dispute resolution. The government issued Resolution No. 117 of 2021, allowing the use of languages other than Arabic in Bahraini courts. This was followed by Resolution No. 28 of 2023, which permits high-value cases to be heard in English.

Bahrain was also given the green light to join the Gulf Cooperation Council (GCC) unified payment system. This initiative will involve collaboration among regional regulators, including the CBB, with the goal of establishing a unified framework for overseeing and monitoring payment systems across GCC countries. By doing so, the GCC region will be transformed into a single, unified market for payments, and Bahrain's past initiatives would place the kingdom in a prime position to capitalise on this development.

Furthermore, in response to the rapid advancement of AI systems, Bahrain's government is proposing to pass a new, independent law to regulate AI. Lawmakers are also considering a separate law to regulate telemedicine that uses AI and electronic tools.

Bahrain's government has prioritised diversifying the economy beyond oil in recent years. This strategy seems to be paying off, according to a recent report by Oxford Economics for the Institute of Chartered Accountants in England and Wales’s Economic Insight series focusing on the Middle East. The report highlights Bahrain and Oman as having the lowest inflation rates in the region. Recognising the need to move away from oil dependence, the Bahraini government is actively strategising to increase non-oil revenue streams. This includes exploring various options, such as the potential introduction of a corporate tax.

From March 1 2024, the Bahraini government has implemented a new system for calculating end-of-service payments (also known as leaving indemnities) for non-Bahraini employees in the private sector. This change is based on Edict (109) of 2023. Employees now apply to the Social Insurance Organization (SIO) for entitlements upon termination. As per a recent clarification, employers are required to contribute to the SIO 4.2% of wages on a monthly basis for the first three years and 8.4% thereafter.

Despite a lack of high-profile public M&A deals, the market saw significant activity in private M&A transactions in 2023. While some public deals may be in the planning stages, private acquisitions played a major role in M&A activity last year.

Global restructuring has been a major driver of M&A activity in Bahrain, particularly involving local subsidiaries and branches. In one particularly noteworthy deal, ASAR – Al Ruwayeh & Partners explored multiple structuring options, including the option of transfer of business through business premises transfer rather than the typical share acquisition.

Another transaction highlighted the complexities of such deals. ASAR analysed whether a global acquisition would automatically transfer all assets of the Bahraini branch by virtue of foreign law, or if specific Bahraini procedures were necessary to transfer certain assets and finalise the acquisition process.

While investment banking activity in the Middle East and North Africa region fell in the first nine months of 2023, there were signs of potential growth. M&A deals specifically declined 16% compared with 2022, but the number of announced deals actually rose. Bahrain's M&A activity followed a similar regional trend.

The coming year might witness a further wave of consolidation in Bahrain's M&A market. While the Bahraini dinar's peg to the US dollar offers stability, it also ties Bahrain to potential inflationary pressures currently impacting Western economies. This indirect effect could influence money flow within Bahrain.

Public M&A deals currently in the pipeline could come to fruition in the next year, potentially leading to a surge in public M&A activity for Bahrain.

Last year, some Bahraini fintech companies successfully ventured abroad, expanding their reach though outbound M&A. This trend is likely to continue in the coming year, driven by Bahrain's attractive regulatory environment and the potential inclusion in the unified GCC payment system.

Global economic factors, particularly consolidation trends and inflationary pressures in Europe and the US, are driving local M&A activity in Bahrain. In the past year, M&A deals at the global level have triggered subsidiary or branch acquisitions in Bahrain, leading to local M&A transactions.

Recent public M&A activity appears to reflect strategic divestments aligned with Bahrain's Economic Vision 2030. The generated liquidity could be reinvested in projects that support the government's long-term goals. Bahrain has already made strides in this direction by integrating the UN's Sustainable Development Goals (SDGs) 2030 into its national strategies.

Private equity (PE) investment into Bahrain has stagnated, if not trending downward. This stagnation is likely due to the lack of structural reforms for issuing innovative securities, which are crucial for funding startups. While the regulatory environment has improved, there is no practical framework for PE funds to invest directly in local startups. As a result, PE firms often resort to using offshore vehicles, hindering their participation in the Bahraini market.

The Takeovers, Mergers and Acquisitions (TMA) Module of the CBB Rulebook Volume 6 is the primary governing regulation for public M&A in Bahrain and it works in conjunction with other regulations issued under the rulebook. It applies where there is an acquisition or consolidation of control of a Bahraini-domiciled publicly listed company; or an overseas company whose primary listing of equity securities is on a Bahraini exchange. Rulebook 6, including the TMA regulation, is administered by the Capital Markets Supervision Directorate at the CBB.

Private M&A, as such, is not a regulated activity beyond the registration of share transfers and transfers of business premises, outlined primarily in the Commercial Companies Law. A public authority called the Authority for Promotion and Protection of Competition is established under Bahrain’s Competition Law and it regulates all other arrangements that intend to hinder competition in the kingdom and larger M&A deals that reach certain thresholds constituting a dominant position.

Also, the inclusion of a process for companies to voluntarily acquire treasury shares through an offer appears superfluous. This method deviates from the standard practice of repurchasing treasury shares directly on the market.

The CBB has issued a public consultation on its TMA Module, proposing revisions to the requirements for independent advice and shareholder approval. Notably, the consultation addresses scenarios where the board cannot reach a unanimous recommendation on an offer. In such cases, a circular must be issued explaining the arguments for and against acceptance or rejection, including the views of any dissenting directors.

Also, Bahrain Bourse's subsidiary, Bahrain Clear, has implemented a new delivery versus payment (DVP) settlement model. This enhanced model ensures that securities are only transferred to the buyer once full payment is received. The new DVP model offers custodians flexibility in adopting procedures based on their clients' readiness. The revised model takes effect on March 14 2024, and is expected to primarily impact public M&A deals involving cash offers.

With the increase in public M&A, the question has often arisen regarding the availability of due diligence review of public companies. While Bahrain maintains a special regime for underwriters (in relation to IPOs and subsequent offerings), there is no special mechanism for due diligence review of non-public information by a major investor in respect of public companies (whether coordinated by an off-market trade or strategic participation in a capital increase). This limitation, which arises by the confluence of insider trading regulations and market manipulation rules, has not even permitted a clean-team structure, much less a pre-disclosure in advance of a public disclosure of information.

This regime appears to have dampened strategic investment in public companies and/or takeover offers without creating a more efficient market arising from the increased transparency.

One common mistake is to structure and implement M&A deals following schemes and solutions developed in overseas jurisdictions without paying the necessary attention to the local legal and regulatory framework, both in cases of cross-jurisdiction and purely domestic transactions. This mistake can go unnoticed in so far as no conflict arises between the vendor and the buyer, though this may result in the completion process conflicting with local regulations. If a conflict arises, the pitfalls of such approach become readily intelligible, including difficulty in obtaining legal redress in the local jurisdiction, uncertainties surrounding application of foreign law provisions in domestic court proceedings, and an impasse in meeting local requirements for completion.

The M&A landscape in Bahrain is increasingly embracing technology, with a growing number of professionals recognising its potential benefits. This trend aligns well with Bahrain's supportive legal environment, which facilitates complex M&A deals involving new-age technologies.

Government initiatives such as the implementation of data protection, cloud, and electronic transactions laws, coupled with regulations concerning fintech and open banking, have positioned Bahrain as a regional leader for attracting global tech businesses. These advancements have also led to more thorough due diligence exercises, with a focus on technology within M&A transactions.

Looking forward, cybersecurity controls may become mandatory for critical national infrastructure entities, and merger controls could be introduced for sensitive technology sectors. While Bahrain's intellectual property sector is not yet robust, its positioning as a GCC ICT hub is fostering a growing emphasis on technology-driven M&A activity.

Acquiring control of a publicly listed company in Bahrain usually involves a tender offer, which can be voluntary or mandatory depending on the acquirer's stake. To forcefully acquire remaining shares from minority shareholders through a squeeze-out, the acquirer needs approval from 90% of those who participate in the tender offer process.

The CBB oversees the entire process and requires approval of the offer document before it can be launched.

Usually, conditions attaching to an offer include levels of acceptance, approval of shareholders for the issue of new shares, and listing/regulatory approvals. A voluntary offer must not be made subject to conditions whose fulfilment depends on the subjective interpretation or judgement by the bidder, or lies in the bidder’s hands. Once a firm intention to make an offer is formally announced, the bidder is committed to proceed.

The scope to withdraw by invoking the conditions to the offer is limited. If the bidder intends to attach conditions other than normal conditions, the CBB must be previously consulted. As a general rule with limited exceptions, financing for an offer must be fully committed when the announcement of the firm intention to make an offer is made.

Break fees are not used in Bahrain and their validity is uncertain, as a commitment to a break-up fee can be seen as unlawfully impinging upon each shareholder's right to decide whether to sell or retain the shares. In the absence of more legal clarity as to the permissibility of break-up fees, this instrument is not expected to be adopted in the structuring of public M&A deals.

The use of completion accounts is still the prevailing consideration mechanism in the realm of private M&A, though the financial data tracked for the purposes of determining any price adjustment with respect to the headline purchase price varies from working capital-only adjustments to full-fledged adjustments based on net worth variations.

Locked-box mechanisms are still relatively uncommon, though an increased use of such mechanisms is expected, especially in the context of vendor-initiated private auctions. There has been a rise in the use of earn-outs in private M&A, and it is believed these are being used as a tool for bridging widening valuation gaps between the seller and buyer sides. Escrows are very common and are mostly used in connection with the management of claims against representations and warranties.

Regulatory approvals are invariably attached to private offers in respect of target companies operating in regulated industries. The registration of share transfer (post-closing) with the Bahrain Bourse would now be included as a condition to a private acquisition for closed Bahraini shareholding companies subsequent to the migration of the registry of Bahraini shareholding companies to Bahrain Clear.

It is also not uncommon to find material adverse change clauses associated with specific quantitative metrics, though these are usually bitterly negotiated. It is common to bring down all representations and warranties to closing so that any breach (or material breach) of them may give a deal exit to the buyer.

The use of foreign jurisdiction clauses in M&A transactions is a common practice, albeit the authors strongly advise against their use, in light of the enforceability issues that these may give rise to. In the case of foreign governing law, foreign arbitration should be seen as a must due to problems faced in proving the provisions of a foreign law in front of a Bahraini court and difficulties in enforcement in Bahrain of foreign court decisions. Bahraini governing law with Bahraini court enforcement may be valuable to facilitate the enforcement of local obligations associated with the transaction and may be favourable for a foreign party that received robust local legal advice against a Bahraini counterparty.

The exit environment in Bahrain is very challenging. The main exit channel remains a private sale to an industrial or a private equity purchaser. The IPO exit route is uncommon in light of the structural liquidity issues affecting local capital markets. Sales to financial sponsors are also often unviable because of the reluctance of financial sponsors to take on balance sheet equities, and in light of the penalising capital treatment that this asset class receives under Basel III capital adequacy regulations.

The growing importance of digital payments across the region positions digital companies as key drivers of future M&A activity. Bahrain, with its friendly regulatory environment and progressive regulatory body, is well positioned to capitalise on this trend due to its first-mover advantage.

Global issues such as climate change and ESG reporting will be a critical factor in M&A activity, particularly for Bahrain's publicly listed companies and government-owned entities. Demonstrating its commitment to a sustainable future, the Kingdom of Bahrain has embraced the UN’s SDGs as part of its national development plan and Economic Vision 2030.

The delayed implementation of VAT by some GCC countries is of concern to Bahrain, which has already adopted the Common VAT Agreement. This disparity creates an uneven playing field, potentially placing Bahraini businesses at a disadvantage compared with their GCC counterparts that have not implemented VAT yet. This price difference can hinder the free flow of goods and services within the region, ultimately slowing down the progress towards a unified GCC market that would be beneficial to Bahrain.