The State of Kuwait is one of the wealthiest, and it has a very sophisticated business people in the private sector. The country is witnessing a steady growth by diversification of its economy. There is significant expansion in various sectors:
- Oil & Gas, Oilfield Services and Energy
- Infrastructure, PPP/BOT Projects
- Health Services
- Information Technology and Security
- Construction and Infrastructure Projects Sector
The government of Kuwait approved more than USD 150 billion for its National Development Plan, this leads the private sector companies seeking and pursuing cooperation with international and foreign companies
Investment in the State of Kuwait is articulated around its strategic position in the North Arabian Gulf region, ensuring its transformation into one of the worlds prominent financial and trade centers within an economic and commercial passage that is free and safe for the region.
The State of Kuwait has shown significant interest in promoting foreign investment through the enactment of a specialized law regulating their work, in addition to the establishment of a specialized Authority under Law No. 116 of 2013 concerning the Promotion of Direct Investment in the State of Kuwait. This Authority acts as an executive economic arm of the State of Kuwait and plays several roles including, without limitation, attracting and promoting foreign direct investments to Kuwait, which have added value and incentives for innovation. In addition, this authority undertakes a regulatory procedural role to facilitate the work of foreign investors, and through which the applications for investment license are received and approved. As well as granting incentives in accordance with the criteria stipulated in the provisions of the law of its establishment through cooperation with the relevant authorities.
The law, has tackled the main considerations for the approval of foreign investment, as Article (12) thereof stipulates that the application for investment license shall be submitted by an investment entity set forth in accordance with the following:
A Kuwaiti company as one of the types of companies stipulated in the Kuwaiti Commercial Companies Law No. 25 of 2012 (One Person Company – Joint Stock Company – Limited Liability Company – Professional Company – Holding Company– Limited Partnership Company – Partnership limited by shares – Joint-venture Company). The foreign investor's share may be up to 100% of its capital, provided the said Company is established for the purpose of direct investment.
A branch of a foreign company licensed to operate within Kuwait for the purpose of direct investment. The competent minister shall issue a decision clarifying the bases and rules regulating the relationship between the foreign company's branch and the official bodies in respect of the transactions necessary for its operation.
Representation offices whose objective is to study the markets and the possibility of production without engaging in any commercial activity or the activity of commercial agents.
Article (15) of the said law deals with the time frame for approving the license application for the foreign investor, which is (30) days from the date of submission of the license application subject to fulfilling all the data, documents and conditions specified by the Authority. In case of rejection of the license application, the rejection decision must be in writing and justified, and the applicant has the right to appeal within (30) days. This is considered as a decision to reject the appeal pursuant to Article (16) of the same law.
An administrative unit facility, called the “single window”, was established to facilitate the process of foreign direct investment in the State of Kuwait, pursuant to Article (17) of the law. related to the procedures of licensing the investment entity to ensure proper completion of transactions within the time period set by the law, which is (30) days. The applicant is also entitled to appoint a qualified consultancy firm approved by the Authority in accordance with the bases and rules determined thereby.
As for the issue of expropriation, it was regulated by Article (19) of the law, which states that, “No investment entity licensed under the provisions of this law may be subject to requisition or expropriation except for public utility in consideration for a compensation equivalent to the economic value of the expropriated project at the time of expropriation. Such value is to be estimated based on the economic condition prior to occurrence of any threat of expropriation and the compensation value shall be paid immediately after issuance of that decision”.
Moreover, Article (20) of the same law regulates the issue of transfer of ownership by giving the investor the right to transfer, renounce or dispose of the ownership of the licensed investment entity, whether the transfer is in favor of the foreign investor or a Kuwaiti investor. In case of transfer of ownership, the new owner or transferee shall replace the original owner in the respective rights and duties.
With respect to the merger process, pursuant to Article (21) of the law, the approval of the Board of Directors of the Kuwait Direct Investment Promotion Authority is permissible for the merger of two or more investment entities based upon a joint request. The new entity resulting from the merger process becomes a legal successor to the merged entities and replace them with respect to the rights and obligations, subject to a decision by the Ministry of Commerce and Industry concerning the procedures, conditions and terms of the merger. The investor may also, under the provisions of Article (22), transfer its profits or capital produced from disposition of its shares or equity in the investment entity.
Corporate Mergers and Acquisitions in Kuwait
Merger is a term used to describe the transaction which involves the combination of two or more companies and assets and the consolidation of their interests to form a single new and independent legal entity leading the previous entities to cease to exist. As a result, all rights and obligations of the lapsing companies are transferred to the new entity. This can be accomplished through the approval of the board of directors and majority of shareholders of both companies to the merger.
Acquisition is a term used to describe the transaction that involves financial and administrative control of one company over the business activity of another company and sometimes are called takeovers. This can be performed by purchasing all or a portion of the shares that are entitled to the right to vote in the General Assembly of the acquired company, whether the shares were purchased amicably or with hostility. In the latter case, the acquirer company acquires a majority stake in the acquiree company, but does not change its tradename or legal structure.
Horizontal Merger: A horizontal merger takes place when two companies offering similar, or compatible, products or services to the same market combine under single ownership.
Vertical Merger: A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. For example, an ice cream cone supplier merges with an ice cream producer.
Homogeneous Merger: A homogeneous merger is one between two companies serving the same consumer base but in different ways. For example, a TV manufacturer merges with a cable company to create a large, dominant player with only a few or no other competitors.
Market Extension Merger:
A market extension merger takes place between two companies that deal in the same products but compete in separate markets.
Product Extension Merger:
A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market.
A merger between firms that are involved in totally unrelated business activities.
What are the Differences Between Mergers and Acquisitions?
- Returns: If the return paid to the company shareholders is monetary and not stocks, the transaction is referred to as acquisition not merger. However, if the return is stocks, the process is a merger not an acquisition.
- Company Fate: If a company does not cease to exist after another company buys its equities, the transaction is an acquisition, not a merger. Yet, if a company sells its shares and dissolves in the acquiring company and ceases to exist or both companies, the acquirer and acquiree, expire leading the way for a new company to emerge, the transaction is a merger and not an acquisition.
The impact of the Corona Virus pandemic on the largest merger deal in the banking sector
Kuwait (Acquisition of Kuwait Finance House and Ali United Bank)
The Kuwaiti market was busy with the merger of KFH and Ahli United Bank (Bahrain), to form the largest banking entity in Kuwait and the sixth bank in the Gulf region, with assets exceeding $94 billion.
This deal will lead to the transformation of the largest Islamic banks locally and globally. According to studies in place, the deal will yield a 26% increase in earnings per share and thus a significant increase in the bank's dividends for the next three years.
The formation of a unified Islamic banking entity operating in 9 markets comes in line with Kuwait's investment strategic plan, as well as Kuwait's New Vision 2035, which targets to invest $900 billion during the relevant period. The merger of the two banks will result in a strong banking institution with a large and robust share capital that will enable credit operations geographical and qualitative expansion. The capabilities gained from the merger will enhance the acquisition of new expertise, reduce the risks of doing business, and create quality local business opportunities that can be exported to other markets.
Ahli United and KFH Merger Regulatory Conditions
KFH, listed on the Kuwait Capital Market, has received approval from the Central Bank of Bahrain (CBB) for the acquisition of Ahli United Bank. However, CBB’s approval remains conditional on the fulfilment of certain determinants set by the Central Bank of Bahrain.
Among the most prominent conditions set by the Central Bank of Bahrain to complete KFH’s acquisition of Ahli United Bank:
- Retain all Bahraini employees at AUB-KFH Bahrain, and increase Bahraini employment in executive positions within the merged banking entity in Bahrain.
- Ahli United Bank external units should continue to be managed from Bahrain following the merger.
- At least one third of the merged bank board members must be fully independent.
- Allow each shareholder in Ahli United Bank the option to sell to KFH or hold his shares.
- Continue to list Ahli United Bank on Bahrain Stock Exchange following merger with KFH in Bahrain.#
- Listing KFH on Bahrain Stock Exchange secondary market and allow the merged bank to invest in Kingdom of Bahrain sovereign securities, compliant with Sharia law.
- KFH to bear the loan allocations as instructed by the Central Bank of Bahrain.
Government decision to postpone the merger and re-evaluate deal after Corona Virus pandemic
Following the outbreak of the Corona virus pandemic and the disruption of the business, KFH announced that it had received instructions from Kuwait Central Bank Board of Directors to re-evaluate the KFH's acquisition of Ahli United Bank of Bahrain, after the situation stabilized and the implications of the Corona epidemic were ascertained. The target is to consider the feasibility of the acquisition and conduct a reassessment of the interbank stock trading ratio once the repercussions of the Corona crisis fall into place with respect to their assets. In the meantime, Kuwait Finance House Board of Directors decided to suspend the transaction procedures temporarily until next December, without deciding to re-evaluate the deal.
On a quick note, the Central Bank does not have step-in rights to make a decision on behalf of the General Assembly unless there is a risk to the economy in general. The Central Bank of Kuwait is not entitled to make decisions on behalf of the banks as to whether the merger is legal or not, simply because commercial consequences and losses are involved.
The reason for postponing the merger decision is not merger related, but rather to a disagreement over the merger value with Ahli United Bank. It is expected that the variations of bonds prices and the rise of US bonds will impact the deal once closed. Therefore, Ahli United Bank would incur greater finance costs, which will cause its profits to drop and bank’s value to mimic such trend. Having said that, the merging value would eventually change.