СТА - ведущая юридическая компания в Дубае с офисами по всему мируhttps://www.stalawfirm.com/ru.htmlSTA Law Firm - Блоги - Mergers and AcquisitionsruCopyright 2024 STA Law Firm All Rights Reserved<![CDATA[Economic and Fraud Provisions in Middle East]]> Economic and Fraud Provisions in the Middle East

"There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

- Milton Friedman

Economic fraud is a term that has been repeated over the years, so much so that the consequences it bears do not have any precedence or impact on the ones that hear it. For many companies and capitalist machinery, this term essentially triggers them to explore options to hide their fraudulent tracks and continue operating in the same manner. To have governments help them cover the tracks in certain jurisdictions ultimately defeats the purpose of the assignment.

Despite the incongruent activities of individuals, companies, and governments from the expected norm of justice in many jurisdictions, other countries are tenacious to implement a regulatory framework that will eradicate such fraudulent activities in the market. This article will discuss the economic and fraud provisions established in the Middle East, their effectiveness, and the scope of reach it possesses about financial crime.

What are the Economic and Fraud provisions in the Middle East?

If one area of the economy has seen a steady increase in the past years, it would be the economic fraud prevalent in society. Regardless of the number of provisions that jurisdictions and international organizations establish to combat financial fraud, none of them seems sufficient. The parties involved in economic fraud and other fraudulent practices are constantly evolving to cover their tracks efficiently.

Infamous scandals like Bernie Madoff and the Ponzi scheme leave one in absolute awe as it remains unclear, what is the culprit: the crime or the criminal? Many innocent parties, including employees and clients, were adversely affected by the ill-doings of these financial schemes. After the outburst of many scandals and its impact on many innocent individuals, jurisdictions are trying to fasten their pace to stay a step ahead of wrongdoers and hopefully eliminate the potential threats in the market.

The introduction of new anti-economic fraud regulations has paved the way for potential investors to feel a sense of security over their investments within the market, along with the ability of the regulations to enforce justice. Over time, people have understood that the formation and establishment of an anti-fraud legal framework are not sufficient to ensure peace and harmony in the market, an iron fist must be imposed on fraudulent parties and companies to deter them from doing such activities in the future and serving it as a lesson for other participants in the market who bear similar intentions.

The types of economic fraud can be quite varied and are spread across different industries and the scope of nature. These could include housing benefit fraud, tenancy fraud, council tax fraud, blue badge fraud, social care fraud, business rates fraud, insurance fraud, bribery, and money laundering. These are just a top layer of economic crimes prevalent in an ocean of fraudulent activities in the market. The crimes that are more coherent to the wrongdoings in the market include not declaring the business location, stating that a property is not in use while it is, dishonestly requesting for an exemption to pay for charges that are owed, or any unauthorized movement of money to make ill-gains.

Often, economic crime is caused not by companies but by customers towards companies. The highest reported crime boost in the Middle East is through customer fraud and procurement fraud, which have proved to be the most disruptive fraud within an economic crime. In a survey conducted on a global platform, the number of customer frauds was comparatively more in the Middle Eastern region.

In an ongoing effort to combat fraud together, many companies in the Middle East began investing in more stringent controls and implementation of the rules to avoid economic crime, while many others conducted a thorough examination into reasons after the occurrence of a crime in the company. Another issue that stands alongside customer fraud about its prominence is procurement fraud. This fraud entails the practice of favoring associates with vendor and supplier contracts.

All these efforts are measures taken to mitigate the risks involved and ensure that proper prevention is taken by instilling the right technology and talent to deviate from any fraudulent prone routes.

However, it is not easy to ensure that accountability will be maintained and transparent feedback is provided. Another limitation of this procedure is that advanced technologies to combat financial crime can be costly, which would further deplete if the company possesses insufficient resources to acquire and install the platform and is not equipped with properly trained employees to manage the technology. The lack of proper expertise to handle the in-place technology could attract various cyber threats, which allows a wrongdoer from any part of the world to infiltrate the company's system.

With this in mind, companies must equip themselves from the arsenal of defenses to protect themself and the financial and reputational facets of the company. The extent of damage that infiltration of the company's system can cause to the operations is quite unfathomable. It would be better for companies to leave their vault of secrets wide open than installing an IT platform that is managed poorly. The necessity of combating such insecurities is proliferating and must be countered at the earliest. One would like to believe that the efforts of the legal jurisdictions in the Middle East to battle economic crime are practical and promptly applied. However, many of the jurisdictions still fail to provide a proper implementation of the provisions established against economic crime.

The readiness of companies in the Middle East to confront the indecisive nature of economic crime and report any issues as they arise is still moving at a stagnant rate. The stark increase in cyberattacks and its potential threats is not a mystery to the companies in these regions. Nevertheless, they decide against preparing themselves in defense of such risks and attacks. The firms in the region and the governmental organizations must understand the types of threats that could arise in the economy and the nature of such economic crimes. Although this would seem like an insignificant step, this particular action could help achieve a more profound revelation of the gaps and vulnerabilities of the economy and its protective framework.

Many would argue that the relationship of the Middle East with economic crime and fraud dates back ages. All the glitz and glamour and the boom of economies are incongruent with the fraudulent activities occurring within the firms and regions. A region's legal systems cannot enforce the regulatory frameworks established to fight against economic crime if the country's government does not implement the rulings.

To know more about Economic and Fraud Provisions in the Middle East in Singapore Click here 

 

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Thu, 30 Sep 2021 14:28:00 GMT
<![CDATA[Cross Border Mergers]]> Cross Border Mergers

Introduction

Recently there has been a noticeable wave of mergers (especially in the banking sector) within the GCC. Just in 2017, there were 85 mergers in the UAE and over 400 mergers in the GCC. Many of those mergers were cross border mergers; for instance, in the UAE, over 50% of the mergers were of cross border nature. Many factors are attributable to this vibrant market, such as the locality, the resources and the seemingly endless liquidity. However, it is evident that the approach taken by the legislators and regulatory divisions form a fertile ground for these investments to flourish. It well established that commercial law in the UAE is specifically tailored to attract promising and prominent foreign investments, obviously while securing local concerns. Hence, you find various options with minor restrictions with regards to foreign direct investments and cross border mergers. Although the law regarding cross border merger is considered vague by some critics, many find in this an opportunity to create larger robust firms that contribute more to the economy. As a result, the UAE and other GCC nations continue to ease restrictions and create more opportunities for foreign investments.

Licensing

The United Arab Emirates is composed of seven emirates joined together by a federal constitution which gives each emirate specific legislative authority, while retaining some at the federal level. All businesses in the UAE need to obtain licensing from their respective emirate to operate within their borders. Different licensing options are available according to several factors, such as the trading zone, the origin of the business activity and the formation of the business.

There are two types of zones available for businesses to operate within the UAE; those are mainland and free zones. There are various exemptions on Free Zones from the requirements on the mainland. For instance, a business does not need to be owned by a local majority or even have local shareholders. In addition to that, companies may benefit from zero-tax rates and relaxed custom duties.  On the other hand, businesses on the free zones find it challenging to build a presence in the local market due to limited access and customs duties. Either way, companies need to consider the location of their business to determine the applicable law. Mergers are no different, for a merger to be successful on the mainland, companies need to fulfil the requirements of the Federal Law No.2 of 2015 on Commercial Companies; while mergers within the free zone need to consider and apply the provisions of Federal Law No. 8 of 2004 on the Financial Free Zones in the UAE.

Tax

Corporate tax

The legislation does not impose a corporate tax; however, states impose a corporate tax on foreign banks and oil companies by local decrees. The taxes imposed on foreign oil companies extracting oil in the UAE can be as high as 80%.

VAT

Recently, the UAE introduced the VAT tax at a standard rate of 5%. Businesses are required to register for the VAT if their turnovers are over $100,000.

Merger process

There are two possible ways to merge in the UAE; those are absorption and combination. Companies that intend to form any merger in the UAE need to follow the prescribed procedure and fulfil the respective requirements.

As previously mentioned, the law regarding mergers is particularly vague; in fact, there isn't a specific article or part of legislation dedicated to cross border mergers. Instead, companies need to satisfy the general legal requirements of the concerned merger region(s). Some companies (such as Oil and Gas companies) are subject to certain exceptions. 

In Practice, the acquiring and the target company need to verify each other; then the merger agreement needs to be drafted and accepted; it is the most significant part of the process. The relaxation of the merger laws in the UAE and the GCC makes the agreement a detrimental factor for the parties to secure their rights. The agreement shall specifically define the conditions and the method of the mergers and the process of the transfer of shares. Additionally, the merger agreement should determine the memorandum of association of the newly formed company and the particulars of the board members. The merger agreement like any contracts is subject to the Federal Law No. 5 of 1985 on Civil Transaction Laws.  

Addition requirements for a successful merger include the approval of at least three-quarters of the shareholders within each company. Members who object to the merger may withdraw from the company and retrieve the full value of their shares. Those members will need to provide a written request within 15 days of the merger's decision, and the merger may not be finalised until those members are fully paid.

Merging companies will also need to notify their creditors as soon as ten days after the approval of the general assembly. Objections to the merger may dispute the issue in a competent court. Finally, a company will need to issue a declaration of incorporation in the registrar of companies. However, the merger shall be suspended for three months following the date of the declaration. In no valid objections were made during that period, then the companies are considered legally merged, and the newly formed company bears the liabilities of the former two.

For two (or more) limited liabilities companies to merge both the companies are dissolved, and their corporate personality is abolished. Subsequently, a new company shall be formed where it will bear all the liabilities and debt of the previous two companies. Shareholders in the target company may have their shares transferred as to the agreed upon transfer rate or bought by the acquiring company.

Once the companies are legally merged, then they may not raise any claims or objections against each other, since they have the same single corporate personality. Only the company may vindicate any wrong done against it, while it is responsible for the rights and obligation it agreed to uphold.

Merger clearance

In some cases, parties may need to apply to the Ministry of Economy for a Merger clearance pursuant to the competition law. Unless an exemption applies, a merger clearance form shall be submitted where there is an economic concentration.  The Competition Law provide the definition of economic concentration as "any act resulting in a total or partial transfer (merger or acquisition) of property, usufruct rights, rights, stocks, shares or obligations from one establishment to another, empowering the establishment of a group of establishments to directly or indirectly control another establishment or another group of establishments".

Restriction on foreign ownership

The restriction on foreign ownership is considered the toughest restriction on foreign investors within the GCC. Traditionally all businesses in the UAE needed to be owned majorly by local entities; therefore, foreign investments may not constitute over 49% of the total shares in a company. As many investors found this impractical, a culture of side agreements was developed where the Local shareholder would limit their rights in profitability and management to an agreed extent. This practice was then outlawed, and those agreements were considered unenforceable. However, that law was deferred, but the enforceability of the agreement remains a grey area.

Recently, the UAE has announced certain changes that will be applied to the foreign ownership limitations which may allow companies (that are not part of the restricted sectors) to be 100% foreign owned even on the mainland. However, a list of (negative) industries has been drafted that won't be included in the waiver. Either way, such a change will definitely give rise to a new wave of cross border mergers that will hopefully drive the economy to set new records. 

Noncompliance

Following Articles 313, 314 and 316 of the Commercial Companies Law, any foreign company based outside the UAE may not operate within its borders unless it has acquired a permit from the Ministry of Economy and Commerce and the concerned authorities in the respective state. Noncompliance with these requirements will render the company's persona inexistent, and therefore the member will be personally liable for any breaches.

If the merger clearance is required and not obtained, the enterprise will be subject to a fine representing between 2 to 5 per cent of their total annual revenues, or a fine ranging between AED 5,000 and AED 5 million.

Conclusion

The UAE is currently the most targeted country in the whole of the MENA region for foreign investments and cross border mergers. The wave of mergers and cross border mergers seems to be continuous all the way through the first quarter of this century. The hosting of EXPO 2020 and the continuous modernisation of the region play a vital role. More significantly, the introduction of appealing legal reforms and the ease of restrictions is the key factor for the smooth flow of direct foreign investments. However, businesses and corporation need to exercise due diligence to fulfil and apply all the legal requirements to avoid hefty fines and penalties. The requirements imposed are merely used as a tool to effectively control the market while allowing as much freedom as possible for investors.

 

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Sun, 04 Aug 2019 12:09:00 GMT
<![CDATA[Rules of Acquisition and Merging of Public Shareholding Companies]]> MERGERS AND ACQUISITIONS: PUBLIC SHAREHOLDING COMPANIES

"How do you make money? Mergers, Acquisitions and Liquidations"

                                                                                                            ~Mario Gabelli

Introduction

Sultan Bin Saeed Al Mansouri, MOE (Minister of Economy), and Board Chairman of the securities and commodities authority (SCA) was responsible for the introduction of a set of regulations concerning mergers and acquisitions of the UAE-based public joint stock companies. This decision includes three chapters comprising 61 articles which focuses on the general rules and conditions of of procurement, various definitions relevant to mergers and takeover as well as control, penalties and inspection. To be investment-friendly and ensure a promising financial system, SCA has introduced, in recent times, a series of decisions launched new systems and modified some others with the aim of efficiently developing a legislative environment and organizational infrastructure. These measures have not only encouraged and helped capital markets ensure more flexibility and responsiveness but have also boosted competitiveness, thereby enhancing and improving services provided by them.

The FGB and NBAD Merger

In the United Arab Emirates, partial or complete control of a public company can be acquired by way of a statutory merger process under the Federal Law Number 2 of 2015 concerning UAE Commercial Companies law (the Federal Companies Law or new CCL) as amended. Under the provisions of this law, one or more companies can merge with another company when the following process is complete. Firstly, a merger agreement must be agreed upon and signed by both the companies. Secondly, the dissolving company must acquire the approval of its shareholders by way of special resolution to approve of the merger upon which the dissolve of the company becomes effective. Thirdly, the acquiring company must acquire the consent of its shareholders, in the same way thereby increasing its share capital and permitting the company to issue shares to the dissolving company. Lastly, and most importantly, the SCA must approve the merger.

A recent example of a merger in compliance with the new governance rules is as follows: National Bank of Abu Dhabi PJSC(NBAD)and First Gulf Bank (FGB)entered into a merger. The merger of NBAD and FGB is being effected using this statutory process and will result in the assets and liabilities of FGB being assumed by NBAD in consideration for the issues of new shares in NBAD to the shareholders of FGB. Following completion of the merger, the FGB shareholders will own about 52% of the enlarged issued share capital of NBAD.

 

Administrative Decisions Number (62/ R.T) of 2017 Concerning Technical Requirements for Acquisition and Merger Rules has its basis on five primary consideration. Where, the first and the foremost factor is of the Federal Law number (4) of 2000 concerning the Emirates Securities and Commodities Authority and Market, and amendments thereof (the SCA Law).The SCA Law regulates the activities of securities and commodities markets in the UAE and including recent modifications of 2006 by Federal Law number (25) and Federal Law Number (6) of 2009. SCA Law provides a uniform definition of securities to be shares, bonds, and notes issued by joint stock companies, relationships, and notes issued by the federal government, local government, public authorities and institutions in the country, or any other locally or internationally acceptable financial instruments issued by SCA. It also gave legal recognition to an agent or a broker as an entity licensed and authorized under the provisions of the law to practice the concerned business in the securities and commodities market.

The second consideration was the Federal Companies Law which was a replacement of Federal Law number 8 of 1984. This law states that all Limited Liability Companies (LLC) must review their articles to ensure that the same comply with the terms of the new CCL. Specific other conditions, although not mandatory, were encouraged to be examined within the scope of this article. A few of the changes introduced by this law were the fact that any part of the shareholder'sreports which referred to and complied with the law that was prevalent in the respective field must be changed and updated to ensure clarity. Also, the introduction of this law, shareholders now had the right to appointment of more than five managers or directors.Additionally, an explicit reference to the increase in positions of administration, the shareholders were required to amend their articles accordingly. With this arrangement, shareholders, to pass ordinary resolutions need a simple majority of the shareholders present at the general assembly as opposed to earlier where recommendations could be given only on the condition that 50% of the votes at that meeting must be secured.

The third consideration has its basis on the Cabinet Resolution Number13 of 2000 regarding the Regulation for Functioning of Emirates Securities and Commodities Authority, and amendments thereof. This resolution sought to clarify and define specific terms about securities and commodities. It further aimed to explain the meaning the Securities and Commodities Authority Market and contributed about five articles for the clarity of this purpose. It alsopointed at categorizing and listing the authority's objectives and powers. It began with Article 7 of the resolution which involved the main aims and the purpose of the decision itself. Article 8 mentioned the skills which the authority possessed in the interest of working towards its target. This resolution further went on to define the organs of the body and its challenges. This part of the decision could be considered an extension of the previous section as it went on to state the functions of the authority. The last part of the decisionfocused on the administrative apparatus of the administration which primarily referred to its structural formation. This resolution consisted of thirty-six articles in all.

Additionally, the fourthconsideration is based several decisions includingDecision of the Chairman of the Authority's Board of Directors Number (38/R) of 2015 concerning assigning H.E. Dr. Obaid Saif Al Zaabi as Acting Chief Executive Officer of the Securities and Commodities Authority. The Authority's Board of Directors' Decision Number (42) of 2015 concerning the Controls and Procedures for Reconciliation in Crimes related to Public Shareholding Companies. The decision of the Chairman of the Authority's Board of Directors Number (18 / R.M) of 2017 concerning the Rules of Acquisition and Merger of Public Shareholding Companies, and
Based on the requirements of the business interest.

Annex number (1) of the decision is relevant to the technical requirements of the acquisition offer document. The first one is the financial and other information about the offer, the acquirer,and the target company. Further, the offer document and any amendments made to it after that must include a note in the introduction of the report concerned highlighting that the consultation of an independent financial consultant who is licensed by the authority is another requirement in case of any queries regarding such a document. Secondly, the parties must mention the publishing date as well as the name and address of the acquirer, and that of the person who submitted the report on behalf of the acquirer. Thirdly, details of the securities subject of the offer, indicating that the transfer should be with or without profits must be specified. The first three guidelines of Annex Number 1 are as follows:

"The financial information and other information about the Offer, the Acquirer and the Target Company where the Offer Document and any amended offer Document must include the following:


          i.            A note in the introduction of the document indicating that consultation of an independent financial consultant licensed by the Authority, in case if there is any doubt about the Offer;

         ii.            The document publishing date, the name and address of the acquirer and the person who submitted the offer on behalf of the acquirer, if any;

       iii.            Details of the securities subject of the Offer, indicating that the transfer should be with or without the profits;

       iv.            The details about the total amount of the offershould also be submitted;

        v.            It must include the procedures that should be followed to accept the offer;

       vi.            The closing price of the securities to be acquired and the closing price of the offered securities (in case of acquisition through Swap) on the first day of every month of the six months immediately preceding the offerdocument's publishing date. And on the last day preceding the offerterm as well as on the previous day available before the offerdocument publishing date, provided that the parties obtain the prices of the listed securities from the market.In the event,the company has unregistered-securities, the information available on the number and value of the deals completed within the last six (6) months and disclosure ofthe source of such information,ornote shall be submitted to indicate that none of such information is available.

     vii.            The details of the first payment of the profits or fees in which shall be payable by the new securities (in case of acquisition through Swap). The classification of securities is profits, costs, the capital, and recovery, and a statement indicating the impact of accepting the offer on the money and the income earned for the shareholders of the Target Company. In case the new securities are not identical to the securities listed in the market, the offer Document shall contain all the details of the rights associated with the guards, and a statement indicating that an application was or will be submitted to the Authority to list them.

    viii.             Indicate the impact of accepting the entire offer on the Acquirer's assets, profits, and business which can be essential to conduct a valid appraisal of the Offer in case of an acquisition.

The second subheading consists of a statement, the exact words of which must be included in the offer document and goes as follows:

"The Securities and Commodities Authority and the Market shall not be liable for the content of this Offer Document and shall not submit any confirmation about the accuracy or completeness thereof, and at this moment expressly disclaim any responsibility for any loss arising from the content of this document or from relying on any part thereof."


This decision also made specific, clear criteria if the payment of the offer value includes securities and in case the acquirer is a company not listed in the market. The following must be involved in the decision:

          i.            The sales, net profits or losses, before tax, if any, and after tax, the amount of paid fee, if any, and any exceptional items. Also, minority interests, and the total number of dividends, proceeds, and profits for each security, for the past three fiscal years.

         ii.            A list of the assets and liabilities based on the latest audited financial statements published.

       iii.            The cash flows, if they are available, based on the latest audited financial statements published.

       iv.            All the material changes to the Acquirer's financial or commercial position after the latest audited financial statements published, or a statement indicating that none of such changes took place.


        v.            The details relating to the items referred to in sub-clause Number (I/3/a) of this article regarding any initial announcement or initial financial statements issued since the publishing of the latest audited financial statements.

       vi.            Any information concerning any of the above that has been amended to take the impact of inflation into account.


     vii.            The significant accounting policies and any keynotes on the financial statements related to the adjustment of data, including any data that was amended to take the impact of inflation into account. If it is not possible to compare the data due to the change of the accounting policy, there should be disclosure of the estimated sum of the discrepancy arising from the difference shall be defined.

    viii.            The parties should mention names of the members of Acquirer's Board of Directors.


       ix.            The nature of the Acquirer's activity and the financial and commercial forecasts.

        x.            A summary of the main content of every material contract concluded by the Acquirer or any ofthe affiliates outside the ordinary course of its activity in the two years preceding the Offer Term. The summary shall include a note to the Related Parties, and the terms, date, and provisions of each contract, and any sums paid by the Acquirer (or any of its affiliates) or paid to it based on each deal. "

The decision also sets out that all offer documents shall contain adequate information about the target company in compliance with the sub-clauses. The offer must also have information regarding the funding, the names of lenders and the source of funding. The decision highlights an essential part ofsection 8 where the decision points out towards the fact that all financial information regarding the disclosure of the offertransparently and efficiently. Importantly, the motive of the acquirer and an analysis of the profitability of the target company's share. 

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Mon, 14 May 2018 10:13:49 GMT
<![CDATA[The Evolution of Private Equity in India]]> The Evolution of Private Equity in India

The advent of the year 2015 has seen a lot of political and economic skepticism unfolding in the form of the Brexit vote, demonetization in India, mounting Chinese debt and concerns over trade relations between the US and Asia. It, however, appears that the politico-economic uncertainty has not shown any signs of slowing down the private equity (PE) investment regime. More particularly, with 2016 marking the third year in a row that the Asia-Pacific PE industry has performed at historic levels-a sign that PE performance in the region is increasingly dependent on the sector's fundamentals. Private equity investments' value in the Asia-Pacific region crossed $92 billion in 2016; which is a pullback from the 2015 all-time high of $124 billion.[i]

The predominant objective and purpose of the PE line of financing remain growth and profits. PE firms typically infuse substantial funds with the intention to conceptualize ideas for growth and overcoming financial disability for companies thereby playing a pivotal role in the nurturing the economic climate of a country. Notably, in comparison to a venture capital investment, a PE investment is typically for a much higher amount, and in return, the investors either opt for a buyout or expects a substantial share in the company with active participation rights in the business. These investments initiate when an entity approaches a PE firm or investor seeking investment (in some situations, even the PE firm may contact a prospective business opportunity). Upon detailed discussion and taking stock of the situation, the parties arrive at an arrangement structuring terms of the investment. Importantly, at this stage, the investor shall undertake due diligence into the affairs of the company along with better understanding of the financial situation of the shareholders of the entity. Upon satisfaction of concerns in the diligence report, if any, and if the investor agrees to proceed, the parties execute final agreements, namely, shareholders' agreement, share subscription agreement, etc. after which the investor infuse funds into the company.

In India, PE line of financing is still in its nascent stages. While in the early 2000s, the focus of PE investments was towards the booming sector of Information Technology due to its dynamic growth opportunities. However, after the burst of the dot-com bubble, PE investors shifted focus to other commercially viable industries. Another hindrance to the rising graph of the PE investment was the economic meltdown in 2008- 2009 which substantially deflected the investment deals size. However, consequently Flipkart's USD 150 million, 4th round funding in 2012 Q1 kicked off an overall positive sentiment in funds investing in the domestic e-commerce industry.[ii]

India witnessed an increase in the number and size of PE investments made in 2014 aggregating to around $11.5 billion, which was 17% higher than the total investment value as compared to the same period the previous year. PE investors have been steadfastly interested in certain lucrative sectors including E-commerce, financial services, power and, energy among others. Most notably, in the current economic scenario, Indian real estate industry owes its foundation to private equity. PE financing, in a broad ambit – now makes up 75 percent of the funds in India's real estate sector, compared with just about a fourth in 2010.[iii]

As discussed herein, this two series article aims to explain the factors that drive private equity investments in India and the regulatory framework associated. The framework and the documentation of PE investments will differ (regarding the regulator and legislation) depending on the structure of the PE investment. In India, the Companies Act, 2013 (the Companies Act), the Income Tax Act, 1961, Foreign Exchange Management Act, 1999 (the FEMA) and the rules and regulations framed therein overlook the governance of PE investments. Securities and Exchange Board of India (the SEBI) regulations governing the regulates the listed companies. By this article, we shall discuss the manner of structuring the PE funds, the mode of investments and the laws which govern the PE financing mechanism in India.

Structure and Applicability

In India, PE funds assume the form of trusts that are registered and regulated by Securities and Exchange Board of India's 2012 Regulations regarding Alternative Investment Funds (AIF Regulations)[iv] as Alternative Investment Funds (AIF). Such AIFs can be set up only as a trust, company or a limited liability partnership (LLP). Therefore, procedurally, a PE fund may be established as a trust under the Indian Trust Act, 1882 and registered as an AIF under the AIF Regulations.  The trust deed and investment/contribution agreement would govern the terms of the arrangement between the parties and shall stipulate the details of the agreement including the amount of investment, period, the object of fund and manner of distribution of returns.

Similarly, an AIF may be set up as a company under the provisions of the Companies Act, and the articles of association and the inter-se shareholders' agreement would govern the same.

In the same manner, AIF funds can be set up as LLPs under the Limited Liability Partnership Act, 2008.

However, AIF is seldom set up as a company since there are stringent compliance procedures to be followed by companies. Also, while an LLP may be an attractive choice for PE funds worldwide, it is still a relatively new structure in India.

Significantly, registered AIFs in the country have substantially expanded over the past two (2) years and estimates to around 270 in 2016. AIFs have also been a major contributor to the overall fundraising in the Indian market and contribute to around 41% of the total funds raised in India in 2016. A majority of the funds reported greater participation from LLPs through passive co-investment rights that existed in their current portfolio. PE Funds expect LLPs to play a more dynamic role in 2017 and is likely to offer more co-investment opportunities. Further, fundraising is supposed to be a higher priority for funds in 2017.

It is pertinent to note that before the enactment of the AIF Regulations, the registration of all domestic private equity funds was under the SEBI (Venture Capital Funds) Regulations,1996. While new AIFs can register themselves with the AIF Regulations, PE funds registered under the earlier Venture Capital Funds Regulations have two options. They can either continue under the previous venture capital regulations till the expiry of the duration of the fund or can be brought under the ambit of the AIF Regulations by re-registration therein subject to the approval of two-thirds of the fund's investors.

Importantly, the appeal of significant growth has attracted foreign investment into India. Reserve Bank of India along with the Foreign Investment Promotion Board and the Department of Industrial Policy and Promotion have stipulated rules and regulations issued by FEMA with the view to regulate the foreign investment that flows into India. In this regard, we will discuss the foreign direct investment (FDI) policy and Foreign Exchange Management (on the Transfer or Issue of Security by a Person Resident Outside India) Regulations in detail in the second part of this Article.

Mode of Investment

Investors in PE may opt from one of the following instruments to effectuate their transactions:

       i.          equity shares;

      ii.          compulsorily convertible preference shares (CCP); and

     iii.          compulsorily convertible debentures (CCDs).

Moreover, under the FDI policy, any instrument apart from the above, which are not completely and compulsorily convertible to equity shall be treated as debt and regulated by the external commercial borrowing (ECB) norms. The old company law regime (Companies Act, 1956) strives to protect the creditors of an entity by classifying the outstanding amounts as deposits. This law states that a CCD could avoid from falling under this category as long as they are convertible into equity or secured by an immovable property. However, the Companies Act amended this provision by stating that conversion of CCD into equity should take place within five (5) years or the underlying security should rank parri passu (same or equal footage) with the first charge on the asset to avoid classified as a deposit.

The issue and transfer of these equity shares, CCPs, and CCDs are regulated by the provisions of the extant FEMA regulations, as also the Companies Act and the inter-se agreements entered into between the parties.

So far, this Article has purported to discuss India's regulated climate on private equity investment. It is evident from the increasing graph that in spite of several regulations and restrictions prescribed by the relevant regulatory authorities and laws, India continues to be a favored jurisdiction for private investment. According to a 2017 report by Bain & Company, "to attract more investments, India may have to strive to reduce the regulatory restrictions in the country; that consists of a regulatory environment that is conducive to business growth."[v] Hence, it is prudent that the regulators reduce the level of restrictions and policies that may hinder the incoming investment opportunities.

Further, in Part II of this article, our attorneys will discuss the provisions of Income Tax Act, 1961, FEMA regulations as well as SEBI regulations regarding the aspects of the private equity market in India. We will also discuss the applicability of PE line of financing in the current economic climate of the United Arab Emirates.


[i] Suvir VarmaKiki Yang and Johanne Dessard, "Asia-Pacific Private Equity Report 2017", March 16, 2017-Bain & Company.

[ii] Kalpana Jain, Vikram Mathur, Punit Gupta, Ajay Sharma, "Private Equity- Fueling India's growth," May 2012, Deloitte.

[iii] Kailash Babar, "Private Equity now funds 75% of Indian property market as banks pull out", The Economic Times, March 20, 2017.

[iv] Discussed at length in Part II of the Article.

[v] http://www.bain.com/publications/articles/india-private-equity-report-2017.aspx

 

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Fri, 14 Jul 2017 00:00:00 GMT
<![CDATA[The Prenup to Every Merger and Acquisition]]>  

The word 'efficiency' may not mean much for those of you who were absent during economics class in school. It is a term around which the whole concept of economic studies in based. Investopedia[i] defines 'efficiency' as the allocation of resources in an optimal manner to serve a company or an individual in the best method by reducing waste. It is the concept of getting work done with the least amount of resources. But that comes at a cost. Many a time, companies try to reduce their costs and maximize profits by employing cheaper materials and inefficient human resources. Companies also try to maintain or increase the level or standard of their output by pooling their resources. While the former is one of the least preferred methods to obtain efficiency, the latter has gained popularity due to the enhancement of corporate structures and growing consumer demands. But efficiency is a million-dollar word.

A similar story lies behind one of the largest mergers in history between Henry J. Heinz Company and Kraft Foods Group, Incorporation. This merger created one of the major players in the food and beverages industry. Ergo, companies should review every aspect, factor and underlying right(s) of all the parties before initiating a merger or restructuring a corporate structure. The structure and type of merger may primarily depend upon the industry and the size of the companies. For example, when the investor limits the transaction to the assets of another company; such an acquisition is an asset purchase. However, when the investors are interested in buying the shares of the other company, the structure of the merger should be remolded to that of a share acquisition. Hence, it is evident that the structure and type of merger or acquisition are decided upon after considering and understanding the factors involved, the extent of assets and liabilities of the companies and the jurisdiction of the parties. Therefore, the benefit of opting for a particular structure or type of merger may be detrimental to the other party. Therefore, this article seeks to draw a line between an asset sale and share purchase and explain about the advantages and disadvantages of both these structures from the purview of private companies in the United Arab Emirates (UAE).

Status quo in the UAE

The principles of contracts govern the mergers and acquisitions in the UAE. The primary piece of legislation that has laid down the provisions regarding the matter is Federal Law Number (2) of 2015 on Commercial Companies (the Companies Law). Article 22 of the Companies Law has stated that a UAE national should hold at least fifty-one (51%) shares of an onshore company in the UAE should be and branch offices of foreign entities in the UAE may appoint a local agent to conduct trade in the UAE. Therefore, transfer of shares in companies established in the UAE should adhere to this restriction on foreign ownership.

Transaction structures for private companies

As mentioned earlier, investors have the option of either acquiring the shares of the company (a share acquisition) or the assets of that company (an asset acquisition). The investors should conduct due diligence and agree on one of the two (2) structures depending on the factors discussed below:

Share Sale

In the case of a share sale, once an investor has purchased all the shares of a particular company, all the assets and liabilities of that company (known or otherwise) will be transferred to the acquirer. Therefore, the status of the target company is not affected by a share sale; however, with a new owner and the seller of the shares will lose his nexus with the entity. It is pertinent for the buyers to conduct extensive due diligence process by employing a law firm that provides bespoke legal advice before purchasing the shares of a company since the investors will assume all the obligations of the business entity. Therefore, the buyer should also negotiate the indemnity, insurance, and warranty of the exact liabilities to mitigate any issues that may arise. However, these solutions are not comprehensive since they may face problems in enforcement since their value depends on the creditworthiness of the seller. Further, an indemnity clause may also be restricted from full enforcement since it is likely to constitute unjust enrichment - prohibited by Sharia Law. Therefore, the injured party can only enforce indemnity to the extent of loss that they have suffered. Minority shareholders will be left when a buyer cannot acquire hundred percent (100%) shares in a company.

The buyer and seller have to comply with all the restrictions on pre-emptive rights provisions in the company's constitution or the shareholders' agreement.

However, share sale also has substantial advantages since the investors do not have to purchase every asset of the company individually. The objective of purchasing the assets is indirectly covered in the transfer of shares. This means that the investor acquires all the contracts and other third-party obligations also. However, the buyers should review change-of-control and termination clauses and may also have to obtain the approval or consent of the third parties before those contracts can be executed. Therefore, the investors should ensure that the seller provides all requisite approvals from all third-parties including regulatory approvals before the completion of the transaction. Specifically, the investors should make sure that the DED (Department of Economic Development) of the respective Emirate approves the transfer of shares and issues an amended license with the new ownership status. The target company may not be permitted to conduct its activities in the UAE without a valid license.

Asset sale

On the other hand, the investor will only acquire the specific assets and liabilities that are identified. This provides investors with a higher degree of certainty since the investors and handpicks the exact assets and liabilities that they want to acquire. However, buying some assets may also mean acquiring certain liabilities. For example, the investor may be liable for any environmental problem in the real estate property. When the property purchased by the investors are a part of another contract, then the buyer will also be liable for the provisions under those contracts from the date of transfer. However, unidentified assets and liabilities are not transferred to the investors.

This method is considerably more ambiguous and complicated than share sale since every asset has to be transferred individually by delivery (for a moveable property) or by transfer of title (for real estate). Therefore, the investor should acquire every property and machinery owned by the target company. The ownership of the seller (i.e. the shares in the company) does not change at the completion of an asset sale. These shareholders will continue to be the legal owners of the company since they hold the shares. Further, if an investor who wishes to obtain the benefit of a license or contract; they will need that particular right to be transferred separately. It is pertinent for investors to note that commercial contracts generally contain a clause that restricts the right of the parties to assign the contract to any third-party. Therefore, the investor should explicitly make sure that the seller obtains all approvals required when there is a provision that restricts the novation or assignment of a particular document without the approval of the other party. Federal Law Number 18 of 1993 issuing the Commercial Transactions Law has mentioned the procedures and conditions that the parties should adhere to while transferring a company's property. Article 42 of this law has stated that any action that may deal with the transfer of ownership of a company's property should be attested and authenticated by the Notary Public and should also be registered in the Commercial Registry. Further, Article 45 (1) has also stated that the investor must publish a summary of the contract of sale in two (2) daily Arabic newspapers (between an interval of one week) with the view of providing creditors of the target company to put forward any objections or claims against such sale.

Miscellaneous

Transfer tax is not applicable on transfer of the share of companies in the UAE. However, a transfer fee of four percent (4%) shall apply to the transfer of shares of a company established in the UAE. Further, a transfer tax ranging from 1% to 4% is charged on the assignment of real estate right by the Policy Sale Services at the Dubai Land Department. The rate may vary with the nature of the property interest and the particular Emirate.

On the other hand, in share sales, the employees of the target company will continue to work under the business, and the change in ownership will not change the employment relationship between the employees and the company itself. Although, this general rule does not apply to foreign employees. Federal Law Number 8 of 1980, as amended and Ministerial Order Number 13 of 1991 (collectively, the Labour Law), a foreign employee's sponsorship cannot be transferred to a new employer. However, the buyer may draft new employment contracts for foreign employees of the target company, in the prescribed forms of the Ministry of Immigration and Labor. In an asset sale, the employees of a company cannot be transferred automatically. Although, the investors have the option of revoking the present employment contracts and registering new employment contracts under the new entity. Ergo, companies have to make sure that their transactional structures are most suitable after considering all the factors to safeguard the rights of the parties.


[i] http://www.investopedia.com/terms/e/economic_efficiency.asp

 

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Thu, 29 Jun 2017 14:00:00 GMT
<![CDATA[Upsurge of IPOs in the UAE: Legal Involutions ]]>"In a world that's changing so quickly, you are guaranteed to fail, if you do not take any risks"                                                                              Mark Zuckerburg (before facebook IPO)   Introduction   The transitions to a public company is a very important development in the history of companies and the next major step in the evolution of any private company, not to mention its role in the deepening of capital markets. The Initial public offering (IPO) launches an immense growth for any company. However, the procedures involved are rigid and require strict due diligence pre IPO and post IPO. Materialization of new listings in the United Arab Emirates (UAE) is however not that efficacious despite the country's market rallying at or near the fastest pace in the world. According to the latest survey , the Dubai Financial Market General Index is up 126.8 per cent in the past year, with Abu Dhabi Securities Exchange Index rising 69.7 percent. The IPO extends substantive capabilities to the public company in terms of growth and development, or in terms of dedicating the concepts of transparency governance and effective management.   Experts are saying that long awaited changes in commercial laws of UAE are boon to the UAE market. UAE economy aims to compete with global standards and ensures transparency in the system with a view to sustain a global economy in this competitive world. To attract more foreign investment in the country this was a need of an hour. The commercial companies law (Federal Law No 2 of 2015) has diversified the avenues.    The main aim for passing UAE Federal Law No (2) of 2015 is to enrich and diversify the UAE economy in order to compete on a regional and global  level, and to enhance the way in which commercial companies operate in the UAE. The idea is that greater transparency and clarity in the system will naturally result in an increase in investor confidence in the UAE market, the ultimate objective of which is to attract a larger volume of foreign investment into the UAE.   The recent proposed change to the UAE companies law will penetrate the IPO market. Under the new companies law, the percentage of ownership that must be sold in an IPO will be cut to 30 per cent from 55 per cent. This is a hindrance for companies going public in the UAE and companies which are looking for massive expansion of their activities are opting for other exchanges in the world, for instance London stock exchange being the most preferred option for the companies in UAE. Recently the big names have come up with their IPOs like Damac holding, a top developer in the UAE which listed their shares on London Stock Exchange. Even Emaar is considering its first issue in the near future. One Abu Dhabi based company has also planned to sell shares on the London Stock Exchange to feed its expansion.     Another constraint under the local listing is regarding the pricing of shares. There is a lack of flexibility for owners in structuring sales as shares are to be priced at a par value of Dirham 1. As per Emirates Securities and Commodities Authority (ESCA) guidelines 2, 45 percent of the shares need to be subscribed by founders before the remaining 55 percent of the shares are offered to the general public via IPO.   Regulatory framework of IPOs - local listings   In the UAE, there are three stock exchanges. Abu Dhabi Securities Exchange (ADX) lists mostly local UAE companies and NASDAQ Dubai deals in the trading of international stocks. The two stock exchanges namely DFM and ADX fall under the regulation of Securities and Commodities Authority (SCA) which is a governing body and both stock exchangs have to comply with the standards of SCA. SCA is a watchdog authority to protect investors', brokers' and listed companies' rights.      Similarly, Dubai Financial Services Authority (DFSA) is the governing authority of NASDAQ Dubai which follows the international standards of listing on the similar lines as of EU norms. In line with the international regulatory framework, a listing on NASDAQ requires certain formalities, however the rules and regulations purported are to be favorable and intuitive and close to the DFSA objectives. The Markets Law 2012 3  and the Market Rules came into force in 2012 after a public consultation process and based on the rules published by Financial Regulation Authority, United Kingdom. A company formulating an IPO would require establishing a concurrent dialogue with both the DFSA and NASDAQ Dubai. The most essential document which sets out all the details and terms of offerings is the Company's prospectus. A requirement that the company must have a market capitalisation of at least USD 10 million and that it must normally list at least 25% of its shares 4 .   Conclusion   In the view of above, the UAE is expected to be a very strong market for IPOs this year. The policy makers are keeping a liberal view and expecting the positive growth of the market. According to a new report from Ernst & Young, capital raised in the country and the wider MENA region saw their highest levels since 2008. 23 IPOs in the region raised USD 3 billion last year marking a 64% increase in terms of volume when compared to 2012 5 . Three IPOs from the UAE, including Al Noor Hospital, DAMAC Real Estate Development and Action Hotel, secured over USD 740 million from foreign listings on the London Stock Exchange .6  ]]>Wed, 09 Dec 2015 12:00:00 GMT