UAE UPDATE – Merger of Two Public Joint Stock Companies
- This article looks at the legal processes involved in amalgamating (merging) two public joint stock companies listed on either of the main stock exchanges in the UAE.
- The Companies Law provides that an amalgamation can be implemented either by an “acquisition” or by a “merger”.
- One of the two main stock exchanges, the ADX, has introduced its own secondary legislation regulating disclosure and transparency, although disclosure requirements for PJSCs on both the ADX and DFM have broadly the same effect.
- There are no specific rules regarding the offer timetable and the process that must be adopted whilst negotiations on a potential amalgamation are ongoing. This may be contrasted with western markets where this process is very tightly regulated. However, disclosure and transparency obligations remain an important consideration for listed PJSC’s discussing amalgamation – a fact which has very recently been brought into focus in the recent news in the region.
This article looks at the legal processes involved in amalgamating (merging) two public joint stock companies (“PJSC’s”) incorporated under Federal Law No.8 of 1984 concerning commercial companies (“Companies Law”) and listed on either of the main stock exchanges in the United Arab Emirates (“UAE”). It also looks at certain aspects of the requirements relating to disclosure of information which apply to such companies, and which can be, and have been, brought sharply into focus when potential amalgamations are under discussion.
As capital markets in the UAE are still in the early stages of their development, the relevant laws, rules and regulations reflect this and significant changes are expected over time. There are currently four stock exchanges in “onshore” UAE of which two are of relevance for the purposes of this article. These two are the Dubai Financial Market (“DFM”) and the Abu Dhabi Investment Exchange (“ADX”) (together referred to as the “Exchanges”). Both of these were established in 2000.
Excluded from the scope of this article are other minor exchanges and the exchange created in the Dubai International Financial Centre (“DIFC”), which is one of the “free zones” which exist within the UAE. Free zones operate under separate laws and regulations and have no foreign ownership restrictions, although there is some degree of overlap with UAE federal law. The DIFC securities market, being the Nasdaq-Dubai, is a smaller exchange than either the ADX or the DFM, and this article does not consider the application of its rules should a PJSC ever be re-domiciled to be listed on that exchange.
Whilst the listing of foreign companies on the DFM and the ADX is not precluded, and there are some public companies within the UAE which have been incorporated through other means, the vast majority of companies listed on the DFM and the ADX are PJSC’s.
This article considers some of the key issues and legal framework relevant to effecting an amalgamation between two PJSC’s in the UAE, as opposed to a straight acquisition of the share capital by one PJSC of the other.
A PJSC listed on the ADX or DFM is generally regulated by the following laws, rules and regulations:
(a) the Companies Law;
(b) rules and regulations promulgated by the Emirates Securities and Commodities Authority (“ESCA”) pursuant to its obligations to regulate the markets, as set out in Federal Law No.4 of 2000 (“Federal Law No. 4”); and
(c) the rules of the ADX (“ADX Rules”) or any equivalent rules which the DFM chooses to promulgate (“DFM Rules”), as applicable (“Exchange Rules”).
Effect of Law and Regulations on Mergers
The Companies Law contains specific provisions regarding the amalgamation of companies generally (Articles 276 to 280). These provisions apply to any PJSC, regardless of whether it is listed on an Exchange. They state than an amalgamation can be implemented by what is termed in translations of the legislation as a “merger” (but referred to here as an “acquisition”) or by what is often termed as a “consolidation” (but which we have referred to here as a “merger”) with the process for each described below.
1 Amalgamation by acquisition:
In an acquisition, one or more companies are dissolved and their assets and liabilities are transferred to an existing company. Assuming that Company A is the acquirer and Company B is the company whose assets will be acquired (and which company will be dissolved), the process to be implemented in respect of an amalgamation by acquisition is as follows (Article 277):
(a) Company B, being the company to be acquired, must first adopt a resolution of its shareholders to decide upon its dissolution. The resolution to dissolve Company B must be approved unanimously by its shareholders unless Company B’s memorandum of association sets out another threshold for this vote and dissolving or amalgamating Company B must be resolved by calling an extraordinary general assembly (‘EGA”) (Article 137);
(b) a valuation of the net assets of Company B must be carried out in accordance with the provisions for the valuation of shares as stipulated in the Companies Law (Article 87). These provisions stipulate that the evaluation of the company’s assets is to be carried out by a committee formed upon a ministerial decree under the chairmanship of a judge nominated by the Minister of Justice or the Head of Justice (or whoever performs this function the relevant Emirate) and comprising also;
(i) a member of the board of directors of the Chamber of Commerce Board in the relevant Emirate;
(ii) a member of the Municipal Council or the Department of Municipality; and
(iii) an expert or specialist.
The committee must submit its report within 30 days from the date of its mandate.
(c) Company A, being the acquiring company, must pass a resolution of its shareholders by means of calling an EGA to pass a special resolution the holders of 75% of its shares to vote in its favour (“Special Resolution”) increasing its share capital (Article 199) by an amount that accords with the result of the valuation of the assets of Company B; and
(d) new shares equal to the increase in the capital value of Company A shall be distributed amongst the shareholders of Company B proportionately to their shareholding in Company B.
2 Amalgamation by merger
In a merger, two or more separate companies are consolidated into a single, new company. A merger differs from an amalgamation by acquisition in that a new entity is created, the liabilities of each of the merged companies are transferred to the new company and the old consolidated companies are dissolved. Assuming that Company C and Company D are two companies being merged and that Company E is the new company, the process to be implemented in respect of an amalgamation by merger is as follows (Article 278):
(a) each of the merging companies, being Company C and Company D, must pass a resolution of its shareholders by Special Resolution for its respective dissolution at an EGA;
(b) a new company (Company E) will be incorporated in accordance with the formalities stipulated in the Companies Law;
(c) a report of an expert concerning the valuation of shares may be adopted without referring the matter to an EGA (Article 278 of the Companies Law). (It is worth noting here that the requirements in respect of the valuation of the assets of two or more companies for a merger are less formal and onerous than those for the valuation of one company’s assets in the case of an acquisition);
(d) upon a valuation being agreed by the shareholders in Company C and Company D, shares need to be issued in Company E according to the process for subscription for shares in a PJSC as set out in Articles 70-94 of the Companies Law;
(e) the Companies Law requires that the first members (those who sign the memorandum and articles) of a PJSC (in this case, being each of the shareholders of Company C and Company D) are deemed to be the founders. Those founders will require to comply with the requirements of Articles 70-94 (including, importantly that they must subscribe for not less than 20% and not more than 45% of its shares prior to public offering of the remainder of the proposed share capital);
(f) following incorporation of Company E, it will be listed on whichever Exchange it has applied to join;
(g) a number of stocks or shares shall be allocated to each amalgamating company, being Company C and Company D, equal to its share in the capital of the new company, being Company E. These shares in Company E shall be distributed amongst the shareholders in each of Company C and Company D proportionately to their shares therein; and
(h) the resolution to amalgamate does not become effective until three months after the date of its registration in the commercial register, during which period, the creditors of either Company C or Company D may object to the amalgamation. If that happens, the amalgamation is suspended until either: i) the objecting creditor waives its objection; ii) the court decrees (in a final judgment) the rejection of the objection; or iii) the debt in question is settled or deferred (with satisfactory guarantees as to payment). At the end of the three month period, assuming no outstanding objection, Company E replaces Companies C and D.
Notice and Disclosure to ESCA and the relevant Exchanges
All companies whose securities are listed on one of the Exchanges must notify ESCA and the relevant Exchange, and provide them with information in respect of various company affairs from time to time. The matters and information which require to be disclosed are set out in ESCA’s Regulation No 3/2000: Regulations as to Disclosure and Transparency (as amended) (“ESCA Rules”). The obligations on a company whose securities have been listed on a particular Exchange which are of particular relevance in relation to a proposed amalgamation (of either type) are:
(a) to notify ESCA and the management of the Exchange of any significant developments affecting the prices of such securities upon learning of the same, such as catastrophes, fires, mergers, the issue of new securities, the discontinuance of a production line, voluntary liquidation or lawsuits filed by or against the company affecting its financial position (ESCA Rules, Article 35);
(b) supply to ESCA and/ or the management of the Exchange “all information and statistics requested by the Authority or the Exchange” (ESCA Rules, Article 36(1));
(c) additionally, to supply to ESCA and/ or the management of the Exchange copies of all printed materials prepared for the company’s shareholders, as soon as they are issued (ESCA Rules, Article 36(8));
(d) to notify ESCA and management of the Exchange of the dates and times of the meetings of the board of directors of the company in which that board is to deliberate on resolutions having an effect on the price and movement of the shares in the securities market, such as cash distributions, bonus shares, increase or reduction of the capital of the company, subdividing the nominal value of shares, and purchase by the company of its own shares, such notification to be effected at least two days before the date of the convening of the meeting (and to provide ESCA and the management of the Exchange with the resolutions passed in this regard after they have been approved by the board of directors forthwith upon issue of such approval and regardless as to whether the day following the meeting is a working day or an official holiday). If the holding of the meeting coincides with trading hours, trading in the shares of the company shall be suspended until the Exchange has been notified of the results of the meeting (ESCA Rules, Article 36(11));
(e) when so requested, to publish any explanatory information which relates to its circumstances and activities and is such as to secure the integrity of transactions and the confidence of investors (ESCA Rules, Article 34); and
(f) if any change occurs in a significant matter contained in a previously published press announcement, the company must issue a press announcement reflecting the actual situation after the change, the subsequent press announcement to be issued in the same newspaper or newspapers as contained the earlier announcement (ESCA Rules, Article 34).
The obligations to disclose information to ESCA and the management of the Exchange mentioned in (a) to (d) above are wide enough so as to include nearly all information relevant to a potential amalgamation of either type.
In relation to obligations (e) and (f), it may be permissible for the entity or company not to issue a press announcement regarding any given information or matters which are under negotiation, if its senior management has reasonable grounds to believe that the revealing of such information will inflict serious damage upon its interests, and there has not been, nor will be, any dealing in its shares by members of its board of directors and executive managers and their relatives on the basis of the information not announced to the public, provided that the company furnishes to the management of the Exchange such information and data specifying the persons aware of such information, and, requesting them to consider it confidential until the grounds which gave rise to that no longer subsist. The management of the Exchange may, in coordination with the Authority, accede to such request or compel the company to announce the information and data if the Exchange and ESCA consider that the revealing of such information will not affect the interests of the company or feel that there is a leakage of the related information and data which the company considers confidential (ESCA Rules, Article 54).
However, in making this kind of decision, the management of the Exchanges and ESCA will have to balance the legitimate confidentiality interests of the Company with their own obligations, and in particular:
The Exchanges have obligations in relation to disclosure and transparency under the ESCA Rules which include:
(a) an obligation (ESCA Rules, Article 18) to issue any press notices necessary to ensure transparency and disclosure;
(b) an obligation to monitor listed companies’ obligations to make disclosure of significant matters and information and financial statements, the publication of the same, and the timing of such publication, and to ascertain that the same are clear and disclose the facts which they express; and
(c) after having taken the necessary action, to refer the violations of listed companies to ESCA for determination.
In addition, Federal Law No. 4 imposes an obligation on each Exchange to publish any statement given to it by companies in respect of significant developments, in the local press and other local media which it deems appropriate.
The ESCA Rules reaffirm ESCA’s obligation to ensure that disclosure and transparency subsist according to relevant law (ESCA Rules, Article 8 ) and set out its right (in co-ordination with the Exchanges) to inspect the records of a company, and (on its own), to compel any person “having a connection with activities in securities”, to make public or private disclosure of information related to its activity (ESCA Rules, Article 16).
Federal Law No. 4 sets out ESCA’s remit in broader terms, including its obligation to ensure appropriate disclosure and transparency, and to require the Exchanges themselves to take all necessary measures for that purpose.
3.5.2 Exchange Rules
The ADX has introduced its own secondary legislation covering matters such as disclosure and transparency. Pursuant to the ‘ADX Obligations of Listed Companies under Disclosure of Significant Issues’, listed companies are required to commit to disclosing important information and significant developments, including but not limited to the following, (which are relevant for the purposes of this article):
(a) resolutions of the board related to mergers or ceasing of activities or launching new activities or products;
(b) large deals concluded or cancelled by the company;
(c) changes to the structure of the company’s capital; and
(d) any other significant issues.
The ADX Rules provide little detail on the point in time when such information and developments must be disclosed, except to say that it must be before the relevant trading session. This would suggest that the obligation is to disclose information immediately it becomes certain.
To date, the DFM has not produced a comparable set of substantive rules on such matters although there are some provisions relating to continuing obligations of companies after listing on the DFM, which, given the DFM’s regulatory remit, should be considered binding. In essence, these provisions effectively re-confirm certain obligations already stated in the ESCA Rules, including those relating to submission of quarterly accounts and immediately disclosing and reporting to the DFM any material information likely to affect the price of securities.
In all cases, disclosure of information on discussions or negotiations regarding potential amalgamations would require to be considered carefully in order to avoid transgressing the rules on not disclosing information which is misleading to the markets (see below under Insider Trading). A PJSC listed on the DFM considering an amalgamation with a PJSC listed on the ADX should be aware of the slightly different approach of the ADX Rules to the DFM’s requirements, although in reality the two regimes are broadly similar in effect, and arguably, neither imposes any duty to disclose information which would not otherwise be required to be disclosed under the ESCA Rules in any case.
Announcements, Information and Affecting the Market
There are no specific rules regarding the offer timetable and the process that must be adopted whilst negotiations on a potential amalgamation are ongoing. This may be contrasted with western markets where this process is very tightly regulated.
However, PJSC’s must continue to comply with the general ESCA Rules and applicable Exchange Rules, (including in particular in respect of disclosure of information, and therefore the process of the bid and timetable will need to be built into these requirements, particularly at a time when transparency in the UAE’s securities markets is a prominent issue).
One sanction available to the Exchanges in the event of any contravention of their rules, is to suspend trading in a particular stock. In 2008, the DFM exercised its powers to suspend trading of the shares of Islamic mortgage giant, Tamweel, for, inter alia, reportedly failing to disclose enough information at a time when talks were generally understood to be ongoing between it and its largest competitor regarding a potential amalgamation.
Misuse of Information
Regulation also exists in relation to the conduct of individuals and their roles in the disclosure, misuse (or otherwise) of information pertaining to amalgamations, or potential amalgamations.
The ESCA Rules and Exchange Rules contain rules regarding insider trading, the most relevant of which are as follows:
(a) the provision of false information, statements or data that could affect the value of securities on the relevant Exchange and an investor’s decision on whether to invest or not, is not permitted, nor is the spreading of false market rumours which relate to the buying and selling of shares (ESCA Rules, Article 37); and
(b) the use of undisclosed information to achieve personal benefits that could affect prices of securities is not permitted (ESCA Rules, Article 37).
Since nearly any information pertaining to a potential amalgamation of any type will be capable of affecting the value of securities, particular care must be taken i) as to accuracy of any such information officially or deliberately disseminated, and ii) in having any dealing in listed securities whilst in possession of any such information which is not in the public domain.
Sanctions which may be imposed against individuals convicted of contravention of these regulations include substantial fines and jail sentences, much like you would expect to see under equivalent regulatory provisions in western jurisdictions.
In the News
Only this month, it emerged that the ADX had launched an investigation into “unusual” movements in the share prices of two of the region’s largest real estate concerns, Aldar Properties and Sorouh Real Estate (both PJSCs listed on the ADX) which started in tandem across both company’s securities during trading on the day on which the two companies later released a joint statement, after the Exchanges had closed, announcing that they were in talks over an amalgamation.
At the time of writing of this article, the focus of any such investigation is not known, but observers will watch with interest to see whether, for example, it will be determined that disclosure rules were not properly followed with regard to the timing of the joint announcement and the possible sanctions imposed as a result.
The amalgamation of listed PJSC’s in the UAE is a process which should work, in principle, in a similar way to comparable or equivalent transactions in many western jurisdictions. The concerns of the regulatory authorities in relation to managing such transactions (the principles of transparency, orderly markets and fairness to the investors) are the same even if the extent and complexity of the legislation seeking to address those concerns is not yet at the level of western jurisdictions with more mature markets and related legal frameworks. This may be seen as both an advantage (room for manoeuvre) and a disadvantage (uncertainty), but proper planning and good advice should ensure that the process can be effected smoothly and without breaching those principles or relevant law.