18 Nov 2018

The importance of Pre-completion Restructuring in GCC M&A will remain in focus

Authored by: Sameer Huda

In brief:

  • When carrying out M&A in the UAE and wider GCC, foreign ownership restrictions are usually one of the primary issues that a foreign investor needs to consider. However, other issues relating to VAT and licensing restrictions are also important.
  • We have been at the forefront of the market in our understanding of the relevant legislation and its practical interpretation by the relevant governmental officials and legal departments. This ensures that we can devise and implement optimal structures for our clients that satisfy their objectives and overcome regulatory issues, when carrying out local M&A.
  • In this article, we set out some of our clients’ main objectives in the context of pre-completion restructuring and detail how we are able to advise on corporate structures that meet these objectives.

We have often commented on the reasons for ensuring that, where possible and pragmatic in the circumstances, any required pre-completion restructuring is completed well in advance of a potential transaction process unfolding. Any delay in completing this can materially impact the dynamics of achieving a speedy successful completion and even, in certain circumstances, impact some of the key terms of the deal already agreed.

When carrying out M&A in the UAE and wider GCC, foreign ownership restrictions are usually one of the primary issues that a foreign investor needs to consider, given the requirement to have a UAE shareholder with 51% of shares. Up until now, 100% foreign ownership of an entity established in the UAE is only possible under two circumstances, if the entity is established in a free zone, or if the entity is established to carry out professional related activities.

However, a decision to allow the Cabinet to start issuing resolutions on which sectors and activities will permit 100% foreign ownership should significantly alter the types of pre-completion restructurings previously undertaken, which will have a positive impact on local M&A.

We have been at the forefront of the market in our understanding of the relevant legislation and its practical interpretation by the relevant governmental officials and legal departments. This ensures that we can devise and implement optimal structures for our clients that satisfy their objectives and overcome regulatory issues when carrying out local M&A. We have managed to work with the relevant licensing authorities to accept our various corporate structures on the principle that such structures are devised with the objective of attracting and facilitating foreign investment into the UAE.

We set out below some of the main objectives of our clients which we have managed to meet by devising bespoke pre-completion restructurings:

  1. Maximise the protection of capital, voting rights and profits for the client;
  2. Consolidate the activities of the group companies from a financial and legal perspective (including any licensing restrictions);
  3. Protect against potential liability exposure invoked by using sole proprietorship and civil companies under a general corporate structure;
  4. Mitigate the potential risks relating to the application of inheritance rules under Shariah; and
  5. Increase prospects of better rates for debt financing.

The structure chart detailed here reflects an example of a pre-completion restructuring which was successfully adopted and implemented by one of our clients.

Under this pre-completion restructuring, we:

  1. enabled the client to consolidate its various lines of business under a newly created holding structure and this new structure subsequently enabled the client to secure better financing terms;
  2. ensured that the client owned the entire legal and beneficial interest of the share capital of a new holding company established in one of the main free zones in Dubai which enabled our client to minimise tax benefits in the foreign investor’s country of origin based on a double tax treaty;
  3. established a nominee vehicle in the Dubai International Financial Centre in which the UAE sponsor would hold 51% of entire legal interest of the share capital. The UAE sponsor and the foreign investor would also execute a pledge agreement under which the UAE sponsor pledged all his shares in the nominee company to the foreign investor. This structure also has the benefit of mitigating the risk relating to the application of the inheritance rules under Shariah; and
  4. protected the client by converting the civil professional company and each of its branches into limited liability companies (as a civil company or branch does not have a separate legal identity from its owner).

Our objective was to allow our clients to focus on their business and have a corporate structure that they know is robust and flexible enough for their short, medium and long term objectives, and which would allow them to secure and control their investment at the same time.

For more information, please contact us on sectors@hadefpartners.com.