08 Oct 2013

MERGER AS A TOOL FOR RE-STRUCTURING

Authored by: Yasser Omar

MERGER AS A TOOL FOR RE-STRUCTURING

A merger can be defined as the transfer of all the assets, liabilities and business of an existing transferor company to another existing company.   In this article Yasser Omar, Head of Corporate in Hadef & Partners Abu Dhabi office discusses some of the limitations to the merger process in the UAE and suggests the adoption of procedures that allow for greater freedom to shareholders in deciding how the merger should be achieved.

In brief:

  • The current UAE regulatory framework treats the merger process as if it is a mechanism for the dissolution of companies, as opposed to a tool for their evolution.
  • The current provisions of the UAE Companies Law create obstacles for the merger process rather than facilitating it.
  • Merger can be a useful tool for re-structuring where the companies involved in the merger process have complementary activities.
  • There is a need to reform to the existing provisions regulating to mergers. The reform should address the objectives and potential advantages of the merger process as a mechanism for growth and expansion.

A merger can be defined as the transfer of all the assets, liabilities and business of an existing transferor company to another existing company. Generally, there are two possible ways of carrying out a merger:

  • Merger by absorption
  • Merger by way of formation of a new entity.

Under UAE law, the merger process is currently regulated pursuant to the UAE Commercial Companies Law (Federal Law No. 8 of 1984, as amended) (‘CCL’). Pursuant to the merger provisions set out under Articles 276-280 of the CCL, UAE law allows for the consummation of two forms of mergers; i) merger by absorption and ii) merger by formation. In each case, the transferor company is dissolved and the existing transferee(s) (in the case of a merger by absorption) or the newly formed entity (in the case of a merger by formation) become the legal successor of the transferor company.
 
The current regulatory scheme set out under the merger provisions of the CCL present three inherent, yet fundamental drawbacks:
 
1)     Lack of  definition of mergers:

The CCL does not have any express definition of a merger, thus the provisions fail to provide any guidance either by way of express definition, or otherwise as to how a merger is understood and treated under UAE law.
 
2)     Need for shareholder approval:
 
Pursuant to Articles 277 and 278, a merger in the UAE must be initiated by way of a resolution of the shareholders of the existing transferor company passing a resolution to dissolve the company. This presents fundamental practical dilemmas in that the resolution of the shareholders to dissolve the existing company legally speaking triggers the commencement of the liquidation of the transferor company, stripping the management of the company of all power and authority, and all such power and authority is transferred to the liquidator by statute. 
 
This requirement for a resolution of the shareholders to authorize a liquidation of the transferor company as a precondition for effectuating a merger seems rather peculiar as the two processes are distinctively unique with starkly different objectives and traits. The objective of the merger process is to allow for the transfer of all the assets, liabilities and business of the transferor to the transferee company, with as minimal disruption to the operations of the business as possible. On the contrary, the essence of the liquidation process is the cessation of the company’s business, disposition of all its assets, and the discharge of its obligations toward third parties.
 
3)   Lack of precedents in utilizing the CCL Provisions:
 
To the best of the author’s knowledge, to date there have been only two efforts to effectuate a merger under the provisions of the CCL, both of which were required to creatively address the said challenges presented by the current regulatory provisions, with the ultimate result being the avoidance of engaging in the merger process as stipulated under the CCL. Naturally this then raises concerns with regards to the uncertainty of consummating a merger pursuant to the untested provisions. 
 
The result emerging from the above noted limitations of the CCL provisions is frustration and ultimate hindrance to the merger process in the UAE.
 
In light of the above, particularly the absence of explicit reference to any conventional definition of a merger, but rather to an inference of liquidation, it becomes apparent that the intention of the legislature in enacting the provisions of Articles 276-280 was to create procedures aimed at liquidation, as opposed to those giving rise to a merger. This raises further concerns as to the extent that the liquidation process needs to be followed through until its finality.
 
The author’s view is that the existing mechanism under the existing CCL requires complete reform.  Mechanisms should be introduced to facilitate the merger process, particularly the adoption of procedures that allow for greater freedom to shareholders in deciding on how the merger should be achieved, while keeping legislative intervention at a minimum with the aim of protecting third party and minority shareholder rights.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE.