22 Dec 2021

Structuring of M&A Transactions in the UAE

Authored by: Hadef & Partners, Sector Groups

In Brief:

  1. M&A deals in the UAE are typically structured as share sales but asset sales became more common following the outbreak of the Covid-19 pandemic.
  2. There are various challenges associated with asset deals in the UAE, which tend to make such deals more complicated, time-consuming and expensive to implement.
  3. All transactions are different and the respective advantages / disadvantages of share / asset deals should always be considered carefully by the parties and their advisers at the outset of a transaction.

Share and asset deals

There are two principal methods of structuring a private M&A transaction in the United Arab Emirates (UAE). 

The first is to structure it as a share deal, where the buyer acquires the share capital of the target company, thereby acquiring ownership of the target company and all of its assets and liabilities. Sellers typically prefer this structure because it involves the transfer of the target company in its entirety (including all its liabilities) and provides them with a “clean break”. 

The second method is for the buyer to acquire the assets and liabilities of the target company (or certain assets and liabilities only). This can be an attractive option to buyers because it allows them to acquire specific assets and liabilities and exclude unwanted assets and liabilities from the transaction. 

Asset deals on the rise

Share deals are significantly more common than asset deals in the UAE. However, following the outbreak of the Covid-19 pandemic and the resulting economic fallout, we have seen a material increase in the use of asset sales. There are various reasons for this, for example:

  • when conducting distressed M&A, buyers are often in a stronger negotiating position and this can give them the leverage to insist on deals being structured as asset acquisitions (which allow buyers to pick and choose the assets they want to acquire and leave behind as much in the way of liabilities as possible, including unknown and contingent liabilities);
  • buyers generally have less time to conduct due diligence on distressed transactions and in such circumstances they may be reluctant to acquire all the assets and, critically, liabilities of the target company via a share sale; and     
  • the owners of a distressed business may not be able to meet any warranty or indemnity claims in the future. As a result, a share deal would carry more risk as the buyer acquires all the liabilities of the target company (including unknown and contingent liabilities) and may not be able to make a warranty or indemnity claim in respect of any such liabilities. An asset deal alleviates risk in this regard as there tends to be much more certainty as regards what liabilities (if any) the buyer is taking on.

Challenges associated with asset deals in the UAE

Despite the increased use of asset sales referred to above, share deals continue to be much more common in the UAE. This is mainly because share deals are relatively simple, involving the transfer of one type of asset (i.e. the shares in the target company). In contrast, asset deals are usually more complex as they involve the transfer of multiple assets and give rise to particular challenges in the UAE, which tend to make such deals more complicated, time-consuming and expensive to implement. 

Examples of such challenges include:

  1. Employees

A key consideration for the buyer on any asset sale will be to ensure that all employees that are associated with or involved in the target business transfer to it. Unlike many jurisdictions, there is no automatic transfer mechanism available in the UAE to procure the transfer of the employment relationship or each such employee from the seller to the buyer. The seller will need to procure that the employment relationship between it and each transferring employee is terminated, UAE residences visas and work permits are cancelled and the employee is paid his “end of service gratuities” in accordance with UAE law (unless it is agreed that the gratuities will roll over to the buyer). The buyer will then need to ensure that it enters into new contracts of employment with each employee it wishes to acquire and arrange for new UAE residence visas and work permits. The above steps result in additional documentation and costs, and can take time to implement which may delay the sale process. In light of the new employment laws and regulations set to come into force in the UAE in 2022, the above may be subject to change. 

In contrast, on a share sale the employees’ employment relationship with the target company remains in place and unchanged (unless, of course, the parties agree otherwise).

  1. Additional approvals

In addition to all the normal approvals that are required on an asset sale (for example, from counterparties to customer / supplier contracts, landlords etc.), further approvals are required from government authorities in the UAE in respect of certain specific assets.  For example:

  • the approval of the Ministry of Health and Prevention in respect of any licences issued by it which are to be transferred from the seller to the buyer;
  • the approval of the Roads and Transport Authority in respect of any vehicles that are to be transferred from the seller to the buyer; and
  • the approval of the Dubai Maritime City Authority in respect of any vessels that are to be transferred from the seller to the buyer.

The need for such approvals on asset transactions can have time and cost implications.

In contrast, these types of approvals are not required on share sales (although care should always be taken to check whether any approvals and/or consents are required from any relevant government authorities as a result of the change of control in the target company). 

  1. Intellectual Property

Intellectual property rights, such as trade marks, designs, patents, and copyrights, can (and ideally, should) be registered in the UAE before the relevant registry at the UAE Ministry of Economy.

In order to transfer a registered intellectual property right, various documents will be needed depending on the nature of the right. In all cases, however, the following will be required: i) an executed assignment agreement in writing and ii) a power of attorney from the assignee.

Depending on where the parties to the assignment agreement are located, the agreement may need to be notarised only (if the parties are located in the UAE) or notarised and legalised up to the UAE consulate in the country in which the party is located (if the parties are located overseas). The same requirement will apply with respect to the power of attorney granted by the assignee. For any legalised documents, these will need to be sent to the UAE and super-legalised up to the UAE Ministry of Foreign Affairs in order to complete the legalisation formalities.

While these requirements will incur official fees and can take time to complete, it is recommended that any change of ownership is recorded before the UAE Ministry of Economy as and when change of ownership takes place. This will ensure that the owner details and chain of title for the relevant intellectual property right is current and correct. This is essential in the event that the intellectual property right is to be relied upon in enforcement proceedings, is to be licensed to a third party, or where it is later assigned to a new owner.

On a share sale the intellectual property rights remain with the target company and no action is required.

  1. VAT 

With effect from 1 January 2018, the UAE introduced VAT at a rate of 5% on most taxable supplies of goods and services. Therefore, on any asset sale the parties will need to consider whether a VAT liability may be incurred. A transfer of a discreet business unit as a “going concern” is not subject to VAT, subject to certain conditions. The parties to an asset sale will need to consider whether or not the transaction falls within this exemption. This will not always be clear, in particular because the VAT legislation only recently came into effect and is therefore relatively untested.

VAT is not applicable in the context of a share sale.  

Conclusion

Set out above are just some of the reasons why share deals are more common than asset deals in the UAE. There may, of course, be others depending on the specific circumstances of a transaction. In addition, it should be emphasised that all transactions are different and there is no “one size fits all” approach. The respective advantages / disadvantages of each structure should always be considered carefully by the parties and their advisers at the outset of a transaction.