UAE offers opportunities for M&A deals

The outbreak of coronavirus, officially Covid-19, has led to a fall in M&A activity across the world, with many deals are being put on hold.

While many prospective deals will continue to be delayed over the coming weeks and months, we expect there will be opportunities for cash-rich buyers to acquire a competing or complementary business at a discounted price. On the flip side, as businesses look to conserve cash and focus on core service or product lines, there may be those looking to divest their non-core assets as a way of cutting losses and raising much needed cash.

While there will be opportunities, doing deals in a "distressed" environment carries an additional level of risk. Careful planning, due diligence, and negotiation is particularly important in the context of a distressed M&A transaction. There are some core issues that both buyers and sellers will need to consider on a distressed acquisition or sale.

Structure of the transaction

Parties will want to minimise their risk exposure. From a seller's perspective, a sale of shares will typically be the preferred option – i.e. it will be transferring the whole company, including all liabilities, for a clean break. A buyer, however, will usually prefer to acquire specific assets while leaving behind any liabilities with the seller.

On a practical level, a sale of shares will generally be the simpler option – you are only transferring one type of asset, i.e. the shares, for which the mechanics of transfer are relatively straightforward – though some practical challenges may arise due to the impact of Covid-19, as explained below. A sale of assets will likely involve different transfer mechanics for different classes of assets, making the transaction process potentially costly, complex and more time consuming. For example:

• a need to novate each customer / supplier contract that is being transferred;
• as there is no TUPE equivalent in the UAE, the need to terminate employee contracts and re-hire those transferring employees, including triggering end of service gratuity payments and associated visa costs; and
• different government authority approvals for different assets.

A sale of assets may also trigger VAT liabilities, depending on whether or not the sale of assets would be treated as the sale of a going concern, and may also incur separate, potentially substantial, transfer fees – for example, fees for transferring real estate.

A possible middle ground may be for the seller to undertake a pre-sale restructuring of the business. In doing so it could separate out the buyer's desired assets, and potentially some liabilities, in to a newly incorporated entity, with the buyer purchasing the shares in that new entity. This restructuring will, however, likely involve many of the issues associated with an assets sale as previously described. The cost and time implications of this will need to be considered in determining whether there is a benefit of continuing down this path.

Due diligence

From a buyers perspective, special attention will need to be given to due diligence on the target company and its assets in a distressed environment. In this respect, it is important to note that there is limited publically available information in the UAE and so a buyer will be almost entirely reliant on the seller disclosing all relevant information. Special care should be given where a seller or target entity is undergoing, or in the process of starting, formal insolvency proceedings, as it may not be possible for a buyer to independently verify this with the relevant authorities.

On a share sale and purchase, the buyer will need to undertake due diligence on all aspects of the target company. In the current market, the risk that the target is in breach of its contractual commitments, and potentially a customer or supplier being in breach of theirs, is likely to be higher. Disruptions to the target's supply chain, and variations to employees' working arrangements, including possible employee redundancies, may also be more prevalent. These will require careful analysis to ensure that a buyer is not exposed to an increased risk of claims. 

On an asset sale and purchase the due diligence can be streamlined to focus on the specific assets being acquired, but it will still be necessary to pay careful attention to those target assets, such as contracts, for the reasons outlined.

The sale and purchase agreement

Certain provisions of the sale and purchase agreement that, in normal circumstances would be relatively uncontroversial, may now warrant some closer attention because of the impact of Covid-19.  These include:

• Material adverse change provisions.

  Used typically as a mechanism for a buyer to be able to exit a transaction between signing and completion, closer attention will need to be given to the drafting of such clauses. Buyers will want these to be as wide as possible to enable it to walk away should there be a significant shift in government policy or practice that impacts the target.  Sellers will want to limit the scope of such clauses to ensure they have as much certainty as possible that the transaction complete, regardless of outside economic or other factors.

• Seller undertakings.

  Another typical buyer protection between signing and completion will include various seller undertakings, i.e. actions the seller is prohibited from taking without buyer consent, with buyers potentially seeking much broader controls. Sellers will be keen to ensure these are flexible enough to allow it to adapt to quickly changing circumstances. We may see a joint approach between parties, with a greater level of collaboration, becoming the norm, at least in the short term.

• Disclosure.

  Sellers will need to reflect on whether additional disclosures are needed against warranties. While sellers are likely to resist repetition of warranties, i.e. warranties being given on the date of signing and then again at completion, because of the quickly changing landscape, buyers will be pushing for certain key warranties, if not all, to be repeated at completion.

• Warranties and indemnities.

  Buyers may increasingly look to warranty and indemnity insurance as an alternative to relying on contractual protections afforded by a seller, or guarantor. Where a company or its assets are being acquired from a trustee in bankruptcy on behalf of the target company or seller, buyers should be mindful that the trustee will be unwilling to give much by way of warranty or indemnity protection. Transaction insurance may be a means of bridging this gap. It is important to note that insurance underwriters may seek details on what valuation method was adopted by the buyer and how, if relevant, the impact of Covid-19 was factored into the valuation, and any valuation adjustment mechanism that is adopted. Buyers will need to demonstrate that they have considered Covid-19 related risks as part of their due diligence exercise. The parties should also be mindful of any Covid-19 related carve-outs or limitations to transaction insurance policies in relation to risk that they are seeking coverage for.

The impact of Covid-19 on M&A transactions is likely to be similar across most jurisdictions, and there are core considerations that parties should be aware of when drafting or negotiating the sale and purchase agreement. 

Bankruptcy and insolvency

On a distressed transaction, consideration will need to be given to the UAE's Bankruptcy Law and, where relevant, those of the relevant free zone.

Buyers should be mindful of ensuring that the target has not, for example, been party to any recent transactions that could be considered as being made at an undervalue, or have made preferential arrangements with certain creditors, which could be at risk of being unwound should the target or seller subsequently become insolvent.

Managers and directors of the seller will also need to be mindful of their own duties, both to shareholders and, in a distressed situation, to creditors, as well as their obligations where the company is insolvent or at risk of becoming insolvent.

The UAE's Bankruptcy Law is relatively un-tested and so it remains to be seen what impact this will have on M&A transactions in the current market.

Practical impact of Covid-19

Covid-19 will have a practical impact on the parties' ability to conclude a transaction, meaning parties should start to plan well in advance to ensure completion runs as smoothly as possible and the impact of likely delays is minimised. In relation to transactions in the UAE, parties should be mindful of the following:

• Execution of documents.

  Parties should consider their ability to hold virtual meetings for approving transaction documents. This may require changes to be made to their constitutional documents. Consideration should also be given to their ability to use electronic signatures as opposed to traditional wet ink signatures.

• Share transfer formalities.

  To affect the transfer of shares in the UAE, certain approvals are required from the relevant government authorities and certain documents need to be signed before a UAE notary public. Government authorities will be working at reduced capacity and so applications may take longer to process than would normally be the case. This should be factored in to any agreed long-stop dates in the sale and purchase agreement. UAE notaries are currently operating remotely and, again, the parties should familiarise themselves with the process and procedures that the notaries have adopted for verifying the identity of parties and documents to be signed. To the extent that a party is based outside the UAE, powers of attorney will usually need to be granted to a person or persons, granting them authority to sign transaction document in the UAE – such documents will need to be notarised and legalised for use in the UAE. Non-UAE parties will also need to consider notarisation and legalisation requirements in their home jurisdiction, which may be limited in the wake of Covid-19.

• Employees and visas.

  In the context of an asset sale, where the parties intend to "transfer" employees from seller to buyer, the parties should consult with the visa and immigration authorities to check whether there are likely to be any restrictions and/or delays on processing visa cancellations and visa applications. While it is our understanding that individuals currently based in the UAE are, at present, able to cancel visas and obtain new visas with new employers, there may be delays in processing applications. This will also depend where the company is based – onshore or in a particular free zone – and the capacity of that particular authority.