M&A Report 2023: Kuwait

M&A activity continued at a steady pace in 2022, particularly in the health, logistics, education, and technology, media and telecommunications sectors.

A hot topic in cross-border transactions is the new ultimate beneficial ownership rules issued by the Ministry of Commerce and Industry (MOCI), which are set to come into force in the second quarter of 2023. The new rules require companies to maintain a register of ultimate beneficial owners and submission of this register to the MOCI. This is an extension of the obligation to disclose actual beneficiaries under existing anti-money laundering legislation and is likely to impact transaction structures for private M&A transactions.

The Competition Protection Authority (CPA) remains active in merger control to ensure compliance with the Competition Law (Law No. 72 of 2020). As a result, transaction parties are now more aware of competition regulation issues. Financing considerations continue to impact deal structures, particularly in relation to the provision of security for financing.

The Kuwaiti market remains primarily driven by private M&A. The narrowing between private and public M&A remained a trend in 2022 and this may continue if public M&A activity maintains its current pace in Kuwait in 2023.

A recent transaction of note is the conclusion of the acquisition of the Bahraini-based Ahli United Bank B.S.C. (AUB) by Kuwait Finance House K.S.C.P. (KFH), Kuwait’s largest Islamic bank, in October 2022.

AUB was fully acquired by KFH and, accordingly, Bahrain’s takeover regime was applied concurrently on the Bahrain Bourse and Boursa Kuwait. Given that AUB’s valuation was approximately $11.6 billion, the transaction led to the creation of one of the largest Islamic banking groups in the region and represented one of the most prominent share swap acquisitions to occur on the Bahrain Bourse.

As the transaction involved regulated banks that are listed in Kuwait and Bahrain, a maze of complex regulatory and legal requirements had to be overcome for the transaction to progress. At issue was identifying the required approvals and disclosures and then structuring and sequencing the transaction to ensure no requirement was breached. Additionally, the transaction involved the acquisition of a conventional bank by an Islamic bank, which added further complexity.

This transaction was also a pioneering one for a Kuwaiti-listed institution to cross-list in Bahrain and the first time a share swap involving a foreign purchaser was utilised to take over a Bahraini company. In view of all the firsts involved, it was necessary to innovate to overcome areas where no clear regulations applied and there were no practical precedents.

M&A activity in 2022 continued at a steady pace compared with 2021, despite global recession concerns which are generally resulting in lower equity valuations and increased acquisition costs due to higher interest rates for purchasers that are considering acquisition financing.

Private M&A activity also remained at a moderate level in 2022 and the trend is expected to continue through 2023. The positive change is largely being driven by accelerated growth arising out of companies focusing on resolving the challenges caused by COVID, such as supply chain and labour-related disruptions being resolved with digital technologies. Increased activity is also being driven by acquisitions that align with the long-term corporate strategies of purchasers, for cross-border and local transactions.

Financing considerations continue to impact deal structuring, particularly in relation to the provision of security for financing. Additionally, foreign ownership restrictions under Kuwaiti law have to be catered for accordingly in M&A transactions. Furthermore, antitrust/competition legislation has also affected deal structuring and transaction timetables.

Financial and strategic investors continue to have a limited impact on the M&A market in Kuwait.

The regulatory bodies are primarily:

• The MOCI;

• The Kuwaiti Capital Markets Authority (CMA);

• Boursa Kuwait;

• The CPA; and

• Other sector-specific regulators, as applicable.

The key legislation governing public M&A in Kuwait is Law No. 7 of 2010 as amended (CML) and its executive CML Bylaws, which together comprise the CML Rules, particularly Book IX (Mergers and Acquisitions) of the CML Bylaws. The CML Rules apply to M&A transactions where there is an acquisition or a consolidation of control of:

• A Kuwaiti incorporated company listed on Boursa Kuwait (formerly known as the Kuwait Stock Exchange);

• A listed or unlisted company in the event of a reverse acquisition; or

• A listed company by way of a partial purchase offer (resulting in an acquirer holding no less than 30% and no more than 50% of the shares of a listed company).

The CML Rules provide a statutory framework for public M&A in Kuwait where there is a takeover offer for 100% of the share capital of a company listed on Boursa Kuwait, and a mandatory takeover offer (MTO), which must be made to remaining shareholders when the offeror acquires more than 30% of the shares of a listed company. Private M&A are largely governed by the Companies Law, Law No. 1 of 2016.

The recently enacted Competition Law provides additional regulation in relation to merger control in Kuwait. Under the new Competition Law, persons participating in “economic concentrations” are required to apply to the CPA for approval in certain circumstances. The Competition Law considers the following circumstances to be “economic concentrations”:

• A merger between two persons or more by way of an absorption or a combination that may lead to “control” or increased “control”;

• An acquisition of direct or indirect control by one person in all or parts of another person or persons, whether by the acquisition of assets, ownership rights or a beneficiary, or by the purchase of shares, stock or liabilities, or by any other way; and

• The existence of a partnership between two persons or more that leads to a permanent and independent economic or commercial activity, regardless of the legal form or activity exercised.

A notification is required if the value of the parties’ registered assets or relevant annual sales in Kuwait, according to audited financial statements for the last financial year before economic concentration, exceeds thresholds ranging between KWD 500,000 (about $1.6 million) and KWD 2.5 million.

The MOCI recently issued Resolution No. 4 of 2023 on the Procedures for the Identification of the Actual Beneficiaries (the UBO Resolution), which requires corporate persons in Kuwait to identify and register “Actual Beneficiaries”. Actual Beneficiaries have been defined as any natural persons who possesses or exercise definitive and final control, whether directly or indirectly, over the person on whose behalf the transaction is being conducted, and who exercise actual and definitive control over a corporate person or a legal arrangement.

The UBO Resolution requires corporate entities incorporated in Kuwait to collect and record certain data on its Actual Beneficiaries in an internal register (the UBO Register) within 60 days from the date of entry into force of the UBO Resolution (i.e., April 1 2023) or the date on which the relevant corporate person has been established. The information required includes:

• Their full name;

• Citizenship;

• The date and place of birth of the Actual Beneficiary;

• Addresses for notices;

• Copies of identification information (a passport or other document);

• The basis upon which the Actual Beneficiary has acquired such capacity; and

• Any nominee managers or directors appointed by an Actual Beneficiary.

Corporate entities are required to submit their UBO Register to the MOCI and any changes to an Actual Beneficiary must also be notified to the MOCI.

In relation to share transfers, a purchaser is required to provide a statement on whether the transfer will result in a change in the identity of the Actual Beneficiary and to provide a description of the nature of such change and the information required of a new Actual Beneficiary.

Since the UBO Resolution is yet to come into force, it is uncertain as to how the resolution will be implemented in practice.

ASAR – Al Ruwayeh & Partners has noted an increase in firms committing to improve their ESG positions in their corporate strategies in the aftermath of the COVID pandemic. While ESG is not yet a big deal driver in Kuwait, there has been an increase in instances in which deals have been assessed from an ESG perspective. Having said this, it is worth noting that in February 2022 the CMA issued extensive amendments to Module 11 (Dealing in Securities) of the CML Bylaws, which now expressly recognises and puts in place a regulatory regime for the issuance of ESG instruments (as well as short-term bonds), and, as such, ESG instruments may increasingly start to become part of the M&A landscape in the coming few years.

From a business impact perspective, there has been an increased use of earn-outs, as parties acknowledge that EBITDA for 2021 to 2022 may not be an accurate reflection of a company’s position, due to the extraordinary strain on businesses as a result of COVID.

Investors should be aware that the Gulf Cooperation Council (GCC) states, including Kuwait, have agreed to the implementation of a GCC-wide VAT framework, to be introduced at a rate of 5% on goods and services, which was to take effect from January 1 2018. Kuwait has recently announced, however, that it would postpone the implementation of VAT in Kuwait.

In addition, the Kuwait government is considering implementing fiscal reforms that include the possible introduction of corporate income tax.

The national legislation in Kuwait implementing the VAT framework has yet to be promulgated and no Kuwait-specific details of the new tax regime have been released at the time of writing.

Investors should also be aware of the impact of merger control regulations on transactions, particularly in relation to the impact that the approval process is having on transaction timetables.

Some of the misconceptions with regard to the Kuwaiti market include:

• Poor disclosure processes because sellers are sometimes inexperienced in the M&A processes, and targets do not keep track of all the documents needed to be disclosed to the buyers; and

• Misconceptions about the regulatory processes, which are often more complicated than expected.

Another common mistake made by practitioners is to import legal structures and documentation developed in other jurisdictions without a proper adaptation to the peculiarities of the Kuwaiti legal system. This can lead to complications in the execution phase of the transaction and in the enforcement of rights arising under M&A transaction documentation.

An area that is often overlooked, and/or paid less attention to, is due diligence. In particular, appropriate translation of due diligence findings into contractual protections – whether by means of pre-closing remedial actions, associated variation of commercial terms, special indemnities or other methods – is deficient. This often arises because the legal practitioners that carry out the due diligence do not always lead the negotiation of transaction documentation.

Parties involved in an M&A transaction also often overlook certain aspects of the Kuwaiti competition regulations. Furthermore, providing M&A/investment advisory services with respect to securities onshore of Kuwait is a regulated securities activity under the CML Rules. As such, foreign service providers should be aware of the restrictions applicable in connection with the rendering of such services onshore of Kuwait.

Technology is playing an ever more significant role in the M&A dealmaking process. It is also key in identifying the latest trends, benchmarking and further enhancing the knowledge system databases of M&A practitioners. The great advances made in cognitive technology – such as artificial intelligence software – also enable the rapid identification and extraction of key provisions through the review of thousands of transaction documents within a relatively short space of time.

The general conditions for a public M&A transaction have been outlined above but there some key factors that specifically concern takeovers. In such cases, parties must obtain the relevant regulatory consents from the applicable regulatory body, such as the CMA for licensed companies and/or (as applicable) the CBK vis-à-vis financial institutions which are subject to supervision by the CBK. Disclosure of the transaction is also required as per the CML Rules.

Parties must also abide by the laws and regulations of each sector. For example, pursuant to the CML Rules, for companies listed on the exchange of Boursa Kuwait, an MTO must be launched by the bidder once the bidder has come into the possession of more than 30% of the voting shares of a target company listed on the exchange. Hostile bids are not common in Kuwait, although the law provides for competitive bids during the mandatory takeover process. In addition, during a block trade, there is a public auction during which a person could instigate a hostile bid. Hostile bids would be treated as takeover bids, and therefore there are no special conditions that would attach to one.

An MTO must not be subject to conditions that can only be satisfied at the discretion, and in the subjective judgement, of the bidder or the target company, or where their satisfaction is within the control of the bidder or the target company. Only voluntary takeover offers (VTOs) may be subject to conditions required by the bidder. However, in the case of an MTO, no conditions may be imposed by the bidder.

Otherwise, the terms of an M&A agreement are generally left to the discretion of the parties. There are no rules in Kuwait dealing with break fees and parties are free to agree arrangements to this effect. Break fees are becoming more frequently used.

Over the past 12 months, there has been a significant use of locked-box mechanisms, although completion accounts have also been popular. Sellers continue to negotiate earn-outs into transaction documentation and the use of warranty and indemnity insurance has remained limited.

The use of foreign governing law and/or jurisdiction (for example, English and Welsh law, and English and Welsh courts/arbitration in London) is more common in the case of mid- to upper-tier M&A transactions involving at least one foreign party, and less so in relatively small or purely local M&A transactions.

Exits in the market are usually structured as trade sales. There was an increased number of trade sales in 2022, as compared with 2021. There was at least one exit by IPO in 2021 that ASAR – Al Ruwayeh & Partners is aware of.

The market is expected to continue at a steady pace in 2023, as companies focus on resolving the challenges caused by COVID and continue to acquire companies that align with purchasers’ corporate strategies.

There is expected to be an increase in firms committing to improve their ESG positions in their corporate strategies in 2023 to address the ESG-related concerns of potential acquirers, as well as continued activity in merger control, in compliance with the notification thresholds set by the CPA.