Out-Law Analysis | 22 Apr 2020 | 9:32 am | 7 min. read
There are strategic opportunities for both buyers and sellers to conclude mergers and acquisition (M&A) deals in the UAE market amidst the coronavirus crisis.
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.
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 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.
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.
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:
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.
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.
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: