Facts to weigh before acquisitions

Acquiring shares in an established business is one of the most effective methods to penetrate into a new market. This would automatically bring in a certain amount of market share. In a fast developing market like the UAE, this is typical too. However, considering the complexities surrounding an acquisition in the UAE, there are myriad of issues to be considered by an investor.

Ownership rights

The first step in the acquisition of a limited liability company is to find out its 'real ownership'. As per the Company Law, every company must have one or more UAE national partners collectively holding at least 51 per cen of the company's capital. Foreign partners can own only up to 49 per cent of the shares. However, in reality, many companies in the UAE are effectively owned and managed by foreign parties, with national partners acting as 'sleeping partners'.

The company's MOA and trade licence may reflect only the de jure ownership. The partners generally execute certain 'side agreements' (as popularly termed) between them to render effective control. These agreements reflect the real understanding between the partners, protect the foreign partner's interests and ensure their control and management over the company. Though apparently not in line with the Company Law, some of the emirates' courts have acknowledged these agreements. The purchaser should meticulously review the MOA and side agreements to understand the real picture.

Activities of the company

There are restrictions on activities that can be carried out by a company with foreign partners, which varies from emirate to emirate. The purchaser should verify the permitted activities for any particular company with the concerned economic development department as this is likely to have an impact on any future expansion plans (activity-wise or area-wise).

Similarly, this could affect the purchaser's plans if the deal involves the company's branches in other emirates.

Pre-emption rights

The Company Law guarantees pre-emption rights to the partners of a company. When a partner intends to sell his shares to a third party, he is bound to first notify the existing partners and give them an opportunity to purchase the said shares. Only upon their refusal (subject to Company Law), can a partner sell the shares. Hence, it is prudent that the purchaser requires the selling partner to obtain written 'waiver' from other partners.

Management

Usually, either through the MOA or power of attorneys, the directors of a company are clothed with wide powers to manage the company. The purchaser should review these documents to understand the nature and extent of directors' powers and necessary revisions be effected. This is critical, as otherwise, the purchaser may not be able to effectively manage or control the LLC, post acquisition.

Employment

Generally, most companies execute two contracts with their employees, especially with senior employees – one containing basic terms and conditions, to be submitted to the labour ministry and another reflecting the detailed understanding between the parties. Issues like employees' entitlement to pay revision, bonus, incentive and stock options would be stated in the latter contract. The purchaser should verify the length of employees' service as this is directly linked to the employer's obligation to pay termination benefits, which could be substantial.

Some contracts entitle the senior employees to resign if the company's management or shareholding changes. The purchaser should be vigilant about such clauses as resignation of senior personnel could adversely affect the company's operations. The company's history of labour disputes, violations, and workmen's compensation claims should also be considered.

Third-party contracts and litigations

The purchaser should review all the agreements executed by the company, with third parties. Many joint venture arrangements and contracts entitle either of the parties to terminate them if the other undergoes restructuring, amalgamation, or ownership change. Such a review would assist the purchaser to identify myriad of other issues too, like the contractual and financial implications of such arrangements, violations, possibilities of consequential liabilities or claims and non-competition provisions affecting company's expansion plans or acquisition itself. The purchaser should conduct enquiries with various departments – including economic development, immigration, labour and traffic departments – to confirm that no official enquiries/proceedings subsist against the company.

This is inevitable as the penalties for violations could be huge – ranging from heavy fines to cancellation of licence. Further, the purchaser should verify the company's litigation history and take stock of the pending and impending legal proceedings by or against it.

Conclusion

In the UAE, the acquisition of a company or its shares involves myriad of procedural intricacies and governmental approvals. These could either protract or complicate the deal considerably. It is crucial that the purchaser meticulously track and carefully structure the transaction. If the company has interests in other entities forming part of the acquisition, the purchaser should conduct independent due diligence on those entities too.

- The writer is senior lawyer, Habib Al Mulla & Co, Abu Dhabi. The views expressed are his own

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