New companies law will have little effect on M&A activity
A raft of new legislation pending in the UAE and Kuwait will significantly impact capital markets activity and, in the case of Kuwait, is widely expected to improve corporate governance standards. However, the new rules will not bridge the gap in mergers and acquisition (M&A) rules needed to facilitate the expected rise in consolidations and distressed asset buys.
From April, listed companies in the UAE will have to comply with a mandatory corporate governance code. Embracing a wider corporate universe, an updated federal companies law is in its final stages following a consultation round in October last year.
However, the updated companies law will have little effect on how M&A is conducted and regulations guiding such activity remain scant, said one lawyer, who has seen a draft.
"The new companies law won't impact M&A, but there are articles in there affecting IPOs [initial public offerings]," he said. Among those provisions, the legislation reduces the required float offered from 55 per cent to 30 per cent.
Significantly, the foreign ownership cap remains set at 49 per cent, continuing to limit foreign bidder access to the local market. However, there is an exemption for investment in mega projects, where foreign investors will be able to own up to 100 per cent, the lawyer said.
Separately, the UAE Ministry of Economy is also working on foreign investment legislation, which is still in the drafting stage and has yet to be circulated around the local legal community, a second lawyer said.
Along with the companies law, new arbitration legislation is expected to be passed by the end of the year. A new insolvency law is also in the works.
The arbitration and insolvency laws will affect distressed sellers, the first lawyer noted. Asset sales and consolidations among distressed companies are expected to be the motor for much M&A activity going forward.
The new arbitration law will provide a framework for dispute resolution, based on the UN's Model Law on International Commercial Arbitration, the second lawyer said. It is expected to go a long way to address the deficiencies in existing arbitration rules, currently covered by less than 20 articles. To date, the troubles of Amlak Finance and Tamweel, which are still set to merge have required the establishment of two separate, special tribunals to deal with potential creditor claims.
However, it is in Kuwait where rules affecting listing companies will undergo the most significant overhaul.
In early February, the National Assembly passed the long-awaited legislation that will provide for the establishment of a stock market regulator and the privatisation of the exchange. It will also strengthen penalties for rule breakers to include prison sentences.
But the proposed capital markets law does not provide for an M&A code, said a Kuwait-based lawyer who highlighted the new law's emphasis on improved reporting and disclosure by listed entities.
The Kuwait Stock Exchange, which is self-regulating, has been the venue for a number of investment company mergers and stake acquisitions, involving companies such as Gulf Investment House and First Investment Company.
- The author represents dealReporter, part of The Mergermarket Group
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