Among Gulf Cooperation Council (GCC) states, Kuwait has been second only to the United Arab Emirates in the number of M&A deals over the last three years. Research by the Kuwait Financial Centre finds that 127 agreements involving Kuwaiti businesses were closed between 2014 and 2018, accounting to 23% of total M&A in the GCC region over that period. In addition, during the fourth quarter of 2021, Kuwait recorded about 34% of all regional M&A transactions, indicating the trend towards financial sector consolidation seems likely to continue this year.
The latest real estate and business developments are expected to prompt additional regional investors to pursue M&A as a means of staying competitive.
Although ‘mergers’ and ‘acquisitions’ are used together or interchangeably, the terms cover several different forms of transaction. Both terms refer to the joining of two (or more) firms; but the motive varies from one case to another. For example, ‘acq-hiring’ sees the acquirer primarily interested in the team and people working at the target company, but can prompt investor vs. cultural fit disputes, so we usually advise strategic investors to outline clearly (on paper) the possible outcomes and expectations from each team member and respect their fiduciary duties after the deal. Hostile takeovers are fairly common, especially in developed markets.
In mergers, two motives usually influence the decision: 1) capturing market share (and eventually increasing shareholder value) and 2) diversification (introducing new product lines to an existing or new market). Mergers have their own processes and management rights.
In recent years, Kuwait has witnessed no notable increase in M&A deals.1 The Kuwaiti market is dominated by private M&A. Once parties have reviewed their situations following the fallout from COVID-19, the market is projected to become more active.
M&A activity in the banking sector has slowed drastically. The proposed takeover of Bahrain’s Ahli United Bank by the Kuwait Finance House would have created the world’s largest Islamic banking organization by asset value but, because of the pandemic, both firms’ shareholders decided to put the transaction on hold.
Regulatory Field Overview
Kuwait’s main regulator for public M&A activity is the Kuwait Capital Markets Authority (CMA).
Mergers and acquisitions are common in Kuwait, and are primarily governed by the Companies Law (Law 1 of 2016) and its executive regulations (issued under Ministerial Resolution 287 of 2016), the Capital Markets Law (Law 7 of 2010) (CML), and the executive regulations to the CML (Law 72 of 2015, as amended). Different types of agreement are typically used to acquire a company’s shares or assets.
If the target is listed (i.e. a Kuwait-incorporated firm listed on Boursa Kuwait), the transaction may be subject to the takeover regime under the CML and the CML Rules. When an offer for 100% of a company’s share capital is made on Boursa Kuwait, the CML Rules establish a statutory framework for public M&A in Kuwait. When an offeror acquires more than 30% of a company’s shares, the offeror must make a mandatory takeover offer to the remaining shareholders.
Under the CML Rules, rendering M&A/investment consulting services in relation to securities on Kuwaiti soil are regulated securities activities. As a result, international service providers should be aware of the limitations that apply to the provision of such services within Kuwait.
Foreign Investment Restrictions
Foreign nationals are forbidden from doing business in Kuwait through a corporate organization incorporated in the country unless one or more Kuwaiti partners holds at least 51% of the participation interests, subject to specific exceptions (Law 116 of 2014):
Although the general prerequisites for a public M&A transaction have been mentioned, a few critical factors are unique to takeovers. In such circumstances, parties must obtain all necessary regulatory consents from the relevant regulatory agency (the CMA for licensed enterprises and/or the Commercial Bank of Kuwait (CBK) for financial institutions subject to CBK supervision. According to the CML Rules, the transaction must also be disclosed. Parties must also follow sector-specific laws and regulations.
In making a mandatory tender offer (MTO) the bidder may not impose conditions, and the offer cannot be subject to conditions that can only be met at the bidder’s or target company’s discretion and subjective judgement, or where the bidder or target company alone can declare they are satisfied. Only voluntary takeover offers (VTO) may be subject to bidder- imposed conditions. Aside from that, the parameters of an M&A agreement are usually left to the parties’ discretion. Break fees are not governed by any explicit rules in Kuwait, and parties are allowed to make their own arrangements. In this area, we are unaware of any trends or market standards.
In Kuwait, locked-box techniques are ubiquitous, while completion accounts have become more popular in recent years. This mostly stems from the pandemic’s impact on many target organizations’ operating circumstances. Sellers are increasingly incorporating earn-outs in transaction documents, and interest in warranty and indemnity insurance increased in Kuwait over 2021. Foreign governing laws and/or jurisdictions may be involved in mid- to upper- tier M&A transactions involving at least one foreign partner, but rarely in relatively minor or exclusively local M&A deals.
The global M&A trends indicate that both public and private deal-making activities will focus on the adoption of new technology and recalibrating strategy amidst the regulations affected by the new COVID-19 era.
The State of Kuwait has mainly seen public M&A activities. Movements in oil prices will inevitably affect the performance of major sectors in the economy. However, we can expect the market to become more active once parties have had the chance to assess their post- COVID position. More consolidation activity in the financial sector seems likely, and more activity in the tech start-up field, alongside an increased role for entrepreneurial incubators in private M&A. In fact, some technological innovations were introduced to the Kuwaiti market during the pandemic and caught the attention of a few strategic investors (bexit.co/Baims/ Duwaween Games/Fiz) in the region.
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