Acquisitions & Divestments in the Middle East: Part 6 – Completing the Deal

Author: Hugh Fraser , Hugh Fraser International (HFI)

This final article in a series of six looks at the peculiarities of bringing an acquisition/divestment in the Middle East to completion. The completion documentation and processes are where Middle East transactions will diverge furthest from standard completion or closing documentation/processes in the western jurisdictions.

Corporate transactions in the region will rarely “sign and complete” simultaneously as most changes for ownership will require at least one regulatory approval. Accordingly, most Sale & Purchase Agreements will set down “Conditions Precedent” which must be satisfied before completion can take place. These clauses will be accompanied by “Conduct of Business” requirements placed on the seller in relation to the interim period between signing and completion, and a long stop date/termination clasues which will allow the parties to withdraw from the deal if all of the conditions precedent are not satisfied (or waived) within a prescribed period of time.

The conditions precedent will often relate to matters flagged up by the due diligence/disclosure process. In HFI’s approach an “A Point” flushed out of the pre-completion checks is a “deal stopper”, a matter so fundamental and irresolvable that the buyer has no real alternative but to withdraw from the process. A “B Point” is a material matter, not serious enough to warrant a withdrawal but of sufficient concern that it must be resolved prior to completion if the buyer is willing to proceed. This may relate to waivers of change of control provisions under contracts with customers, joint venture parties, key suppliers and subcontractors, landlords and licensors of intellectual property. A ”C Point” is a matter of relative materiality that will not prevent completion but may merit a “Specific Indemnity” to protect the buyer after completion and a “D Point” is a matter which is sufficiently manageable that it can be left to be to be managed post-completion under the representation/warranties or exclusion/limitation clauses. There is a plethora of commercial issues which may justify a “B Point” status as a condition precedent and it will be for the seller to assess whether it has sufficient control over the relevant issue to agree for a condition precedent to apply.

The condition precedent clauses will almost invariably include a provision for the approval of the transaction by the applicable registration/licensing authorities. This may involve a series of approvals depending on the applicable regulatory regime or a single approval in the case of a free zone authority if no special approvals apply. In the case of larger scale transactions, a formal clearance from the applicable competition law authority may be necessary, adding considerable cost and delay into the process. This will mean that a pragmatic approach will be needed in formulating a long stop date/termination clause.

The next area for consideration is the need for the establishment and verification of the legal authority of the parties to enter the Sale & Purchase Agreement/Ancillary Agreement and to implement the completion process. This was typically call for the granting of Powers of Attorney under formal legalization processes which involves certification in the Ministry of Foreign Affairs equivalent of the home jurisdiction of the applicable party and further certification by the embassy of the regional jurisdiction of the target. This is a challenging area as counterparties, in-country authorities and banks are prone to challenge and reject POAs which do not precisely address and empower the detailed aspects of the transaction. As well as the transfer of ownership of shares, the transaction may well involve the change of corporate name, change of legal structure (including multiple shareholders to single shareholder), change of the target’s constitutional documents, change of directors/managers, change of registered office, change of auditors and change of banks or authorized signatories. The documentation may also be subject to official translation and further in-country legalization in the target’s jurisdiction. The watch point is to plan ahead, conduct pre-checks and seek advance approvals on wording where possible prior to execution of the POAs and supporting corporate documents.

The documentation and process involved in implementing the transfer of legal ownership of the applicable shares tends to be more convoluted in the region than in the western jurisdictions. This will vary from jurisdiction to jurisdiction and whether or not the applicable entity is established in a free zone. The process will typically involve the execution of dual language or Arabic language (with official certified translation) in the presence of an official notary public, the submission of a prescribed application, initial approval and then final approval. The process may involve publication by way of newspaper advertisement and a waiting period to ensure there are no third-party challenges.? The process will be completed, typically be the issue of a new registration certificate and/or trade licence which will record the new owners and management. Only at this stage has legal ownership been transferred.

The legal ownership transfer process invariably throws up debate between the seller and buyer and their advisors as to when and how the sale price (or initial element of the sale price) should occur so that the seller can be sure of receiving payment and the buyer of receiving legal title. This is not a straightforward process as the seller may have to sign off transfer documentation in favour of the buyer and then the parties face a wait to see if the regulatory approvals fall into place. The seller will ideally wish to have the price transferred at sign off but the buyer will be reluctant to transfer the sale price until legal ownership transfer has been completed. While there may be strong case that the transfer point should be the trigger point, what happens if the buyer prevaricates on the making payment once legal title is in its hands? Traditionally, an escrow agent was used but increasingly stringent anti-money laundering regulations has made the bureaucracy and cost of escrow arrangements unattractive in many cases. A 50% on sign off and 50% of transfer of title may provide a more balanced allocation of risk although not 100% ideal. An alternative option is for the buyer to pay the price on sign off in exchange for a bank guarantee from the seller that can be called up by the buyer if the approval process does not go through (or vice versa).

Fortunately, the increasing use of portals/automated systems, video conference verification meetings and “DocuSign” execution of contacts has improved the functionality of the completion processes in Middle East corporate deals in recent years. However, the efficient management of these processes needs careful and detailed planning and mutual co-operation and pragmatism between the parties and their advisors. “Further Assurance” should be both a contractual and professional conduct watch point if the completion process is to run smoothly and with confidence.