Deal-making in the Middle East is on the rise. Consumer confidence is improving, credit is more readily available, and capital markets are maturing. However, the region still faces several challenges as investors remain cautious, looking for increased due diligence and post-closing protection.
According to speakers at the Megatrends in Mergers & Acquisitions conference in October, 2014, private M&A in the Middle East has been dominated by family businesses looking to divest core assets and private equity looking for growth. Outbound activity is limited because investors see growth prospects within the region. Global private equity players are becoming more interested in the region, especially due to the loosening of foreign ownership restrictions and the region’s need for further infrastructure.
In 2014, there was significant M&A activity in the financial services sector in the Middle East. The market has many international banks lacking the scale necessary to be successful and finding it difficult to comply with international anti-money laundering and sanctions obligations. There may therefore be more consolidation among regional banks in the future.
M&A transactions in the Middle East are becoming more complex. Regulatory regimes are becoming more sophisticated, including a fairly new merger control law in the UAE and the development of the tax regimes in the UAE and Egypt.
For instance, the United Arab Emirates (UAE) Federal Competition Law (Federal Law No. (4) of 2012) came into force in early 2013. It seeks to prohibit certain behaviours that affect competition in the UAE no matter where the activities are carried out. Where a proposed “economic concentration” may affect market competition, particularly to create or enhance a dominant position, a notification must be made to the Ministry of Economy at least 30 days prior to the transaction for pre-approval.
The Minister of Economy is required to issue a decision within 90 days of the receipt of the notification, although this period may be extended. If no notification is made, or if the transaction is completed before obtaining approval, the law authorizes a fine of 2% to 5% of the offending company’s total annual sales revenue from the previous financial year (or AED 500,000 to AED 5,000,000 if the annual sales revenue cannot be determined). Fines can be doubled in the case of repeat offenders. Courts are also authorized to temporarily close offending companies for three to six months, and can order publication of the judgment in newspapers. It is unclear how the penalties would be shared if a number of parties were involved in the merger or acquisition.
The definition of “economic concentration” is wide and could capture traditional share acquisitions as well as transfers of assets and liabilities between entities. However, the law does not apply to government-related entities, small- and medium-sized entities, and businesses in certain sectors such as telecommunications, financial, and oil and gas.
Of course, political instability remains a major challenge for mergers and acquisitions in the Middle East. Bribery and corruption due diligence continues to be important. However, the increase in the value and volume of deals in 2014 suggests that the Middle East will follow the global positive trend in deal-making.
The author would like to thank Annie Tayyab, artling student, for her assistance in preparing this legal update.