Introduction
Recently, a client reached out to us, not knowing the next steps and how to navigate an acquisition offer for the business that she and her husband had dedicated years to building. This isn’t uncommon! The entire deal process in mergers and acquisitions (M&A) can often seem daunting for any business owner.
Whilst M&A is a broader terminology covering any corporate sale or acquisition or merger regardless of the buyer, venture capital (VC) and private equity (PE) are specialised M&A transactions. VC deals revolve around minority investments in startups/ early growth-stage companies, whilst PE deals are focused on investments by PE funds in mature/ established companies entailing heavily negotiated control rights (often with leverage).
UAE Legal Landscape
The UAE operates under a complex legal landscape. On the mainland, companies are governed by a civil law framework, whilst the two major financial free zones—the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)—operate under a separate common law framework.
Further, increasingly preferred (non-financial) free zones like the Dubai Multi Commodities Centre (DMCC) have their own specific company regulations and regulatory requirements. For instance, when dealing with a DMCC-based entity, it becomes necessary to liaise directly with the DMCC Authority’s legal team to stay abreast with the constantly evolving regulatory requirements and to facilitate a smooth and timely closing of the deal process.
Therefore, M&A deals involving entities in different jurisdictions – within the UAE itself- must also be approached with expert legal advice and tailored strategy.
Key Stages of an M&A Transaction in the UAE
1. Introductions and kickstart discussions:
M&A business deals usually start with informal discussions with one or several potential buyers. In many scenarios, in order to exit from a business and to sell it off, business owners often strategically decide to engage investment bankers – these professionals could play a critical role by leveraging their expertise and network to identify and introduce suitable potential buyer to achieve the desired outcome from a sale.
2. Executing NDA and Term Sheet / LoI:
Typically, in an M&A transaction, the first formal document – setting out the fundamental commercial terms of the deal between the parties- is usually referred to as a “letter of intent” (LoI), “term sheet” or “memorandum of understanding”.
The drafting of the LoI must be unambiguous to demarcate binding and non-binding clauses in this first initial document serving as the roadmap for future negotiations and the definitive binding agreements. Generally, the binding clauses in a term sheet are limited to confidentiality, exclusivity or “no-shop” provision (to restrict the target entity or the seller from engaging in discussions with other prospective buyer for a certain time period) and the governing law and dispute resolution.
Whilst a term sheet or LoI could have the necessary confidentiality provisions, before you start giving out your business secrets to a potential buyer- you may want to enter into a standalone “non-disclosure agreement” (NDA) at the very outset. You want to avoid the possibility of disclosing sensitive business information and trade secrets to prospective buyer, who may just walk away from the deal and then use your sensitive information to their advantage
As a business owner you may even want to execute (in addition to an NDA) a “non-solicitation agreement”- because you do not want a potential buyer (who may already be running a similar or the same line of business) to swoop in and poach your star employees!
3. Due Diligence in M&A Transactions:
Following the signing of a term sheet or LoI, a potential buyer would request the target entity for information and documents – for the purpose of conducting a due diligence process to thoroughly evaluate the target business. The legal and financial due diligence reports are often the deciding factors in whether a deal proceeds or falls through.
Even if the due diligence reports issued by qualified professionals do not highlight any red flags and the deal does go through, the due diligence phase remains significant.
For a potential buyer, this phase is crucial for uncovering hidden issues that could impact the negotiations in relation to the sale consideration, conditions precedent and indemnification provisions – which must be drafted without ambiguity in the final definitive agreements.
Essentially, the due diligence process makes a buyer aware of the potential risks, negotiation points for the legal counsels representing the buyer side and seller side to safeguard their respective interests – prior to signing the final, legally binding definitive agreements to seal the deal.
4. Definitive Agreements:
Whilst the suite of the required definitive documents would depend upon the bespoke requirements of a particular transaction, certain legal instruments tend to feature typically across deal types. In an M&A deal, the key agreements are generally ‘share purchase agreements’ or ‘asset purchase agreements’ – often annexed with disclosure letters and ancillary share transfer documentation. In venture capital transactions, the share subscription agreements and shareholders’ agreements form core documents to balance the interests of founders vis-à-vis investors. In private equity transactions, share subscription and shareholders’ agreements typically constitute the primary contractual documents.
What is a disclosure letter/schedule?
A disclosure letter or schedule is a key document annexed to the core definitive agreement – which qualifies or limits seller warranties by setting out exceptions to them.
As a result, if a matter is clearly disclosed by the seller in the disclosure letter, the buyer is being made aware and can further negotiate the deal consideration as well as the indemnities with the seller prior to signing the definitive agreement. At a later date, the buyer cannot then claim breach of warranty if the specific disclosure was made by the seller in the disclosure letter.
5. Closing an M&A Deal in the UAE:
Finally, the definitive agreements are signed by all parties, the sale consideration is remitted by the purchaser to the seller and the incoming investor(s) or acquiring entity become the shareholder(s) of the target business following completion of necessary procedural formalities with the relevant authorities. For a streamlined completion of a deal, an expert in the M&A legal team can help you all the way until the investments are finally received by the target entity and the shares in the target business are acquired by the purchaser as agreed in the underlying transaction documents.
James Berry and Roshni Chadda
At James Berry & Associates, we possess substantial experience advising businesses with funding and expansion aspirations across the UAE and the GCC region. Do not feel overwhelmed when you receive a term sheet but reach out to us and we’ll help you navigate your next steps!
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Disclaimer: This blog provides general information and does not constitute legal advice. To discuss the specific aspects of an M&A, VC or PE transaction, please seek expert advice from a qualified legal professional.
Managing Partner
Legal Consultant