During the first half of 2023, the United Arab Emirates emerged as the leader in mergers and acquisitions (M&A) activity across the Middle East and North Africa region. This was largely attributed to the country’s business-friendly government reforms and attractive investment environment for international investors, government entities, and sovereign wealth funds.

Private transactions are the traditional method of business transfer in the United Arab Emirates, and account for a significant portion of the M&A market.  These transactions are primarily carried out in two forms: Share Transfer and Asset Transfer.

Share Transfer

Share Transfer transactions have become increasingly common, and typically occur through a holding company incorporated in a common law jurisdiction, for example Dubai International Financial Centre and Abu Dhabi Global Market.

Asset Transfer

In contrast, Asset Transfer transactions involve the seller retaining ownership of the legal entity used for business operations, while the buyer acquires the individual assets of the seller’s company. Asset Transfer are less common and may involve the transfer of employees. This process lacks the statutory mechanism for transferring employees and involves the cancellation of existing visas, applying for new visas, and establishing new employment contracts that treat their employment as continuous.

Advantages and Disadvantages of Share Transfer

Share Transfer transactions are common due to its advantages, as it allows changes in the entity's shareholding structure while keeping existing licences, business, employee relationships, and asset ownership intact. However, the disadvantage is the acquirer cannot selectively choose the assets and liabilities they wish to take on.

Participants in Private M&A in the UAE

Private M&A transactions in the UAE typically involve financial advisors or investment bankers, lawyers, and tax advisors. Both buyer and seller assemble their respective teams, each with a defined role.

Key Documents in M&A Transactions

Non-disclosure agreements (NDA) and letters of intent (LOI) serve as the building blocks of the deal and provide a framework for both the buyer and the seller to move forward.

Non-disclosure agreements (NDA) serve a key role in maintaining the confidentiality of the transaction. These agreements are designed to safeguard sensitive information and data shared between the involved parties. By explicitly outlining the scope of confidentiality, NDAs ensure both the buyer, and the seller can participate in sensitive conversations without the fear of information leakage.

Letters of intent (LOI), also referred to as 'term sheets' or 'memoranda of understanding', are comprehensive documents outlining the key commercial terms of the M&A deal. The binding nature of this document can vary, with non-binding LOIs often being preferred due to the flexibility offered in the negotiation process. LOIs set the groundwork for the transaction, specifying the essential terms, conditions, and expectations, helping all parties involved understand and agree upon the key aspects of the potential merger or acquisition.

 Due Diligence and Key Sectors

Conducting due diligence on the target company is a process involving thorough investigation into various key areas, including commercial and corporate matters, agreements, litigation, tax, employment, intellectual property and information technology, data protection, cybersecurity, and real estate. Depending on the industry and nature of the business activities, additional sectors and areas of investigation may be added to the due diligence process. This process helps to ensure parties stay organized through conditions precedent checklists and closing checklists, with clear assignments of stakeholder responsibilities and the status of each action item to ensure the M&A transaction progresses smoothly, mitigating risks, and maximizing the chances of a successful deal.

Regulatory Approvals for Share Transfer

Share transfer transactions require approval from the target's registration authority, depending on the type of company. Certain sectors require additional government approvals beyond the registration authority, such as those required by the Knowledge and Human Development Authority (KHDA) for educational institutions, the Ministry of Health and Prevention for healthcare entities, the Securities and Commodities Authority (SCA) for public entities offering securities, the UAE Central Bank for financial entities, and Dubai Municipality for supermarkets.

These additional approvals play a key role in upholding industry-specific standards, regulatory compliance, and the integrity of businesses operating in these sectors.

Challenges in Share Transfer Registration

One of the challenges in share transfer transactions, in both onshore and free zone entities, is the logistics involved in completing the registration formalities. This process includes visiting a notary and the submission of legalised documents from corporate shareholders.

These logistical complexities provide further challenges when dealing with share transfer transactions involving free zone entities. Free zones in the UAE have their own sets of rules and regulation, which may require additional steps and approvals. The nature of the business, the Free Zone, and the nationality of the shareholders can all influence the specific requirements involved in the share transfer process.