Legislation overhaul needed as takeovers increase
As the GCC economies, and Dubai in particular, recover from the financial crisis of the past two years, there is an increase in mergers and acquisitions (M&A) activity in the region.
As the recent Deloitte chief financial officer survey illustrates: "There was strong growth in the value of M&A activity in the Middle East in the first quarter of 2010, with deals up 138 per cent in value and 33 per cent in volume terms over the previous quarter."
With indications of an expected economic upturn in the region, a continuing rise in M&A activity in terms of value as well as number of transactions should be expected, the publication states.
Although the overwhelming majority of regional M&A deals involve private companies, more transactions involving publicly listed companies are being announced, particularly in the GCC.
The failed quasi-takeover of Arabtec by Aabar this year together with the successful maximisation of Aabar by International Petroleum Investment Company (IPIC), its controlling shareholder, and the recent offer by Etisalat to acquire 46 per cent of the capital of Zain, which was subsequently increased to 51 per cent, are good examples of the rise in GCC public M&A activity.
With widely expected consolidation in certain industries (for example, in the financial sector, in which most players are listed) we can expect the level of public M&A activity to increase in the GCC.
However, only Saudi Arabia and Bahrain have public takeover (or public M&A) regulations in place.
Regulations on takeovers aim to ensure that mergers and acquisitions of publicly listed companies are conducted in a fair, equitable and transparent manner. Although takeover regulations differ from jurisdiction to jurisdiction, taking slightly different philosophical approaches, most regimes adopted globally have similar objectives.
The key objectives of any takeover regulation should include:
* Creating a clear and transparent process and time frame for acquisitions.
* Providing shareholders with all the information necessary to make an informed decision.
* Ensuring equal treatment of shareholders and that all shareholders fairly share the control premium paid by the buyer.
* Ensuring equitable treatment of minority and dissenting shareholders.
* Ensuring that management and shareholders interests do not conflict.
* Clarifying the role of the target's management and board of directors in the takeover process.
As is the case in other areas of regulation (for example, the lack of insolvency regulation in the UAE that was brought to light during the financial crisis) the deal makers are moving faster than the legislators, and most of the transactions are taking place in the absence of an adequate regulatory framework.
The lack of regulation brings uncertainty to the transaction process and discourages willing bidders from acquiring certain targets (some of which are undervalued).
Consequently, this not only entrenches ineffective management but also denies shareholders an exit option that would allow them to maximise the full value of their investments.
To date, examples of successful public M&A deals in the GCC have been few and far between, each having had a unique set of circumstances such as common or controlling shareholders that made the deals possible in the absence of adequate takeover regulations.
In other circumstances, we have seen regulators such as the Emirates Securities and Commodities Authority (ESCA) intervene in a deal to supplement the lack of shareholder protection that a modern regulation on takeovers would provide.
Clearly this is not a realistic long-term solution, since the public M&A market requires predictability and clarity to function adequately. The absence of regulations may also mean that possible buyers of listed targets struggle to structure certain acquisitions, particularly in the event of unsolicited offers.
When we look at some of the recent regional transactions that have been announced, we realise that the absence of adequate takeover regulations is creating certain anomalies and lack of clarity in the M&A process.
When IPIC, which owned 71 per cent of the capital of Aabar, announced its intention to privatise the company, it effectively put the shareholders in an impossible dilemma - either accept the low price offered or remain a minority shareholder in an unlisted entity holding a very illiquid investment.
It created a "lose-lose" situation for several minority shareholders and resulted in obvious discontent, which was mirrored in the financial press at the time. It took an unusual intervention from ESCA to force IPIC to increase the purchase price to what ESCA considered to be a fair proposal.
A detailed analysis of how a similar deal would have unfolded in jurisdictions with more mature takeover regulations would be beyond the scope of this commentary, but the following observations are worth noting: If adequate takeover regulations had been in place, ESCA would not have had to intervene and IPIC's offer would have been subject to certain control mechanisms that ensure the fair treatment of Aabar's minority shareholders.
A takeover regime would have been expected to provide a separate vote for the minority shareholders in the case of an offer by a controlling shareholder (ie majority of minority).
It would have also provided a mechanism for dissent and perhaps a handy "squeeze-out" mechanism, whereby the buyer could force the last few shareholders out by paying them the fair value of their shares to fully privatise Aabar.
It is widely acknowledged that good corporate governance and transparent disclosure are essential to the creation of efficient markets that attract capital (generally at lower costs), encourage investment and optimise valuations.
Another key element of efficient capital markets is an efficient, clear and level playing field for takeovers. In fact, one of the key elements of a robust corporate governance regime in any country is the existence of an efficient and well-administered set of takeover rules.
In the absence of adequate regulations, we will continue to witness anomalies and lack of clarity in the regional M&A process.
We may see an increase in ad hoc interventions from the local securities regulator, which brings with it an undesired level of deal uncertainty and arbitrariness in situations where the regulator is perhaps not best placed to intervene (a good example of that being valuations).
In addition, the treatment of minority shareholders will remain uncertain at best, severely affecting the credibility of regional capital markets and their ability to attract global capital.
Recent public M&A activity in the region highlights the urgent need to enact modern takeover regulations, in line with international best practice.
Such legislation will be yet another milestone in the modernisation and development of the region's capital markets and will fill a considerable gap in the legislative regime.
This will inevitably result in more efficiency and increased credibility for the region's capital markets.
Karl Tabbakh is a partner at DLA Piper Middle East
Published: November 29, 2010 04:00 AM