This article is written by Janhavi Shringarpure who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
A new wave of mega deals dynamizing the merger activity in the Middle East Asian nations was unprecedented in the year against the backdrop of disruptions caused by the COVID Crisis. Growth is back on the table, at least for UAE and Saudi Arabia as the value of deals in 2020 spiked to $96.9 billion that amounted to the second-highest on record for the region. The pickup is notable in the energy, mining and utility sector with 42 deals worth $38.7bn. The recent Goldman’s Sach reports suggest that The Abu Dhabi National Oil Company (ADNOC) is looking to form partnerships with companies from the United States to develop unconventional oil resources in the UAE and had increased its total oil reserves by 2 billion barrels to 107 billion barrels.
Furthermore, the telecommunication sector is growing leaps and bounds since the valuable deal featuring Saudi Telecom’s USD 2.39 billion acquisition of Vodafone Egypt happened. Moreover, activist investors are playing an enlarged role in divestments to proactively balance their strategic portfolios and thereby adding up to the value of M&A deals in the Middle East Nations.
This dramatic increase in the value of the deals in Saudi Arabia, Abu Dhabi and other UAE enclaves showcases a positive market outlook, early recovery sign from the COVID market crisis and the ever-rising appetite of businesses to acquire in order to outshine their competitors and foster innovation. It is interesting to note that UAE stepped up to the 16th position in the world’s ease of doing business rank and in a bid to boost competitiveness, an array of reforms aimed at improving its business appetite, attracting foreign portfolio investors, creating jobs and diversifying its economy have been proposed by the UAE government.
This progress in the M&A Activity however has ushered the emergence of stringent regulatory norms and strict policies for antitrust and competition issues. From drawing up the agreements, obtaining clearance from the competition authorities and due diligence to closing the deals, a large deal of knowledge about the merger control regime in UAE becomes indispensable on the part of Law firms, legal advisors and attorneys to have a good deal of knowledge about the merger control regime in the UAE, in order to cater to all the requirements of their clients and acquisition candidates.
This article delves into the merger control regime in the UAE and its legal facets.
Emergence of anti-trust laws in the Middle East
The astonishing pace of growth witnessed in Middle East Asia inevitably brought along with it a set of challenges. Competition laws and regulations were the result of the challenges that were spurring out of inefficient market structures and poorly developed governance systems which ultimately led to concentrated economies over time among a few elites and general rent-seeking behavior in Arab countries. To address these challenges, a legislative framework dealing with the competition issues was sought in the UAE.
In the UAE, an attempt to lay the first stones of merger control regime and anti-trust policies was witnessed in 2012. The first competition/ antitrust legislation came into force on 23 February 2013. Federal Law No. (4) of 2012 (Law) was enacted with the objective to forbid and penalize anti-competitive agreements, abuse of dominant position within a given market and to provide a robust framework for merger control and regulation that promotes harbouring fair and correct market mechanisms in consonance with the principle of economic freedom.
Merger Control in the UAE : An Outlook
The primary objective behind enacting the Federal Law No. (4) of 2012 (Law) was to foster a competitive market governed by strong market mechanisms, through banning restrictive agreements and conducts that lead to the abuse of a dominant position, controlling the operations of economic concentration and avoiding all that may limit or prejudice or prevent competition. This Act has multiple facets which are described below:
I. Applicability and jurisdiction
The Act has jurisdiction over organizations engaged in economic activity in the UAE and/or exploiting the intellectual property rights inside and abroad of the UAE. Furthermore, its jurisdiction extends to any organizations based outside UAE but which have a significant impact on the competition within the UAE.
The law categorically excludes from its applicability, the federal government and UAE government entities or its subsidiaries, entities operating within the sectors of telecommunications, electricity and water, oil and gas, pharmaceuticals and financial sector. Further, the law offers leeway to the enterprises having a small market share by categorizing them in the de minimis exemption group.
II. Scope
The law encapsulates certain restrictions on the activities which could adversely affect the competition, and peculiarly focuses on these aspects:
1) Entering into anti-competitive agreements including cartelization
The escalation of agreements having an adverse effect on the competition called for a framework for weeding out all such market practices. Thus, Article 5 of the federal law was articulated to prohibit the market players from entering into any anti-competitive agreements such as collusion in bids or proposals in tenders, supply offers, horizontal collusions, price-fixing, limiting production or supply, exclusive distribution agreements etc.
2) Abusing dominant position
The law does not intend to forbid any market player from enjoying a fair monopoly and or a position of strength in the market. However, it seeks to prevent any misuse of such dominance or monopoly to the prejudice of other market players and bring about a level playing field for them. Article 6 of the federal law prohibits any entity that holds a dominant position in a given market segment, from carrying out any actions that lead to the abuse of this position in order to prejudice, restrict, or prevent Competition. The recent clarifications from the ministry stipulate certain thresholds for a concern to be termed as holding a dominant position in the market (as averred below). These customarily include activities like predatory pricing or trading restraints.
3) Merger clearance/ merger control
The law requires the prospective parties to obtain prior approvals from the Ministry of Economy for effectuating the proposed deals including share acquisitions, spin-offs, divestitures or asset transfers or any transactions that are likely to result into an acquisition of a direct or indirect market control. The idea is to avoid economic concentrations by regulating deals that canvass a significant market impact.
The prospective parties are required to notify the ministry within certain timeframes as entailed in the circulars or rules, the failure of which would attract fines ranging between 2% to 5% of the violating entities total sales revenue for the previous fiscal year. If sales and revenue data cannot be determined, fines ranging from AED 500,000 to AED 5,000,000 may be imposed.
In Saudi Arabia, any entity intending to participate in an economic concentration must notify the Authority prior to completing the transaction where the total annual value of sales of the participating entities exceeds 100 million Saudi Riyals (SAR 100,000,000) during the last complete financial year.
III. Merger Control Thresholds
The Act did not provide any threshold limits per se. However, this year two cabinet decisions were issued which throw light on these aspects: Cabinet Decision No. 13/2016 (the “Ratios Decision”) in respect of market share thresholds and Cabinet Decision No. 22/2016 (the “SME Decision”) in respect of small and medium establishments.
The ratio decision provides that certain agreements which are perceived to be anti-competitive would be exempted given that they are entered into by parties with a combined market share below a threshold of 10% of the concerned market. Further, the ratio decisions provide that an entity shall be considered to be in a dominant position when its share in the concerned market exceeds 40%.
In the Kingdom of Saudi Arabia, for instance, a notification requirement is triggered when the combination results in control of at least forty percent (40%) of the market, and in Kuwait, filing is required when more than thirty five percent (35%) of the market is concentrated in one entity.
Therefore it is prudent on the part of entities associated with businesses in the UAE to conduct internal assessments, business evaluations and scrutinize their relationships with suppliers and distributors or any alliances with the competitors to determine whether they fall into the scope of this Act and to obtain a sanction from the ministry if the specified thresholds are crossed.
IV. Timeline for filing a notifiable transaction
The prospective parties are required to file an application to the ministry of Economy, at least 30 days prior to the anticipated date of completing the transaction which falls within the definition of economic concentration. The Ministry shall then review and examine the transaction within 90 days of receipt of such application (However this is extendable by 45 days at the discretion of the ministry). Depending upon the transaction and its impact on the market and the resulting economic concentration, the ministry may approve or reject the deal, either conditionally or without any conditions.
If the Ministry of Economy fails to issue a decision within the aforementioned review period, the Ministry of Economy will be deemed to have approved the transaction and the transaction and related agreements may be completed.
V. Procedure for filing a complaint regarding any violations pertaining to the competition laws
A person may file a complaint regarding any violations of the competition law, to the Competition Regulation committee. The complaint should be drafted precisely and should lucidly explain the facts of the matter, the defaulting party and sections which were violated. Subsequently, the committee would notify the defaulting parties and other related parties having a substantial interest in the matter, within 10 days. The committee would then submit its report to the ministry. Within 30 days upon the receipt of the committee report, the ministry shall notify the defaulting parties of its decision.
VI. Appeal provisions
A person aggrieved by the decision of the ministry may file an appeal to the competition regulation committee within 14 days of the decision along with all the necessary documents in its support. The committee shall submit its recommendation to the Ministry within the next 10 days. Finally, the ministry shall issue a decision on such petition within the next 30 days, failing which the appeal shall be deemed to be rejected.
VII. Court and criminal proceedings
The offences under the foregoing law may attract civil as well as criminal liabilities. The court may order the business to be closed for a period not less than 3 months and not more than 6 months. The Law also allows for interim relief and temporary injunctions prior to the final court judgment.
With respect to criminal proceedings, the law mandates the Minister’s approval for initiating a criminal prosecution. Furthermore, the Minister of Economy is authorized to settle any matter, before the criminal case is transferred to the criminal court with minimum settlement amount not less than double the minimum fee.
Conclusion
Despite a few impediments, the federal law No. 4 of 2012 on the Regulation of Competition, has ushered a competitive market in the United Arab Emirates and forged a level playing field for the market players. Even though a few clarifications are sought on certain issues that have been loosely addressed by the primary legislation, many cabinet decisions and circulars are coming up to precisely deal with the provisions. With the rising frequency of cross border deals with UAE, it becomes imperative for law firms as well as attorneys to be proficient with the competition and allied laws as well as the updated cabinet resolutions and have a fair procedural knowledge while advising on any deals involved in UAE, in order to avoid any sticky situations or causing costly delays for their potential clients.
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