UK: Clyde & Co Launches 2015 Middle East Deal Study
Last Updated: 15 June 2015

M&A highlights

  • A "seller friendly market": in terms of risk allocation, the 2015 Deal Study continues to provide evidence that sellers are able to negotiate favourable deal terms. We remain of the view that the Middle East is a seller friendly market. Increased market confidence and the enthusiasm of new entrants to gain a foothold in the region could all be reasons for this trend.
  • Non-cash consideration a rarity: there was no significant change in this area with 70% of M&A deals having an all cash consideration (compared to 30% non-cash or a combination of assets and/or equity consideration). This reflects in part the difficulty regional buyers face when issuing shares as non-cash consideration. See page 7.
  • Greater use of purchase price adjustments: In 53% of the deals reviewed there was a form of purchase price adjustment (up from 39% in our previous Deal Study). Where the purchase price was subject to adjustment, most commonly this was based on either completion accounts or a locked box mechanism, (with earn-out mechanisms being relatively rare). See pages 7 - 8.
  • Security for claims: there was a slight increase from 34% to 41% of M&A deals that contained security for the buyer in the event of a claim against the seller. Most commonly this came in the form of the right to set off against deferred consideration. The second most common form was the retention of a specific amount of the purchase price. See page 10.
  • Limitations on sellers' liability: there was no significant change in this area with limitations on the sellers' liability included in 61% of M&A deals. Where there were limitations, the liability cap was less than the total amount of the purchase price in 47% of M&A deals (with 26% being less than half the amount of the purchase price). There was also widespread use of "de minimis", "baskets" and other common limitations on liability. See pages 15 - 16.

The Middle East continues to show signs of being a sellers' market in terms of risk allocation.

  • Split signing and completion: there was no significant change in this area with 74% of M&A deals containing a split signing and completion. 50% of M&A deals took between one to three months to complete (due, in large part, to the fact that share transfers in the Middle East often require regulatory/procedural consents). This throws up a host of related issues such as walk away rights and management of the target during this period. See pages 18 – 19.
  • Business transfers remain tricky: there was no significant change in this area with only 23% of M&A transactions taking the form of business and asset transfers. This reflects the legal challenges of transferring assets and particularly employees in the Middle East.
  • Tax: market practice remains unchanged with relatively few buyers insisting on extensive protection against tax liabilities. However, tax regimes do exist in the region, and care should be taken before conceding this point too quickly. See pages 12 – 13.
  • Choice of law/forum: 79% of M&A deals used arbitration over courts as the chosen forum for disputes (up from 59% in the last Deal Study). This is now much more in line with JVs where arbitration is overwhelmingly the preferred choice. Where courts were the chosen forum the two most popular options were the courts of England and Wales (57% of M&A deals) and the DIFC courts (29% of M&A deals). There was also a clear tendency towards the use of English law. See pages 23 – 24.

USD 6.5 billion aggregate value across 43 M&A transactions.

JV highlights

  • JVs beginning to be overtaken by M&A as a route to market: 43% of all deals reviewed were JV transactions (down from 51% in the last Deal Study). Perhaps the JV model (which has been going out of fashion in some Western markets) is now also being questioned in this region (for a variety of reasons including post-completion integration and synergies). However, even if they are on the decline, JVs will continue to be used given the regulatory environment in the Middle East, where local partners are often required.
  • Offshore structures for flexibility: there was no significant change in this area with 27% of JVs using a corporate vehicle from outside the region (such as the Cayman Islands or BVI) as their main JV vehicle. This can provide more options when it comes to governing laws and the use of legal mechanisms (such as different classes of shares) not generally found in Middle Eastern jurisdictions. See page 27.
  • Contributions: in terms of what each party brings to the table, cash was, by far, the most common form of contribution, followed by a host of tangible/intangible contributions (with intellectual property/know-how contributions being the next most popular). Compared to our previous Deal Study, we have seen less emphasis on local know-how and employees as forms of contributions. See page 30.
  • Reserved matters: 82% of JVs had contractual reserved matters (up from 69% in our previous Deal Study). Where a GCC corporate vehicle is used, a number of matters will in practice require the consent of all shareholders and this can also provide an effective form of veto. See page 32.

Greater use of price adjustment mechanisms demonstrates growing maturity in M&A market.

  • Exclusivity: there was no significant change in this area with the vast majority of JV partners still agreeing to commit to the JV on an exclusive basis by including noncompete restrictions in the JV documents. See page 35.
  • Share transfers: unsurprisingly a large number (64%) of JVs contained contractual provisions restricting transfer of shares in addition to statutory pre-emption rights. There is room to be creative in this space, for example 28% of JVs included lock-in periods on share transfers of between 1 and 5 years, 16% included tag along rights, 16% included drag along rights and 8% included put / call option provisions. See page 36.
  • Deadlock resolution: 55% of all JVs contained deadlock resolution provisions, down from 75% in our last Deal Study. This may be explained by reducing confidence in deadlock resolution mechanisms in the Middle East as some may argue that the commercial circumstances at the relevant time may dictate how the deadlock is actually resolved (which may be different to the manner contemplated in the JVA). See pages 38 - 39.
  • Choice of law/forum: the preferred forum for JVs is arbitration (80%) with DIFC/LCIA Arbitration Rules being the most common rules governing the arbitration (69%). In terms of choice of law, JV partners tend to prefer English law (59%) over other laws. Noticeably, we have seen an increase in courts being the forum for disputes arising from a JVA (up from 7% to 20%). This increase may be attributable to regional partners insisting on local courts (which may be seen as an advantageous forum for them). See pages 40 -41.

M&A emerging as more popular route to market than traditional JV route.

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