Paul Day and Steven Brown of ASAR - Al Ruwayeh & Partners assess the regulatory landscape for mergers and acquisitions in Bahrain
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Take-over, Mergers and Acquisitions Module (TMA Regulation) of volume 6 of the Rulebook (Rulebook 6) issued by the Central Bank of Bahrain (CBB) is the primary governing regulation for public M&A in Bahrain. It works in conjunction with other regulations issued under Rulebook 6. It applies where there is an acquisition or consolidation of control of: a Bahrain-domiciled publicly listed company; or, an overseas company whose primary listing of equity securities is on a Bahrain exchange.
Rulebook 6, including the TMA Regulation, is administered by the Capital Markets Supervision Directorate at the CBB.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The TMA Regulation is enforced by the CBB by imposing penalties for non-compliance and by issuing restrictions or prohibition orders under Decree 64 of 2006 (CBB Law). Also, CBB and Bahrain Ministry of Industry and Commerce approvals apply to certain actions which would act as a prerequisite to completion of a transaction. Violation of the relevant regulations may also trigger criminal or civil liabilities.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
There are two principal ways to effect a takeover of a Bahraini public company: (i) a friendly or hostile contractual takeover offer by the bidder for the shares of the target; or (ii) a merger of the target by consolidation or by absorption into the bidder or a subsidiary or associate of the bidder (or vice versa in case of a reverse merger), noting that a merger structure would likely be unavailable in a hostile acquisition, as it requires cooperation of the target's board of directors.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice of a structure is determined by the bidder, although the election for a merger or reverse merger requires a joint agreement and entry into a merger agreement with the target. The structuring decision may be influenced by, for example, the type of consideration the bidder is offering and the level of acceptance the bidder is seeking to obtain.
In case of a cross-border transaction, special structuring considerations may arise based on the tax and regulatory regime of the implicated jurisdictions, noting that Bahrain lacks a regulatory framework to effectively complete a cross-border merger.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
All takeover offers must be open for acceptance for at least 15 days after becoming or being declared unconditional. The acceptance condition must be satisfied within 60 days from posting of the offer document, whereas the fulfillment of all other conditions must be fulfilled within 15 days of the first closing date or the date on which the offer becomes or is declared unconditional on acceptances, whichever is the later. A merger will typically require a shorter timeframe for completion. Competing offers adopt the timetable of the new bidder.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
Except with the consent of the CBB, a cash offer is required where the bidder has bought for cash (during the offer period or within three months prior to its commencement) an interest in shares of any class under offer in the target carrying 10% or more of the voting rights of that class, or if in the view of the CBB there are circumstances which render such a course of action necessary.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
The TMA Regulation prohibits an offer from being declared unconditional on acceptances unless the bidder has acquired more than 50% of the voting rights in the target. A bidder must squeeze out minority shareholding if it holds or controls 95% or more of the target's voting share capital within three months from the date of acquisition of the 95% stake. There would be no squeeze-out right, nor a squeeze-out obligation, below an acquisition of a 95% stake.
A merger must be approved by at least 75% of the shares present at the relevant extraordinary general meeting for both merging entities.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Yes, there exists a general principle that the bidder must treat all holders of each class of securities of the target in a fair and equitable manner, demonstrating no bias to a single, group or class of shareholders. In particular, except with the CBB's consent, the bidder may not: make any arrangements with selected shareholders and may not deal or enter into arrangements to deal; make purchases or sales of shares of the target; or, enter into arrangements concerning acceptance of an offer either during an offer or when one is reasonably in contemplation, if there are favorable conditions attached which are not being extended to all shareholders.
A partial offer would require the approval of the CBB, which would not usually be granted unless the contemplated post-offer stake is to fall between a 30% and a 50% shareholding in the target. In the absence of an approved partial offer, where a person acquires an interest in shares carrying 30% or more of the voting rights, or where a holder of a 30% shareholding acquires an additional one percent or more of the target's shareholding, such action would trigger an obligation to make a general offer to acquire the remainder of the shares, known as a mandatory offer, in the absence of a whitewash resolution of the independent shareholders of the target.
Lastly, there exists a best price or all holders rule, whereby if the bidder buys voting shares in the target at above the offer price (the value of the offer during the offer period) during the offer period or within the three months prior to commencement of the offer period, it must increase its offer to not less than the highest price paid for any shares acquired in this period.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
A voluntary offer must not be made subject to conditions whose fulfillment depends on the subjective interpretation or judgment by the bidder or lies in the bidder's hands. Once a firm intention to make an offer is formally announced, the bidder is committed to proceed. Scope to withdraw by invoking the conditions to the offer is limited. To the extent that the bidder intends to attach conditions other than normal ones – such as level of acceptance, approval of shareholders for the issue of new shares and listing – the CBB must be previously consulted.
As a general rule with limited exceptions, financing for an offer must be fully committed when the announcement of the firm intention to make an offer is made.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Bahraini entities other than those engaged in the extraction or refining of hydrocarbons in Bahrain are not subject to income taxation. There are no dividend taxes and no special tax considerations involved in a public M&A transaction.
3.2 Are there special considerations in cross-border deals?
There should not be local tax implications. Foreign tax considerations, such as those relating to withholding on dividend payments, may arise.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Once a bona fide offer has been communicated to the board of the target or the board of the target has reason to believe that a bona fide offer may be imminent, no action which could effectively result in an offer being frustrated may be taken by the board of the target in relation to the affairs of the company without the approval of a whitewash resolution by the shareholders of the target. Neither may any action be taken which results in the shareholders of the target being denied an opportunity to decide on the merits of an offer. In particular, the target's board must not, without whitewash approval, do or agree to do the following: (a) issue any shares; (b) create, issue or grant, or permit the creation, issue or grant of, any convertible securities, options or warrants in respect of shares of the target; (c) other than during the normal course of business, sell, dispose of or acquire assets of a material amount; (d) enter into contracts, including service contracts, otherwise than in the ordinary course of business; or (e) cause the target or any subsidiary or associated company to purchase or redeem any shares in the target or provide financial assistance for any such purchase.
4.2 How do targets use anti-takeover defences?
Without a whitewash resolution by the shareholders of the target, the possible anti-takeover defences or impediments a board of the target may consider are: denial of due diligence access; solicitation of competing offers; and, encouragement of shareholders not to accept the offer.
In the case of a merger, the non-cooperation of the target's board could prevent the merger from completing. In such instances, the hostile bidder would necessarily have to launch a contractual takeover offer.
4.3 Is a target required to provide due diligence information to a potential bidder?
No. However, where a target's board chooses to disclose information or grant access to management to a potential or actual bidder, it must, on request, provide equal information access to rival bidders.
4.4 How do bidders overcome anti-takeover defences?
There are no instruments to force the target's board to recommend an offer. Nevertheless, the non-cooperation of the target board may result in the bidder being unable to offer better pricing or to make an offer at all. This may be deemed as a breach of fiduciary duties of the target's board vis-à-vis the target's shareholders. The bidder may therefore encourage the target's shareholders (who have plenary power) to restrict the board from exercising anti-takeover defences.
4.5 Are there many examples of successful hostile acquisitions?
No.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
While any inducement fee or offer-related arrangement between the bidder and the target must be publicly disclosed, there is no general prohibition on such arrangements. However, the possibility of entering into an arrangement such as a break-up fee agreement without a whitewash resolution by the target shareholders remains questionable.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Under the TMA Regulation, the target board cannot deny any competing bidder the same access that has been granted to the friendly bidder. Break fees and lock-up agreements could give rise to violations of the target board's duty against frustrating action.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
There is no general merger control notification in Bahrain. There is, however, a general requirement that a merger must not result in monopolising an economic activity, a commodity or a certain product.
6.2 When will transactions falling below those thresholds be investigated?
Not applicable.
6.3 Is an antitrust notification filing mandatory or voluntary?
Not applicable.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Not applicable.
6.5 How long are the antitrust review periods?
Not applicable.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Not applicable.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
There are specialist merger control regimes for certain industries. For example, the acquisition of control over a financial institution licensed by the CBB must be previously authorised by the CBB. The state may also restrict ownership of some entities in the interest of national security.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
Amiri Decree 15/1976 (Penal Code) as amended by Law 01/2013.
7.2 What are the potential sanctions and how stringently have they been enforced?
A maximum sentence of 10 years is imposed on any person accepting or requesting a bribe in exchange for performing or omitting to perform (or to cause the performance or omission of performance of) a task or duty related to the person's work, duties or position, or negatively affecting the owner of a business or company. A briber may be subject to a similar penalty even if the bribe was rejected. Fines may also be levied at the court's discretion.
Bahrain has expressed an intention to strengthen enforcement of anti-bribery legislation.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
The structuring of a securities exchange offer by means of issuance of new shares of the bidder requires the waiver by the shareholders of the bidder of priority rights to subscribe to the new shares. The law does not outline clear mechanics for the waiver of such rights which are personal to the shareholder.
The high squeeze-out threshold (95%) coupled with the lack of a codified squeeze-out procedure and investors' limited inclination to trading would likely undermine an attempt to reach 100% ownership of the target. In such cases, a merger with the target may be the only workable solution for obtaining 100% ownership.
8.2 What are the key recent M&A developments in your jurisdiction?
There have been very few public M&A transactions in Bahrain and no recent major regulatory developments.
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Paul Day
ASAR - Al Ruwayeh & Partners
Kuwait City
About the author
Paul Day is a partner at ASAR – Al Ruwayeh & Partners (ASAR) and works primarily in the corporate and commercial field. He has extensive experience in commercial transactions and has negotiated and acted as lead counsel on numerous international joint ventures. He represents a broad range of prominent foreign clients in the establishment of a local presence and on legal and practical considerations relevant to foreign companies with operations in the Gulf region.
Steven Brown
ASAR - Al Ruwayeh & Partners
Kuwait City
About the author
Steven Brown is a senior associate and managing attorney of the Bahrain office at ASAR – Al Ruwayeh & Partners (ASAR) and works primarily in the corporate and financial field. He has a broad knowledge and experience in corporate law, including governance and compliance of public and regulated entities. He also leads the Bahrain finance practice. He has been involved in numerous banking and finance transactions, local and cross-border acquisitions and transaction structuring in Bahrain. His M&A experience includes acting as lead and local counsel on various transactions representing buyers, sellers and targets in addition to assisting underwriters and financiers on public entity transactions.