Doing business in the UAE: corporate acquisitions

According to data from EY, M&A activity in the Middle East increased 12% in the first half of 2022 compared to what was a record-breaking year post-Covid in 2021. Of the 359 deals in total, 105 concerned UAE-based targets and those deals were worth an estimated $14.2 billion, which was around a third of the $42.6bn total value of 1H 2022 deals signed in

There has been a lot of activity in the technology, e-commerce and real estate sectors, a trend that the Pinsent Masons team expect to continue in the near future, as diversification away from oil and gas businesses continues across MENA.

This guide aims to help businesses understand some of the core considerations when exploring an M&A deal with a UAE business – in particular, through a share sale.

Share sale v asset sale

Share sales are by far the most common route for acquisitions in the UAE.

While investors might look at business and asset deals as a way of "cherry picking" key assets and avoiding unwanted liabilities, asset purchases – particularly where all or substantially all of the target's business and assets are being transferred – are generally more complex.

As is the case in most jurisdictions, the assets must be transferred individually. This includes real estate, licences, commercial contracts, loans, and employees. Employees do not automatically transfer to a buyer on a business and assets sale and purchase. If a buyer wishes to take on the seller's employees, the seller must first terminate their employment and cancel their visa, if the seller is a visa sponsor. The buyer must then re-employ the employees and sponsor their UAE visa – this can be a costly and time-consuming process.

It is also important to bear in mind with business and assets deals that, to ensure continuity of business, any purchaser would need to ensure that it has the required corporate structure, and necessary licences, in the UAE in order to be able to continue the acquired business. It is important to plan ahead for this as, broadly speaking, the timeframes for establishing a company in the UAE can range from several weeks to several months.

Foreign ownership restrictions

For a prospective purchaser, it is important to first understand where in the UAE the target is incorporated and registered, as this can impact on the target’s current ownership structure, and the formalities to affect a transfer. Broadly speaking, the target will either be incorporated and registered in mainland UAE or in one of the many ‘free zones’.

A free zone entity can be 100% owned by non-UAE nationals. The main disadvantage of free zone entities is that, generally, they can only do business in the free zone designated area. This restriction implies different things, depending on the type of company, activity, and free zone in question, and therefore must be considered on a case-by-case basis.

Up until recently, most mainland companies were required to have a UAE shareholder owning at least 51% of the shares in the capital of the company. However, changes made to UAE companies law have lifted this restriction for mainland companies carrying out certain types of activities. Each emirate can determine which types of businesses can be 100% foreign ownership, subject to certain restrictions. The Department of Economic Development in certain emirates has started issuing their lists of approved activities (positive lists) and requirements for foreign shareholders.

The changes to foreign ownership rules apply to both new and existing companies, as long as they are carrying out activities on the relevant positive lists. See our separate guide on foreign direct investment in the UAE for more details on foreign ownership rules.

Due diligence

It is vital to conduct thorough due diligence of a target business. There is limited publicly available information in the UAE, and so there is a reliance on the target company providing up to date and accurate information to assist with this.

Where a buyer is looking at a mainland UAE target company, an important consideration is whether that entity is, or is capable of being, 100% foreign owned and whether there is a majority UAE shareholder in place. For buyers not familiar with the UAE market, having a majority UAE shareholder would give rise to obvious concerns around control, financing, and profit distribution. There are solutions that can be adopted to address these concerns, however.

Where 100% foreign ownership is not permitted, and the foreign shareholder wishes to retain 100% of the management and economic rights over the business, a common practice that has developed over the years is to put in place private side agreements, which are not subject to registration, between the foreign shareholder and the UAE shareholder. In these agreements, the UAE shareholder agrees to limit either partially or in whole their rights to participate in the profits or running and management of the company, typically in return for an annual fee. 

Appointing a “professional” corporate service provider as the UAE shareholder, rather than a UAE individual, who is likely to be less concerned if their action or inaction impact the operation of the business, is another way to further mitigate this risk. There are reputable corporate service providers in the market whose core business is to act as a nominee shareholder.

Having a clear picture of the current shareholding of a UAE target business and, where applicable, the arrangements that are in place with any UAE shareholder, is essential to understanding the risk associated with those arrangements; the suitability of the documentation, if any, that is in place; and whether any action needs to be taken – whether pre, at, or post, completion – that could impact on the timings of the transaction.

Share transfer formalities

To formalise a transfer of shares in the UAE, certain approvals are required from the relevant government authorities, and certain documents will need to be signed before a UAE notary public. Depending on the specific jurisdiction within the UAE, this process can sometimes take several days, and potentially weeks to complete.

For a foreign buyer, powers of attorney will need to be granted to a person or people on the ground in the UAE, authorising them to sign the necessary transaction documents in the UAE – such documents will need to be notarised and legalised for use in the UAE. It can often take several weeks to have fully notarised and legalised documents in place, which may also then require further attestation in the UAE, and so this should be factored into any deal timelines.

Payment of consideration

Sellers will usually want some comfort that buyer funds are available and will be released once the relevant target company licence has been updated.

Because legal title to shares does not transfer with the signing of a stock transfer form or similar short form instrument, as is the case in many other jurisdictions, there is typically a gap of one or more days between share transfer documents being signed and the share transfer taking effect.

To protect the seller and, to an extent, the buyer in these circumstances, it is becoming more common to see the purchase price paid in to an escrow account in advance of share transfer agreements being signed, whether before the UAE notary public or relevant free zone authority, and for the consideration to then be released once the target company’s updated commercial licence or equivalent documents, showing the buyer as the new shareholder, are issued.

From a buyer perspective, while a seller may argue that it has taken all the action that is required from their side in signing share transfer documents before the UAE notary public or relevant free zone authority, it is important to bear in mind that shares, in most cases, do not legally transfer until the relevant company licence or articles of association is updated to reflect the name of the buyer. Because of this, it is usually advised that consideration funds are not released from escrow until the buyer has had sight of the relevant documents to be able to evidence this.