Typical due diligence issues
In the United Arab Emirates (UAE), it is customary to finalize the due diligence exercise prior to the execution of the acquisition agreement(s). The main areas of review in the due diligence process vary from transaction to transaction, but generally include corporate, licensing and permits, financing, material contracts, real estate, employment, intellectual property, insurance, litigation and tax matters. Based on the due diligence findings, the parties may negotiate specific representations and warranties, pre-closing conditions, express indemnities and/or a purchase price retention/reduction. Due diligence findings may also give rise to a request from a buyer to carve-out certain assets/entities from the target group.
The amount and quality of due diligence documentation can vary quite widely, depending on the target (i.e., the approach to due diligence and flow of information from an early-stage founder run business is likely to be different to that from a large corporate, financial institution or financial sponsor operated target). The approach to due diligence requests will also need to be tailored based on the background of the target, as well as the industry sector.
Due diligence considerations in the UAE will be similar to other jurisdictions, however investors should be particularly mindful of the following matters: ownership structure, licensing compliance, related party arrangements, registration of real estate interests and compliance with employment laws. With the introduction of value-added tax (VAT) on 1 January 2018 and corporate income tax on 1 June 2023, tax is now an additional focus area that must be borne in mind when conducting due diligence.
Pricing and payment
The most common form of consideration is cash, however loan notes or equity may also be used. There are no legal requirements regarding pricing and payment of consideration. Payment does not need to be made locally in the UAE. Valuations are not required, except in limited circumstances (for example, pursuant to a statutory merger) or where there is an exercise of a buyer of shares under a pre-emption right (and where the target is an onshore UAE entity).
Electronic transfers of funds, including through the SWIFT international payment system, is the most common way of paying cash consideration. There are no foreign exchange controls or restrictions on repatriation of funds. Due to onshore local share transfer requirements, the use of escrow accounts to hold consideration payments is common where the target is an onshore UAE entity.
It is common for the initial purchase price to be stated on a "cash-free, debt-free" basis, based on either a "locked box" or completion accounts methodology.
While it is not common to provide for deposits or break fees, an escrow arrangement is relatively standard. Earn-out arrangements are also relatively common, allowing the buyer to defer the payment of part of the consideration, conditional upon agreed milestones or thresholds being achieved.
Signing/closing
Share sale
A share purchase in the UAE will have many commonalities with share purchases in other jurisdictions. The key transactional document will be the long-form share purchase agreement (SPA) that sets out the full terms of the transaction.
An SPA can be drafted in English, it does not have to be notarized and the parties can sign the signature page without having to sign or initial each page of the SPA. The SPA can be subject to either UAE, or foreign, law. English law is commonly used, particularly for cross-border transactions, transactions involving foreign parties, large corporates, UAE sovereign wealth funds, regional private equity institutions and large family offices, however UAE law is also often used, particularly between UAE parties. It is generally acceptable for SPAs to be signed in an electronic form under UAE law, provided that certain requirements are met with respect to verifying the signature.
An SPA is usually subject to the jurisdiction of the UAE courts (if the SPA is governed by UAE law), or the Dubai International Financial Centre (DIFC) courts, the Abu Dhabi Global Market (ADGM) courts or an arbitration tribunal that is based in a jurisdiction that is a party to the New York Convention (if the SPA is governed by a different governing law, e.g., English law). It can be problematic to enforce a court order or arbitration award in the UAE where the court order or arbitral award is granted in a jurisdiction other than the aforementioned options.
Share transfer of an onshore UAE entity
To implement the transfer of shares in an onshore limited liability company (LLC) (the form of entity that is most commonly used), a separate short-form Arabic language share transfer agreement is required. If the share transfer agreement is drafted in a bilingual form (i.e., in Arabic and any other language, usually English), it must be attested by a sworn translator in the UAE before the existing and new shareholders of the company can sign it before a notary public. The notary publics in certain Emirates have recently introduced the option/requirement to execute certain documents before a notary public via a videoconferencing facility rather than in person.
In addition to the share transfer agreement, a schedule of amendment to the entity's existing memorandum of association must be signed before a notary public (either in person or via videoconference). The attested, signed and notarized documents must then be submitted to the Department of Economic Development (DED) in the relevant emirate. The DED will update the commercial license of the company and issue a new license stating the names of the new shareholders with their respective shareholding. The share transfer agreement and the schedule of amendment of the articles of association may also be combined into one document if preferred.
If a buyer of shares is itself a corporate entity, the DED and notary public will require the constitutional documents of the buyer to be submitted to it for review, along with a shareholder or board resolution (as the constitutional documents of that company requires) resolving to acquire the shares and to appoint a signatory to sign the share transfer documents before the notary public, and any other relevant documents that may be required to obtain external approval from other regulators.
Where the buyer is a foreign entity, the buyer's constitutional documents, a certificate of good standing, an incorporation certificate or trade register extract and a power of attorney must all be legalized by the UAE Embassy in the country of incorporation of the buyer, attested at the Ministry of Foreign Affairs and International Cooperation in the UAE, and then translated into Arabic and attested by a sworn translator in the UAE. Where the buyer is an entity that is incorporated in the UAE, an original or attested copy is sufficient for the purposes of submission to the DED and the notary public.
For companies that are registered in one of the many free zones in the UAE (other than the ADGM and DIFC), similar documents are required to effect a transfer of shares, with the exception that: (i) the existing shareholders and the buyer must sign the transfer documents before the relevant free zone authority rather than signing the share transfer agreement before a notary public (although a number of free zone authorities will allow the share transfer documents remotely and delivered by courier where that free zone authority holds a legalized specimen signature on file for the relevant signatory); and (ii) the constitutional documents of the target company and the buyer and seller resolutions may not need to be translated into Arabic.
Shareholders of an onshore LLC have statutory rights of preemption on all transfers of shares in that LLC, which would need to be waived by any remaining shareholders to implement the share transfer.
Share transfer of an entity in the ADGM or DIFC
It is increasingly common for holding companies in the UAE to be structured through a financial free zone, such as the ADGM or the DIFC. As a result of this, the same formalities as apply to onshore UAE entities (as described above) would not apply.
Implementing a share transfer of an ADGM or DIFC entity involves completing and filing various standard form documents which detail the proposed transfer on the ADGM portal, or with the DIFC Registrar of Companies. The standard forms include updated register of members, corporate resolutions, the main transfer instrument, ultimate beneficial owner documentation and updated articles of association. Templates of these can all be found on the ADGM and DIFC websites. Similar to completing an onshore transfer, the articles of the association of the relevant entity will need to be updated to reflect the new shareholders. One of the key things to note when implementing a transfer in the ADGM or the DIFC, is that further legalization requirements typically associated with onshore transfers are not required. For example, there would not be a need for the updated articles of association to be signed before a notary.
From a timing perspective, it needs to be considered that from submission of the aforementioned documents on the relevant portal (ADGM) or Registrar of Companies (DIFC), the relevant authority can take one to three days to review the documents (and potentially make further enquiries with respect to the transferor or transferee) before issuing the updated the commercial license. The commercial license is the document that evidences the transfer of legal title. The mechanics of when completion takes place will, therefore, need to be considered in the purchase agreement.
Asset sale
An asset purchase in the UAE will share many features of asset purchases in other jurisdictions. The key transactional document is the long-form asset purchase agreement (APA). The APA does not need to be submitted before any authorities and, therefore, may be drafted in the language preferred by the parties. The APA may also be signed electronically if the parties prefer this approach.
As in the case of an SPA, in most cases, an APA may be subject to either the laws of the UAE or the laws of a foreign jurisdiction (with English law being the most commonly applied foreign law for an APA). For the transfer of certain assets (e.g., real estate, intellectual property, motor vehicles) there are likely additional formalities that will need to be followed, which should be addressed in the APA. It is generally acceptable for APAs to be signed in an electronic form under UAE law, provided that certain requirements are met with respect to verifying the signature.
An APA is usually subject to the jurisdiction of either the UAE courts (if the SPA is governed by UAE law), or the DIFC courts, the ADGM courts or an arbitration tribunal that is based in a jurisdiction that is a party to the New York Convention (if the SPA is governed by a different governing law, e.g., English law), as it can be problematic to enforce a court order or arbitration award in the UAE where the court order or arbitral award is granted in a jurisdiction other than the above.
Unless the assets to be transferred are of a type that is registered, there is no need to file any documentation with the relevant authorities. If the registered assets were to be transferred, the parties would typically execute a short-form document to that effect rather than filing the long-form APA that contains the full terms of the transaction with the authorities.
Certain types of registered assets may require a separate transfer agreement to be entered into or a procedure to be followed. Such assets include (without limitation) real estate, motor vehicles and registered intellectual property. Employees cannot be "transferred" under UAE law and, instead, will need to be terminated by the transferor and re-hired by the transferee. End of service benefits will accrue upon termination and accordingly any transfer of end of service benefits will need to be agreed with the relevant employees (see further commentary below in the Employment section).
Foreign investment restrictions
As of 1 October 2023, there is no general foreign investment screening procedure in the UAE.
In September 2021, the Commercial Companies Law was amended to remove the requirement that at least 51% of the share capital in an onshore company be owned by a UAE national. Following the adoption of the amended Commercial Companies Law, 100% foreign ownership of onshore entities was permitted, though restrictions continue to apply for certain activities (e.g. security, defense and military activities; banking, exchange houses, financing companies and insurance; communications; etc.).
While onshore companies had traditionally operated with such a foreign ownership limitation, companies incorporated in freezones permitted 100% foreign ownership.
In addition to the foregoing, the UAE has implemented a policy that permits 100% ownership of UAE companies by individuals or companies from the Gulf Cooperation Council (GCC). This policy is widely adopted, although its precise scope is unclear and it is left to the discretion of the individual corporate registration departments of the relevant emirate to implement.
Antitrust/merger control
The UAE has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed. For further information, see the more detailed section on "Antitrust/merger control".
Other regulatory or government approvals
The requirement for regulatory or government approvals varies depending on the sector, the industry and whether the target company or assets are located onshore in the UAE or within one of the UAE's many free zones. Approval will always be required from the relevant authority to transfer shares and such approval may be further conditioned on obtaining approvals from additional government departments.
Share sale: All employees who are employed by the target group would remain employed by the target company upon closing of the transfer of shares, and all employment contracts and immigration permissions would, therefore, remain in place.
It may be the case that one or more employees of the seller's group are not technically employed by the target group but they perform certain employment functions in relation to the target group. If the parties intend to transfer any such employees as part of the share sale transaction, they would need to apply the same approach for transferring those employees as that of the asset sale arrangement referred to below.
Asset sale: Employees transfer from the seller to the buyer under an asset sale by way of termination and rehire. New employment contracts would need to be entered into with each of the employees and new immigration permissions would need to be obtained in order to obtain a visa under the sponsorship of the buyer. If any employees refuse to agree to the transfer of their employment, they would remain employed by the seller unless and until their employment contracts are terminated or the employee resigns.
There is no obligation on the buyer to replicate the terms and conditions of the transferring employees, subject to any contractual obligation to do so that might be imposed under the transaction documents. However, employees are likely to be reluctant to agree to the transfer if they deem their new employment contracts to be less favorable for them. Although termination triggers the obligation to make all termination payments due to the transferring employees, it is common for the seller, the buyer and the employees to contractually agree to the rollover of the accruals and benefits to the new employment arrangement. This may require an adjustment to be made to the purchase price to reflect the rollover of these benefits.
There is no formal obligation to inform and consult with employees in either a share sale or an asset sale. However, such consultation is required in practice in relation to an asset sale, as the employment arrangement cannot be transferred in that case without the cooperation of the employee.
There is little in the way of legal guidance regulating the transfer of employees pursuant to a corporate transaction. There is one reference in Federal Decree Law No. 33 of 2021 to current employment contracts remaining in place in the event of a "change in the form or legal status" of an establishment, and requiring the new employer to be liable for the employees. This provision is unlikely to apply in an asset sale (given the requirement to terminate and rehire the employees). Further, the proportioning of liability is normally dealt with in the transaction documents, which typically provide that the seller is liable for any breach that it incurs up to the date of closing, with the buyer becoming responsible for any breaches that are incurred thereafter.
There is no stamp duty or capital transfer tax in the UAE. Registration fees are payable to the municipality on the transfer of real estate. The rate varies, depending on the emirate. In the emirate of Dubai, the rate is 4% of the value of the property.
Corporate income tax was introduced with effect from 1 June 2023. The applicable general tax rate is 9%. Companies established in free zones that undertake certain qualifying activities (subject to conditions specified in the tax legislation) are subject to tax at 0%. Government entities, government-controlled entities, qualifying Public Benefit entities, Qualifying Investment Funds, persons engaged in extractive business and persons engaged in non-extractive natural resource business are exempt from tax.
Income (including capital gains) from qualifying participations (5% or more ownership interest in a company) is exempt if certain conditions are met.
Transfers within Qualifying Groups can be made on a tax neutral basis and business restructuring reliefs are available if qualifying conditions are met.
Transfers between related parties are subjection to the application of arm's length pricing principles.
There is no personal income tax on individuals.
VAT is due at 5% on the transfers of assets in certain circumstances (but not on shares). The transfer of a business as a going concern is, however, outside the scope of VAT.
There is no withholding tax on the remittance of funds (within or outside the UAE).
The UAE has a network of tax treaties, which makes it a flexible tax efficient jurisdiction for structuring corporate holdings for acquisitions.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.