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ASAR Partners shed more light on Takeovers and Mandatory Offers New CML rule seeks to facilitate consolidation of industry sectors and protection for minority shareholders

KUWAIT CITY, Dec 21: No stock market in the world works perfectly, there’s always room for improvement. And the Capital Markets Law (CML) of Kuwait which triggered the formation of the Kuwait Capital Markets Authority (CMA) is a bold attempt at infusing some more sanity and transparency as well as fairness into the Kuwaiti Capital Markets, ensuring a level playing field for all including minority shareholders. A media roundtable was organized by ASAR - Al Ruwayeh & Partners Law Firm (ASAR) at the corporate law firm’s premises as a follow up Q & A session following the recent seminar on Takeovers and Mandatory Offers. The event was held to throw more light on Takeovers and Mandatory Offers as stipulated in the Kuwait Capital Markets Law and the bye-laws thereto (CML). The CMA was created under the CML as a governing body for stock exchange activities. Ibrahim Sattout and John Cunha, both Partners in the Banking & Finance and Capital Markets department of ASAR handled questions expertly from the press.

On Mandatory Offers, Sattout explained that in a situation where a company owns more than 30% shares in an entity listed on the Kuwait Stock Exchange prior to the entry into effect of the CML, then the company should not be bound by the Mandatory Offer rules, but if later on the company raises its stake, then it must make a Mandatory Offer to acquire the rest of the shares (up to 100%) in the listed entity. “So mandatory offers are triggered once a person comes into the possession (whether directly or indirectly) of more than 30% (the Mandatory Offer threshold) of the shares of a listed company”, said Sattout who added further, however, that shareholders would be required to make a Mandatory Offer in the event where an existing shareholder who has shareholding above the Mandatory Offer threshold will be required to make a Mandatory Offer if and only if the shareholder decides to raise or lower his shareholding, but still leaving them with a shareholding above the Mandatory Offer threshold.

The impact of the Mandatory Offer rules on investment may deter certain investors from making acquisitions if they’re not interested in the compulsory 100% acquisitions. Essentially, there might be various reasons for investors not to want to cross the Mandatory Offer threshold because they might not have the finances to proceed with the mandatory acquisition and just stay happy with their level of investment below the Mandatory Offer threshold. There’re exceptions though where the CMA may decide to exempt a person from having to make a Mandatory Offer out of consideration for the public interest and the interest of the remaining shareholders. There haven’t been cases where these exceptions have had to be exercised, but the CMA has the Mandatory Offer waiver power.

From the pricing perspective, Cunha noted that there was an instance a few months back where the CMA changed the pricing mechanism of a Mandatory Offer with the position now being that one can make any offer in terms of price but it should be within a certain minimum price range. The price must be the highest of either i) the average price for the target company as determined by the Kuwait Stock Exchange for the six months prior to the date of the disclosure of the Mandatory Offer, or the highest price paid by the bidder, or any of his affiliates, allied or associate parties within the six months prior to the date of the disclosure of the Mandatory Offer.

So whichever is the higher, the average price as determined by the Kuwait Stock Exchange or the last higher price paid by the bidder, or any of his affiliates, allied or associate parties within the last six months.  This is also a shareholders’ protection mechanism to ensure that shareholders receive fair value for their shares in the target company. In a mandatory situation, the target company’s shareholders’ approval is not needed; , whereas in the target company, the approval must come from the individual shareholders.  In all events, the process is always monitored by the CMA.
Cunha stated that one of the many reasons for the mandatory offer rule is to facilitate the consolidation and strengthening of industry sectors. Another reason for the rule is to provide protection for minority shareholders so they don’t get muscled out of the market and those decide to exit get fair value for their shares.
The CML of Kuwait was inspired by the Saudi Capital Market Law which was the only independent CML existing before then in the entire GCC.  The two CMLs were specifically created to regulate the markets in their respective jurisdictions and to regulate various matters, including mandatory offers and takeovers.  

Regarding positives brought by the new CML legislation to the market, Sattout explained that before it came into force, there was no single separate independent body controlling or monitoring the market with powers to prosecute, issue regulations, apply sanctions on errant traders, the CML came and put all these in place in addition to the regulations for acquisitions which were absent under the previous legislation, with the exception of the provisions of the companies law dealing with mergers and the Kuwait Stock Exchange’s block trading rules (which was similar to sale of 5% or more of a listed company’s shares by auction). Neither of the two gave enough protection to minority shareholders.
Among the novelties brought by the CML include regulations regarding the disclosure to the CMA and the Kuwait Stock Exchange of interest (that is 5% or more in a listed company), and material information about listed companies and which might affect the price of the company, and dealing with insider information for listed companies. All these rules were issued in order to enhance transparency of the market and ensure no abuse.

As to what extent CMA can find out and punish rogue companies, Cunha said the CML has a specific chapter in it that regulates all disclosures which need to be made to various parties concerning the holding of shares in Kuwait listed companies. For instance the holding by a shareholder of 5% or more of the shares of a Kuwait listed company (and the fluctuation thereof of in excess of half a percent) must be disclosed to the concerned listed company itself, the Kuwait Stock Exchange, and the CMA.
Board neutrality is ensured in the context of a mandatory by-law offer or takeover as in one of the rules in CMA bylaws in which the board is prohibited from taking their own subjective interests into account on whether to push for or against a proposed takeover and additionally, under CMA rules, an independent financial adviser who must be licensed under CMA rules, to advise on takeovers and mandatory offers with shareholders’ interest in mind.

By Iddris Seidu
Arab Times Staff

By: Iddris Seidu

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