The M&A Lifecycle Part 2 – Due Diligence - M&A/Private Equity - United Arab Emirates (2024)

Continuing from our earlier article on the mergers andacquisitions (M&A) lifecycle, we will be looking at the processof due diligence which occurs once term sheets have been signed andnon-disclosure agreements (NDAs) are in place. As a key part of theM&A lifecycle, a thorough due diligence process is likely tobenefit both sides of a transaction. Through this process, buyerswill become aware of any perceived risks in relation to theiracquisition and can seek to either encourage the seller to remedythe issue or otherwise mitigate the risk through protectionsincluded in the transaction documentation. Sellers, on the otherhand, can use this process to ensure full disclosure to buyersabout the entity they are acquiring as a tool to reduce anypotential liabilities post-transaction.

The due diligence to be carried out is often sector-targetcompany ("Target") andpurchaser-dependent, focusing on those areas where issues mayarise. Generally, this is likely to include financial and legal duediligence, alongside possible other areas such as tax, commercial,technical, regulatory and/or environmental due diligence, dependingon the nature of the Target (and its assets) and the buyer'sconcerns.

The scope of the legal due diligence will then likely bedetermined between the buyer and their lawyers. In particular, thefollowing is likely to be considered:

• Corporate – Are filings, licences andregisters complete, accurate and up-to-date? It is not unusual tofind that shareholder and ultimate beneficial ownership registershave not been kept up to date, which should be rectifiedpre-completion where possible to avoid the buyer inheriting anyliability in this regard. Corporate registries maintained byrelevant authorities should be checked to confirm records areaccurate, although in certain jurisdictions, including onshore inthe UAE, these may not be accessible or available.
• Related Party Contracts – Are therecontracts with related parties which may be at an undervalue ordiverting profit or assets away from the Target? Are there directorloans or similar? The buyer may want to consider whether sucharrangements should remain in place following completion.
• Finance – Is there any security over theTarget? Is there any indebtedness, including intra-group? Are thereany personal guarantees or similar arrangements in relation to debtfacilities? These should be considered to identify any repaymentsrequired at completion and removal of charges where appropriate.This will also usually be flagged through financial duediligence.
• Commercial – Are the Target's topcustomer and supplier contracts current or historic (i.e. is therea revenue pipeline and is supply secured)? Specifically in the UAE,are there any agency or distributor arrangements which may bedifficult to terminate due to local laws? Do the contracts includebalanced provisions to address risk or are there any unusual/overlyonerous obligations? Are there any change of control provisions?Where such issues exist, it is not unusual for lawyers to recommendthat affected contracts be re-negotiated post-completion. The buyerwill also need to consider whether it wishes to seek change incontrol consents from key customers pre-completion.
• Intellectual Property (IP) – What IP hasbeen registered and what remains unregistered? Has the registeredIP been registered in the name of the Target, or does it needassigning from another entity or individual? Does the Target ownthe IP used in connection with its business, or does it rely onthird-party licences? Do employment contracts contain adequate IPprovisions (i.e. ensuring all IP is held by the Target)? Dependingon the issues raised, pre and post-completion rectification itemsmay be recommended, such as ensuring IP assignment documents are inplace.
• Litigation – Has the Target beeninvolved in any litigation in recent years? If so, what is thestatus? If cases are ongoing, an assessment of risk will need to bemade, and protection sought in the transaction documents (if deemedmaterial) to avoid the buyer inheriting any latent liability forsomething that occurred prior to its control.
• Employment – What contractualarrangements are in place with employees/contractors? Arecontractors treated as contractors, or is there a risk of thembeing reclassified as employees and therefore subject to morestatutory rights/obligations? What termination provisions andpost-termination restrictions are included? It may be that newemployment contracts are recommended, particularly for seniormanagement, prior to completion of a transaction. It will also beimportant to understand who the key employees are and seek someassurance that they will continue after the change of ownership. Ifkey employees whose details are registered with a relevantauthority, such as a General Manager of a UAE entity, will beleaving post-completion, corporate filings and signatoryrequirements will also need to be considered as part of the duediligence.
• Property – What properties areleased/owned by the Target? Are any leases due to expire, what arethe terms of these, and do they contain any unusual obligations?Has the Target breached any covenants? If the lease term is nearexpiration, the renewal process should be considered (particularlyif the premises are critical to the Target), or if not, theposition on dilapidations needs to be considered and those chargesaccounted for.
• Regulatory – What licences/regulatoryconsents does the Target require to operate in key jurisdictions?Are filings and licences, including any trade licences if theTarget is based onshore in the UAE, current and up-to-date? Haveany regulatory investigations been undertaken, and what was theoutcome of these? It may be that updates are required pre orpost-completion to rectify any issues identified.

The above is not intended to be an exhaustive list, butconsiders some of the key areas that would usually be considered tosome extent. These need to be considered across the Target'sgroup of companies, wherever they may be incorporated. There may besignificant transactional risks that apply only in certainjurisdictions; therefore, those local matters should be considered,and by local lawyers where appropriate.

As alluded to above, once risks have been identified, thelawyers carrying out the due diligence should go beyond this andconsider recommendations to the buyer. These may includerecommendations to consider a price-chip in the event of a materialissue, to recommend indemnities to protect the buyer (on a poundfor pound basis) in the event of any loss, and warranties to ensurethe sellers can confirm certain positions in relation to the Targetand its group companies. They may also consider rectification itemsto be undertaken pre or post-completion by the Target and sellersshould anticipate such requirements when considering their saletimeline.

The upcoming third part of our M&A lifecycle series willconsider the key transaction documents and the role they play inthe M&A process.

Gowling WLG is well-placed to assist with all aspects of M&Atransactions and is consistently ranked for M&A work across theglobe. We are able to deliver both cross-border and domesticcorporate transactions as part of structured sale processes oroff-market deals.

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The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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