Acquisition of Companies in the State of Qatar

 

Acquisition of Companies in the State of Qatar

and Australia

 

 

A Comparative Analysis

Dr. Zain Al Abdin Sharar

Dr. Mohamed AlKhulaifi([·])

 

Executive Summary

In recent years, acquisitions have become an increasingly popular choice for local public shareholding companies in Qatar striving for economic growth, and looking to increase their investment and enter foreign markets.([1]) In response to the importance of acquisitions as a mean of economic concentration and a method for external growth, the Qatari legislatures enacted Law No 3 of 2010 amending some rules of the Commercial Companies Law No. (5) of 2002, and has introduced Chapter 4 which included new rules for acquisitions.([2]) The new rules set out basic procedure, which applies to a friendly acquisition,([3]) when a public shareholding company acquires the shares of another public shareholding company within the State of Qatar.([4]) However, the new rules lack clarity, and do not indicate the goals and objectives of acquisition.([5]) Moreover, the rules do not sufficiently address important issues in acquisitions, such as protection of shareholders of the target company (the acquired company),([6]) hostile acquisitions, compulsory acquisitions, cross border acquisitions and disclosure of information to shareholders.

In Australia, Chapter (6) of the Corporation Act 2001 set out detailed rules regulating acquisition (also known as takeover),([7]) and is largely concerned with protecting shareholders of target companies.([8]) It applies to listed companies, unlisted companies with more than 50 members and listed managed investment schemes. Other important rules relating to takeovers are found in the Australian Stock Exchange (ASX)Listing Rules, ([9]) the Foreign Acquisitions and Takeovers Act (FATA) which contains complex provisions regulating the acquisition directly or indirectly by foreign persons of, inter alia, Australia companies,([10]) and other applicable legislation which imposes restriction on takeovers involving companies which operate in particular industries such as banking, media([11]) and life insurance.([12])

This article compares the acquisition regime in Australia with that which applies in Qatar by virtue of Law No 3 of 2010 only, and makes some recommendations to the Qatari authorities about how the Qatari law could be modified to make it more consistent with the Australian takeovers law and therefore more consistent with international standards and best practices.

Definitions of Acquisition

According to Gaughan, the expression ‘acquisition’ or ‘takeover’ is a legal process whereby a company buys or takes control of another, whether by buying the majority of the company’s shares or all of its property. ([13]) This will clearly be the case where a company acquires all or over 50 per cent of the voting shares in the target company. ([14]) As a result of this process, the acquiring company becomes a holding company, whilst the target company (acquired company) becomes a subsidiary without losing its legal personality. ([15])

The consideration for an acquisition of shares of a target company is usually cash; however, the consideration may comprise shares in the acquiring company, or a mixture of cash and shares.([16])

The most popular types of acquisition are: friendly acquisition (friendly takeover) and hostile acquisition (hostile takeover).([17])

In a friendly acquisition, the acquiring company buys or takes controls of the company’s shares through negotiations between the directors and management of the acquiring company and directors and management of the target company.([18]) This type of acquisition is also known as a negotiated acquisition.([19])

On the other hand, in a hostile acquisition,([20]) the acquired company unilaterally acquires the shares of the target company through the capital market (the exchange) and without the consent of the latter one. Generally, the acquiring company usually makes an offer to all of the shareholders to buy the shares in order to gain majority control of the voting shares in the target company, after getting the approval of the regulator of the capital market, without the need to get the approval of the target’s management and directors.([21])

Scope of Application

In Qatar, Article 282 (bis) 1 of The Companies Law No. 5 of 2002 , as amended by Law No 3 of 2010 uses the words “acquisition of a company” and therefore, on the face of it would appear that it covers only acquisitions of a public company,([22]) and does not extend to investment funds ([23]) or collective investment schemes.([24]) This interpretation is consistent with the fact that as at the time of writing this paper, there were no laws in place in Qatar regulating collective investment schemes.([25])

Article 282 (bis) 2 set out the steps and procedures that the acquiring company and the acquired company need to follow in order to have a valid acquisition. In addition, Article 282 (bis) 2(1) provides that both the acquiring company and the acquired company (target company) are required to approve the acquisition by way of a resolution of an extraordinary general assembly. Therefore, it can be concluded that the acquisitions rules contained in Law No 3 of 2010 are designed only for friendly acquisitions and do not apply to hostile acquisitions.

Moreover, The acquisition rules contained in Article 282 (bis) 1- Articles 282 (bis) 4 address only acquisitions made by companies and do not address acquisitions made by individuals.([26])

In Australia the takeovers legislation applies to takeovers of companies and other corporate bodies,([27]) which are either listed on the Australian Securities Exchange (ASX) or have fifty shareholders or more.([28]) It is important to note that the takeovers legislation applies also to listed management investment schemes (e.g. unit trusts).([29])

When do the Acquisition (Takeovers) Provisions Apply?

In Australia the takeovers rules are set out in Chapter 6 of the Corporations Act 2001 (Cth).([30]) The principles set out in Chapter 6 are aimed at ensuring that changes in control of a public company are open and fair and ensure that all shareholders are treated the same way.

Under section 602 of the Corporations Act, the purposes of the takeovers provisions seek to ensure that:

acquisition of control should take place in an efficient, competitive and informed market;([31])

shareholders and directors of a target should know the identity of the bidder,([32])

have a reasonable time to consider an acquisition proposal([33])

are given sufficient information to be able to assess the merits of the offer([34]) ; and

all shareholders should have a reasonable and equal opportunity to participate in the benefits of the offer([35]).

Moreover, section 602 applies to acquisitions of control over:

voting shares in unlisted companies with more than 50 members;

listed bodies other than companies; and

voting interests in listed managed investment schemes.

Listed managed investment schemes are treated as if they are listed companies.([36])

According to section 606 of the Corporations Act, there is a prohibition against a person acquiring a “relevant interest” in the securities of an Australia company if, by virtue of the acquisition:

that person’s voting power in the company increases from below 20% to above 20%; or

a person’s voting power in the company is between 20% and 90% and increases([37]).

The prohibition in section 606 is subject to a number of exceptions which are set out in section 611.([38]) For example, a person does not breach the section if an acquisition:

resulted from acceptance of an offer under a takeover bid;

resulted from an on-market transaction where the acquisition is by a takeover bidder during the bid period;

was previously approved by resolution of the general meeting of the target company;

was by creeping takeover whereby the acquirer held voting power in the company of at least 19 per cent and no more than 3 percent was acquired in the previous six months;

occurred as a result of an allotment by the company to all shareholders on a pro rata basis; or resulted from a dividend reinvestment plan available to all shareholders.

The reasons for these technical exceptions are based on the assumption that it would not assist the objectives of the takeovers legislation by requiring compliance in those situations.

In Qatar, unlike the Australian provisions, there is no stated prohibition against acquiring a particular percentage of voting shares.([39]) According to Article 282 (bis) 1 of Law No 3 of 2010 which provides that “acquisition shall occur through direct or indirect ownership for a part of the capital of another company or by obtaining a majority of voting rights throughout the purchase of all shares or part therefor through a public offer for exchange or pursuant to an agreement with partners or shareholder without prejudice to the interests and objectives of the company or through any method provided for in the provisions of this law.”([40])

As can be seen, there is no specified limit on the number of shares that need to be acquired in the target company to be subject to the acquisition rules. Article 282 (bis) 1 states that “acquisition of a company shall take the form of direct or indirect ownership for a part of the capital of another company”.([41]) Accordingly, accruing any percentage in a public company will constitute to be acquisition as the article does not specify what is meant by “a part of the company”.([42]) Therefore, it is highly recommended that the Qatari legislature clarify what is meant by “part of the company” by stating the exact percentage, which will constitute a percentage for acquisition.

However, the second paragraph of Article 282 (bis) 1 stipulates clearly that the acquisition of a company can be accomplished by “obtaining majority of voting rights”.([43]) This clearly would suggest that acquisition of voting rights should not be lower than fifty plus percent as Article 282 (bis) 1 uses the word “majority”. This interpretation is very significant, as a bidder could stand in the market and acquire up to just short of 50% without having to make any statement or disclosure about its intention to acquire the target company.

It is not clear how Article 282 (bis) 1 would be interpreted and applied by the Qatari courts and the authorities. It also remains to be seen if, in practice, there will be any challenges mounted by interested parties against a proposed acquisition where it does not comply with these take-over provisions, even though the acquisition is not of a majority stake in a company.

Moreover, the acquisitions provisions refer to an “indirect ownership for a part of the capital of another company”, they do not define what amounts to an indirect acquisition nor do they clearly address and define the concept of related parties in an acquisition. As such, it is arguable that these provisions could be circumvented through an acquisition by parties acting in concert.

Therefore, the Qatari legislature should amend chapter 4 of Law No 3 of 2010 in order to include detailed articles that clarify the exact percentage required so that acquisitions are in line with the Australian Corporations act. This would eliminate the ambiguity in chapter 4 of the Commercial Companies Law.

Disclosure of ownership of shares

In Australia, One of the main objectives of the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth) is to ensure that the identity of a person who propose to acquire a substantial interest in a company be known to shareholders and directors.([44]) However, this is implemented partially in the substantial holding provisions of Part 6C and the tracing beneficial ownership of shares provisions of Part 6C.2 of the Corporations Act 2001 (Cth).([45])

The substantial holding provisions,([46]) compel shareholders who have a relevant interest in not less than five per cent of the voting shares of a listed company to disclose to the company full particulars of their relevant interest in the shares.([47]) The disclosure of substantial holding information is often the first indication on an impending takeover bid.

Therefore, it is important to understand the scope and meaning of the term “relevant interest”.([48]) Under the Corporations Act, a person has a “relevant interest” if they are the holder of the security, they have the power to control the exercise of the voting power attached to the security, or they have the power to dispose or control the disposal of the security.([49])

Likewise it is important to also understand what is included in the term “voting power”. A person’s voting power comprises the aggregate votes of the person and associates taken as a percentage of the total votes in the body corporate.([50]) The term includes not only the voting securities which a person owns but also includes the associates of that person, so that their interest in voting securities must also be taken into account.([51])