The Counsel

International - Mergers and Acquisitions

Mergers & Acquisitions in Oman

by Taimur Malik

Legal Advisor, Middle East & North Africa Region, Vale Minerals and Metals

The financial challenges being faced by businesses all over the world have resulted in many organizations looking towards consolidation through mergers as a means of survival whereas others have embarked upon acquisitions led by growth objectives to prepare for future opportunities.
Mergers and acquisitions (“M & A”) are not uncommon in the Middle East and Oman has continued to witness moderate M & A activity in recent years. For example, M & A deals have been instrumental in Bank Muscat’s growth and these include its mergers with Al Bank Al Ahli Al Omani, Commercial Bank of Oman and the Industrial Bank of Oman. Similarly, Bank Dhofar al-Omani al-Fransi and Majan International Bank merged in 2003 to form Bank Dhofar and ONIC Holding was formed as a result of the merger of Oman National Holding Company and Al-Ahlia Portfolio Securities Company in 1998. Moreover, RSA Insurance Group plc and ONIC Holding recently announced that, subject to regulatory and other approvals, RSA Oman will acquire Al Ahlia Insurance from ONIC Holding and in return ONIC Holding will acquire a 20.3% stake in RSA Oman.
On the acquisitions front, Electricity Holding Company recently acquired the majority stake in Dhofar Power Company and ANC Holdings of UAE acquired the majority stake in Dhofar Fisheries Industries Company.

Structuring Considerations
The most important decision in relation to an M & A transaction relates to the structuring of the deal. In the case of mergers, the decision whether to merge one company into the other company or to establish a new company depends to a large extent on the social and commercial considerations of the parties.
Another important factor, in addition to issues relating to the assignment and taking over of the rights and obligations of the merging company, is the transfer of the employment contracts and particularly of the employment visas of the foreign employees of the merging company to the incorporating company or to the new company established pursuant to the merger.
In relation to acquisitions, the acquirer needs to decide whether it is more appropriate to simply go for the acquisition of the assets of the target company or to acquire its shares.
Royal Decree 4/1974 (the “Commercial Companies Law”) provides for mergers to take place either (a) by way of incorporation, i.e. dissolution of one or more companies and transfer of their assets and liabilities to an existing company or (b) by way of consolidation, i.e. establishment of a new company to which the assets and liabilities of all the companies to be amalgamated are transferred and subsequent dissolution of such companies.

Legal Due Diligence
A legal due diligence exercise is an important part of an M & A transaction and helps the parties to identify any legal risks and consider strategies to minimize such risks (e.g. by requiring the counter party to remove these risks as a condition precedent or provide warranties in this respect).
At the initial stage the due diligence of an Omani company usually involves the review of its corporate documents including, inter alia, the Constitutive Contract/Articles of Association, Ministry of Commerce and Industry (“MOCI”) Certificate of Incorporation and Commercial Registration Information print-out and Authorised Signatories Form, Oman Chamber of Commerce & Industry membership certificate and the latest audited financial statements. The due diligence should also cover aspects relating to the registration of all Omani employees of the company with the Public Authority for Social Insurance ("PASI") and evidence that all PASI contributions are up to date.
As the due diligence proceeds further, additional information relating to the company’s shareholders, financial commitments, contractual rights and obligations should also be reviewed including details of any legal or commercial mortgages creating a charge on the property of the company, particulars of all guarantees, performance bonds, letters of comfort or similar documents of assurance and any indemnities provided by the company or its directors for the benefit of the company.

Regulatory Considerations
In the case of certain companies such as those undertaking activities in the banking, insurance, electricity or water sectors, there is a need to obtain specific approvals for an M & A transaction from the relevant regulatory bodies.
If the target is a bank or an institution carrying out banking and financial activities, the bidder must first obtain the approval of the Central Bank of Oman (“CBO”) and if the target is an investment fund or brokerage company then an approval is required from the Capital Market Authority (“CMA”).
Similarly, in the case of companies in the electricity sector, approval for the change of control is required from the Authority for Electricity Regulation Oman (“AERO”). In this respect, consideration will need to be given to the conditions of the licence granted to the target company by AERO and the bidder’s existing shareholding in companies operating in the electricity sector in Oman.

Foreign Capital Investment Law
M & A transactions involving foreign investment also require consideration of Royal Decree 102/1994, the Foreign Capital Investment Law (“FCIL”). If the merger involves the takeover of an Omani company by another Omani company, care must be taken to ensure that the foreign investment limit of 70% is not exceeded. Similarly, if a new company is to be established pursuant to the merger of one or more companies, the provisions of the FCIL relating to share capital and foreign shareholding would need to be complied with.

Labour Law Matters
Royal Decree 35/ 2003 as amended (the “Labour Law”) sets out the rights and obligations of the employees and employers in great detail and companies contemplating M&A transactions in Oman will need to look at various issues in relation to employment matters.
For example, it is pertinent to evaluate in relation to the target company or the other merging companies (normally as part of the due diligence and valuation process) the nature of any accumulated end of service gratuities with respect to the non-Omani employees and that there are no arrears in relation to the PASI contributions and that the company complies with its Omanisation targets.
Companies also need to consider whether it will be necessary to terminate the services of any existing employees of the merging or target company. This is important because the Labour Law provides protection to employees against termination without cause and it is normal for courts to award compensation to employees in such cases as the courts are not likely to accept a merger as a valid reason for dismissal.
In the event that a new company is to be established pursuant to the merger transaction then the existing non-Omani employees will need to be transferred to the sponsorship/visa of the new company.
According to the terms of the Labour Law the contracts of employment will continue to exist pursuant to a merger and the successor entity will be jointly responsible with the former employers for discharging all the obligations prescribed by the Labour Law.

Listed Companies
M & A transactions involving listed companies take more time and are subject to greater regulatory and legal requirements and approvals compared with transactions involving only unlisted companies.
For example, there are disclosure requirements in relation to listed companies and any contemplated transactions especially transactions that may result in a change of control need to be disclosed through the electronic system of the Muscat Securities Market.
Moreover, Royal Decree 80/98 (the “Capital Market Law”) provides that no single person or related persons up to the second degree of kinship can hold 25% or more of the shares of a joint stock company whose shares are offered for public subscription, except by a prior approval of the Executive President of the CMA.
Furthermore, where the persons to whom the shares are allotted are related parties, the company has to disclose this fact to the shareholders and a resolution of the company’s General Meeting approving such a related party transaction needs to include the names of the proposed allottees, the number of shares and the issue price.
The above mentioned matters are some of the important issues that need to be considered by businesses contemplating an M & A transaction in Oman. Other pertinent issues include the valuation mechanism and pricing structure for the shares/assets of the merging or target company and any tax implications arising from the transaction. As highlighted above, there are a number of legal, regulatory and procedural issues that need to be considered by the parties before embarking upon an M & A transaction and timely advice and assistance in respect of these matters can improve the efficiency and clarity with which the completion of such transactions can be achieved.

Taimur Malik worked as Executive Director of the Research Society of International Law (RSIL) Pakistan and with Ahmer Bilal Soofi & Co before joining a leading law firm in the Sultanate of Oman. He is now the Legal Adviser (Middle East & North Africa) at Vale (formerly known as CVRD), world’s second largest mining and diversified metals company. This article was originally published in the Business Today magazine and is based on the Oman chapter written by him for a forthcoming Globe Law and Business publication on Mergers & Acquisitions in the Middle East. Comments may be directed to editors@counselpakistan.com.