United Arab Emirates Treasury Shares Guide IBA Corporate and M&A Law Committee 2014

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1 United Arab Emirates Treasury Shares Guide IBA Corporate and M&A Law Committee 2014 Contact Sameer Huda or Muhammad Nassef Ali Hadef & Partners, Dubai, United Arab Emirates

2 Contents Page INTRODUCTION 2 GENERAL OVERVIEW 2 REGULATORY FRAMEWORK 2 ACQUISTION OF TREASURY SHARES 3 UTILIZATION OF TREASURY SHARES 5 SALE OF TREASURY SHARES 5 TREASURY SHARES AND TAKEOVER LAW 6 Page 1

3 INTRODUCTION Set out below is a brief description of certain aspects of the regulatory framework relating to the buyback of shares of a public joint stock company ( Company ) under the laws and regulations of the United Arab Emirates ( UAE ). Accordingly, please note that this guide does not tackle the regulations issued by free trade zones located in the UAE in respect of the matter at issue or any other related matter. Generally, it should be noted that the UAE business laws and regulations are still under development and have yet to reach a level of maturity and sophistication comparable to that of the US and the EU business laws and regulations. It should also be noted that a new law regulating commercial companies is expected to be issued during the course of this year. Such new law might introduce new provisions in respect of treasury shares and might also change the provisions of the current law in respect of the same subject matter. The information in this guide does not constitute legal advice and should not substitute professional legal advice. GENERAL OVERVIEW Is the buyback of shares permitted in your jurisdiction? The buyback of shares of a Company is permitted under UAE law, however, it is subject to certain restrictions and conditions as set out below. What are the characteristics (maximum holdings, voting rights and other rights) of treasury shares? Treasury shares do not carry any voting rights nor dividend rights as long as they are held by the issuing Company (if applicable). As for the maximum permitted holding of treasury shares, please see our comments below. What are the main reasons to acquire treasury shares? A Company may only buy back its shares for one of the following purposes: 1. to reduce its share capital; 2. to redeem the bought-back shares; or 3. to sell those shares after buying them, but, in such case, the Company may not buy more than ten percent (10%) of its shares, subject to the terms set out below. REGULATORY FRAMEWORK Treasury shares are primarily regulated under Law No. 8 of 1984 Concerning Commercial Companies ( Companies Law ). As you will discern from our comments below, Companies Law does not contain detailed regulation of several aspects of treasury shares. Also, we note that, with respect to certain UAE legislation, implementing regulations are issued to provide more details as to the implementation of such legislation; however, no implementing regulations have been issued in respect of Companies Law. Page 2

4 In addition to Companies Law, buyback of shares listed on a stock exchange in the UAE is regulated by certain regulations issued by the Securities and Commodities Authority ( SCA ), which is the UAE s main capital markets regulator. Those regulations include SCA s Board Decision No. 113/R of 2006 Concerning the Implementation of Article 168 of Companies Law ( ESCA Board Decision ). ACQUISTION OF TREASURY SHARES How can a company acquire treasury shares? In order to address this question, we shall analyse each of the three situations under which treasury shares can arise in the UAE (as noted above): 1. With respect to a buyback of shares for the purpose of reducing a Company s share capital, the following conditions must be satisfied: (a) (b) (c) (d) obtain the approval of shareholders of the Company in an extraordinary general assembly (it should be noted that the quorum for convening an extraordinary general assembly would satisfied by the attendance of shareholders holding not less than 75% of the Company s issued share capital and the approval of shareholders holding 75% of the shares represented in that meeting is necessary to pass a resolution to reduce the Company s capital); the Company s auditor s report in respect of the reduction of the Company s share capital must be presented in the extraordinary general assembly in which the resolution to that effect will be passed; obtain the approval of the Ministry of Economy; and the reduction of the Company s share capital shall be based on either: (a) the fact that the Company s share capital exceeds the Company s financial needs; or (b) the fact that the Company has incurred a loss that cannot be rectified through future profits. 2. With respect to a buyback of shares for the purpose of redeeming a Company s shares, the Company s business must be of a type that erodes gradually throughout the Company s lifetime. In addition, the Company s articles of association must provide a right for the Company to redeem its shares. Accordingly, in case the Company s articles of association do not provide for such right, a resolution must be passed by the extraordinary general assembly to amend the articles of association. It should be noted that the quorum for convening an extraordinary general assembly is the attendance of shareholders holding not less than 75% of the Company s issued share capital and the approval of shareholders holding not less than 50% of the shares represented in that meeting is necessary to pass a resolution in that regard. 3. With respect to a buyback of shares for the purpose of subsequently selling those shares, the following conditions must be satisfied: (a) notifying SCA and the stock exchange on which the shares are listed of the date of: (a) the corporate meeting in which the buyback will be discussed; and (b) the resolution of the Company s Board of Directors pursuant to which the buyback has been approved; Page 3

5 (b) (c) (d) obtaining the approval of SCA prior to execution of the buyback transaction and, if the Company is a bank, it must obtain the prior approval of the Central Bank and it must finance and implement the buyback transaction in accordance with the terms set out by the Central Bank; the buyback of shares may not take place within the 15 days preceding the end of a financial quarter, financial half-year, initial financial year, or a subsequent financial year and it may not take place within the 3 days following disclosure of the Company s accounts; and the buyback of shares must take place through the applicable trading rules of the relevant stock exchange. Are there any restrictions in acquiring treasury shares? (e.g. purpose-wise; accountingwise?) As noted above, a Company may buy back its shares only for one of the following purposes: to reduce its share capital; 1. to redeem those shares; or 2. to sell those shares after buying them, but, in such case, the Company may not buy more than ten percent (10%) of its shares. In addition, please note the following restrictions in respect of treasury shares bought for the purpose of subsequently selling them: 1. the buyback of the shares must take place within a year as of the date of issuance of the SCA s approval in relation thereto; 2. the Company must use funds that are in excess of its capital and the legal reserve that the Company is required to deduct from the net profits (being 10% of such net profits); 3. the Company may not sell any of its shares while undertaking the buyback of the shares; 4. the Company may not apply for a buyback of its shares until not less than one year has elapsed from the date of sale of the bought-back shares; and 5. neither the members of the Company s board of directors nor its executive managers may be a party in the purchase or sale of treasury shares. Which authorization is needed? Please see above. What are the publicity requirements in the event of acquisition of treasury shares? The buyback of shares must be published in two daily and widely-published newspapers. One of these newspapers must be printed in Arabic. The Company may not undertake the buyback of the shares within the two weeks that follow the publishing of a notice indicating the buyback of shares. In addition, the Company must disclose all the purchase and sale transactions in respect of its shares in the first quarterly report issued after the relevant sale or purchase transaction. Page 4

6 Put and call options do they count as acquisition of own shares? There are no provisions under UAE law which regulate whether acquisitions of put or call options count as a buyback of shares. Accordingly, we believe that an acquisition of shares by means of a put or call option does not count as a buyback of shares, except to the extent that SCA has solid grounds to believe that such an acquisition has been undertaken for the purposes of circumventing a mandatory provision of Companies Law, ESCA Board Decision or any other relevant regulation. UTILIZATION OF TREASURY SHARES Are there any statutory obligations to resell or redeem treasury shares? A Company must resell the shares it bought according to a buyback transaction within two years of the date of the latest buyback transaction (note that the buyback transaction must take place within a year of the date of SCA s approval of such transaction). In addition, if the resale of the bought-back shares does not take place within that two-year period, the buyback transaction would be deemed to have been made for the purpose of reducing the Company s capital and, therefore, the bought-back shares would be deemed to be redeemed. How are treasury shares redeemed? As noted above, treasury shares may either be redeemed immediately upon buying them pursuant to the provisions of Companies Law and the Company s memorandum of association or upon the expiry of the timeframe determined by Companies Law for the resale of such treasury shares. UAE law does not provide further details as to the redemption of treasury shares. SALE OF TREASURY SHARES How can the company sell treasury shares? A Company must notify SCA and the stock exchange on which the treasury shares are listed of the Company s decision approving the sale of the treasury shares. It should be noted that the sale of the treasury shares must take place through an authorized stock exchange in the UAE. Are there any restrictions for selling treasury shares? We note the following restrictions in respect of selling treasury shares: (a) (b) (c) the Company may not sell any of its shares while undertaking a buyback of the shares; the Company may not issue new shares until completion of the sale of the treasury shares; and neither the members of the Company s board of directors nor its executive managers may be a party in the sale of treasury shares. Which authorization is needed for selling treasury shares? As noted above, a Company must notify SCA and the stock exchange on which the treasury shares are listed of the Company s decision approving the sale of the treasury shares. Page 5

7 Can treasury shares be sold other than via the stock exchange or by public tender offer? As mentioned above, the sale of the treasury shares must take place through an authorized stock exchange in the UAE. What are the publicity requirements in the event of a sale of treasury shares? A Company must disclose any sale transactions of treasury shares in the first quarterly report issued after the relevant sale of treasury shares. What legal restrictions are there in order to avoid market abuse? Article 1 of ESCA Board Decision relevantly provides that a Company will be liable for any adverse effect that the purchase or sale of treasury shares may have on its financial position. In addition, if a buyback represents a material event that affects the share s price, the Company must immediately disclose such buyback. Neither the members of the Company s Board of Directors nor its executive managers may be a party in the purchase or sale of treasury shares. Generally, trading in shares, whether directly or indirectly, based on non-public or undisclosed information is subject to criminal penalties. Further, dissemination of inaccurate information that could affect an investor s decision is subject to criminal penalties. TREASURY SHARES AND TAKEOVER LAW What are the general implications of treasury shares under the applicable takeover law regime? There is no federal law regulating takeovers in the UAE, however, the three stock exchanges being the Dubai Financial Market ( DFM ), Nasdaq Dubai and Abu Dhabi Stock Exchange ( ADSA ) regulate takeovers based on their own rules. Treasury Shares as defense measures? As noted above, takeovers are not specifically regulated by federal law in the UAE. Page 6