Why a buyer might leave the company where it is and buy only what it owns, and what that choice does to the due diligence, the completion mechanics and the licences the buyer will need.
This is Part 5 of our Investment Series. Earlier parts looked at the legal systems that can govern a UAE acquisition, the MOU, due diligence and the promises a buyer obtains in the sale agreement, and most of that discussion assumed that the buyer was acquiring a company. Here we consider the alternative, in which the company stays with its owners and the buyer acquires only the assets it owns.
Buying the Shares or Buying the Assets
The most straightforward way to acquire a business is to buy the shares in the company that owns it. The company carries on exactly as before, with its licences, contracts, employees and bank accounts intact, and the only thing that changes is who owns it. That simplicity comes at a price, because the company brings with it everything it has ever done, including the claims nobody has yet brought, the tax returns nobody has yet queried and the employment grievances still simmering in the background. Since a buyer of shares inherits all of it, a buyer of shares has to investigate all of it, which is why share acquisitions call for the wide-ranging due diligence described in Part 3.
In an asset purchase the buyer chooses what it wants, whether a building, a fleet of equipment or a piece of software and the intellectual property in it, and the seller transfers those assets alone, keeping its own liabilities and its own history. Take a company whose only business has been to build, and then to run, a particular technology platform. A buyer interested in the platform may have no use for the company itself, still less for its office lease, its staff, its supplier disputes or whatever it may owe the tax authority, and by buying the software and the rights in it the buyer can take what it values and leave the rest behind.
The attraction is real, though it would be a mistake to treat an asset purchase as free of risk. Some liabilities attach to an asset whoever owns it, and each asset has to be transferred by its own process, which in the UAE is often more demanding than the transfer of shares. Above all, the seller’s licences and permissions stay with the seller, so the buyer may need to obtain its own before it can lawfully hold or use what it has bought.
| Share purchase | Asset purchase | |
|---|---|---|
| What the buyer acquires | The company, with all its assets and all its liabilities | Only the assets it selects, together with any liabilities that attach to them |
| Scope of due diligence | The whole company and its history | The assets, the seller’s title to them and third-party rights over them |
| How title passes | Transfer of the shares under the rules of the relevant jurisdiction | Asset by asset, each under its own registration or transfer process |
| Licences and permits | Remain with the company, subject to any change of control approvals | Stay with the seller; the buyer needs its own |
| Contracts | Continue, subject to any change of control provisions | Generally need the counterparty’s consent to transfer |
| Employees | Stay employed by the company | Do not transfer automatically and must be re-employed by the buyer |
Due Diligence on an Asset Deal
Due diligence remains necessary on an asset purchase, but its subject changes. The enquiry now centres on the asset itself: whether the seller owns it outright, whether anyone else has a claim over it, and what obligations come attached to it.
With real estate, the starting point in Dubai is the register kept by the Dubai Land Department, since a transfer of property is not valid until it has been recorded there. The register will show whether the property is mortgaged, in which case the mortgage will need to be discharged, usually out of the purchase price, before the transfer can be registered. It will also show whether the property has been attached by the court in an execution case against the owner. An attachment takes effect once it is entered on the property records, and from that point the property cannot be sold until the attachment has been lifted, so a seller with unpaid judgment debts should be assumed to have creditors who will look first to its land. A dispute over the property that has not yet produced any entry on the register will not appear there at all, and is a matter for searches, enquiries of the seller and, in the end, warranties.
Where the building is let, the tenancies come with it. Under Dubai’s tenancy law a change of ownership does not affect a tenant’s right to remain for the rest of a fixed-term lease. A landlord may recover possession at the end of a lease only on the grounds the law allows, and where the ground is a sale, demolition, major renovation or the owner’s own use, only after giving the tenant twelve months’ notice through a notary public or by registered post. A buyer with plans for vacant possession or redevelopment should therefore not assume that it will get either on its own timetable. Each lease needs to be reviewed for its rent, its term and any renewal rights, the tenants’ security deposits held by the seller need to be accounted for on completion, and the buyer should check that each lease has been registered on Ejari.
The location of the property matters as much as its title. Outside the designated freehold areas, ownership in Dubai is reserved to UAE and GCC nationals, companies wholly owned by them and public joint stock companies. Foreign buyers, and UAE companies with any foreign shareholder, are confined to the designated areas, and the Land Department applies its own policies on which corporate vehicles may hold title even there, so the buyer’s ownership structure has to be checked against the property before anything else is done. Abu Dhabi has a broadly similar system of designated investment areas, under its own rules. Within a master-planned community, the developer’s no-objection certificate will ordinarily be needed before the transfer can be registered, and will not be issued until service charges have been paid up to date. Land in some free zones, Jebel Ali among them, is held on a lease rather than as freehold, and the lease will typically prohibit any assignment without the landlord’s consent. There is cost as well: the Land Department charges a transfer fee, currently 4% of the value, which should be reflected in the price negotiations from the outset.
With software, the questions concern the chain of title. The buyer needs to know who wrote the code and under what contracts, whether each employee and contractor assigned their rights to the seller in writing, what open-source components are embedded in the product and on what licence terms, and where any patents and trade marks are registered, and in whose name. Intellectual property rights are territorial, so a product sold in several countries may be protected, or not, quite differently in each, and the diligence needs to follow the registrations wherever they are.
Completion: Transferring Each Asset
Where completion of a share sale is largely a matter of transferring the shares, each asset in an asset deal passes by whatever method the law prescribes for that kind of asset, and the methods vary a good deal. Land is transferred by registration with the relevant land department. Vehicles and equipment registered with the Roads and Transport Authority (RTA) are transferred through the RTA, which requires any finance recorded against the vehicle to be released, and outstanding traffic fines to be paid, before it will register the new owner.
Copyright in software arises in the UAE without any need for registration, and is assigned by a written agreement which must specify the rights being transferred and the purpose, duration and place of their use. A UAE patent is assigned by a written agreement signed by both parties, made before the Ministry of Economy, notarised or duly attested, and then recorded on the patent register. A transfer of a trademark is not enforceable against third parties until it has been entered on the trademark register and published. Registrations outside the UAE each follow their own local procedure, and completion of such procedures can take months to complete.
Contracts are not carried across by the sale of the assets. Customer contracts, licences of third-party software and hosting arrangements cannot generally be transferred without the other party’s agreement, so each one that matters will need to be novated, or replaced with a new contract between the counterparty and the buyer. Nor do employees transfer automatically. The federal Labour Law, which also governs the standard free zones, has no equivalent of the regime in the United Kingdom under which employees move with the business, so the seller will usually end their employment, pay the end-of-service gratuity and other accrued entitlements and cancel the visas, and the buyer will offer new contracts and sponsor new visas. Since no employee can be obliged to accept, a buyer who depends on particular individuals should secure their agreement before it commits.
As some of these steps take time, and lie partly outside the parties’ control, payment of the price is often separated from signing. A common structure is for the buyer to pay the price, or part of it, into escrow on signing, with the escrow agent releasing it to the seller in stages as defined steps are completed: the land transfer registered, the patent assignments recorded in each listed country, the key customer contracts novated. Each step should carry a deadline and a clear consequence if the deadline is missed, whether a reduction in the price, a right for the buyer to recover the unreleased balance, or both.
The agreement should also oblige the seller to sign whatever further documents are needed to perfect the buyer’s title after completion. Such a clause is standard and well worth having, although it is only as good as the seller’s continued existence, a point discussed in Part 4. A company that has sold its only valuable asset is precisely the kind of company that tends to be wound up soon afterwards, and the timetable for any outstanding filings, and the money held back to secure them, should be set with that in mind.
Licences Stay With the Seller
Buyers new to the UAE most often overlook the fact that a licence belongs to the person who holds it. In a share sale this usually works in the buyer’s favour, since the company keeps its trade licence, its regulatory approvals and its registrations, subject to any change of control approvals of the kind discussed in Part 1. In an asset deal, the buyer acquires the assets but none of the permissions the seller held in order to own and use them.
A mobile crane bought as part of a fleet of construction equipment shows how this works in practice. The crane is registered with the RTA, and a company can register a vehicle in its own name only once it is itself registered with the RTA, which in turn requires a valid trade licence. A company may also carry on only the activities its licence permits, so a buyer that intends to hire the cranes out, or to operate them on its own projects, will need those activities on its licence, together with any permits the RTA requires for them. A buyer that agrees to purchase the fleet without first putting its own licensing in order may find that it has paid for equipment it cannot register, insure or put to work.
Regulated sectors raise the same issue in a sharper form. Health facility licences, for example, are generally not transferable, so a buyer of a clinic’s equipment and premises will need its own facility licence before it can treat a single patient. Where a business depends on a licence that is slow or difficult to obtain, that fact alone may tip the balance in favour of buying the company instead.
Making the Choice
An asset purchase tends to suit a buyer who wants something specific and readily identifiable, such as a building, a fleet or a product, and who is wary of a company whose history it cannot fully investigate. A share purchase tends to suit a buyer for whom the value lies in the business as a going concern, in its licences, its contracts and its people, which are precisely the things that do not travel easily on their own.
Sellers often see the matter differently. A seller of shares parts with the company and, apart from the warranties and indemnities it gives in the sale agreement, with its liabilities too, whereas a seller of assets is left holding a company, its liabilities and the cash, and must then decide what to do with all three. That difference often surfaces in the price, and it is one reason the choice of structure is best settled early, ideally at the MOU stage, before either side has built its expectations around the other.
As with the other stages of a transaction covered in this series, the structure of an acquisition is itself a means of allocating risk. A buyer who chooses it deliberately, with a clear view of what it is buying and what it is leaving behind, will usually find that the rest of the transaction falls more readily into place.
This publication does not provide any legal advice and is for information purposes only.