Legal &Regulatory Bulletin 20

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CONTENTS

4 Private Equity in Vietnam

7Colombia: Ten Years of Development of the PE Industry

10Amendments to Foreign Fund Private Placement Exemptions in the UAE

12The Auction Process: Advantages and Disadvantages and the Key Steps

© 2017 EMPEA2

About EMPEA

EMPEA is the global industry association for

private capital in emerging markets. We are an

independent non-profit organization with over

300 member firms, comprising institutional

investors, fund managers and industry advisors,

who together manage more than US$1 trillion

of assets and have offices in more than 100

countries across the globe. Our members share

EMPEA’s belief that private capital is a highly

suited investment strategy in emerging markets,

delivering attractive long-term investment

returns and promoting the sustainable growth

of companies and economies. We support

our members through global authoritative

intelligence, conferences, networking, education

and advocacy.

For more information, visit empea.org.

Publication Editorial Team Ann Marie Plubell Vice President, Regulatory Affairs

Production Assistance Ben Pierce Pierce Designers

© 2017 EMPEA. All rights reserved. The EMPEA Legal & Regulatory Bulletin is an EMPEA publication. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the prior permission of EMPEA.

EMPEA | The Watergate Office Building | 2600 Virginia Avenue N.W., Suite 500 Washington, D.C. 20037-1905 USA

Phone: +1.202.333.8171 | Fax: +1.202.333.3162 | Web: empea.org

To learn more about EMPEA or to request a membership application, please send an email to membership@empea.net.

EMPEA Legal & Regulatory Council

Mark Kenderdine-Davies (Chair) CDC Group plc

Carolyn Campbell Emerging Capital Partners

Antonio Felix de Araujo Cintra TozziniFreire Advogados

John Daghlian O’Melveny & Myers

Mark Davies King & Spalding

Barbara Day OPIC

Folake Elias-Adebowale Udo Udoma & Belo-Osagie

Laura Friedrich Shearman & Sterling LLP

Geoffrey Kittredge Debevoise & Plimpton

Prakash Mehta Akin Gump Strauss Hauer & Feld LLP

Zia Mody AZB & Partners

Gordon Myers IFC

Peter O’Driscoll Orrick, Herrington & Sutcliffe LLP

Chike Obianwu Templars

Bayo Odubeko Norton Rose Fulbright

Paul Owers Actis

George Springsteen IFC Asset Management Company

Mara Topping White & Case LLP

Cindy Valentine King & Wood Mallesons SJ Berwin

Nigel Wellings Clifford Chance

Harald Zeiter Capital Dynamics

DISCLAIMER: This material should not be construed as professional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity community in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Radel at radelh@empea.net.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 3

I would like to take this opportunity to wish you a very Happy New Year and welcome you to the Winter Edition of our Bulletin.

The Bulletin features contributions from lawyers and private equity executives based in Bogota, Dubai, Hanoi, Ho Chi Minh City and Tokyo on legal, regulatory and market matters. The variety of the content reflects EMPEA’s global footprint.

I hope that the articles will pique the interest of practitioners in the emerging markets private capital investment community and thank the contributors for putting pen to paper.

In this Bulletin our contributors present: Private Equity in Vietnam: a reflection on the Vietnamese private equity market over the last decade. The contributors, a seasoned lawyer and a private equity firm owner, have both lived in the country for more than 20 years observing its evolution from a command to a quasi-market economy with a maturing private equity market and changing laws and regulations.

Private Equity in Colombia: an overview of the Colombian private equity market over the last decade with a focus on the development of the domestic fund management community and the role of local institutional investors.

Recent Amendments to the exemptions for foreign funds making private placements in the United Arab Emirates: an overview and analysis of fund formation and fundraising issues in the United Arab Emirates.

Merger and acquisitions strategy and the use of the auction process: an analysis of M&A strategy and the pros and cons of divesting portfolio investments via an auction process.

EMPEA Regulatory Affairs Resources: • EMPEA’s regulatory advocacy resources support members

as they seek to encourage legal and regulatory enabling environments in emerging markets that don’t disadvantage private investment. Contact: Ann Marie Plubell, VP, Regulatory Affairs at plubella@empea.net.

• EMPEA Guidelines set out key legal and tax regimes optimal for the development of private equity and are now available in numerous languages including Arabic, Burmese, Chinese (simplified character), Portuguese, Vietnamese, Russian and Spanish on the EMPEA website.

• EMPEA Legal & Regulatory Council draws on deep subject matter expertise in the emerging markets practice to address trending concerns.

• EMPEA Legal & Regulatory Bulletin publishes key perspectives and insights of leading practitioners on current challenges and concerns of the emerging markets community plus the occasional overview of the market in particular countries.

• EMPEA education courses and resources for emerging market regulators, pension and policy oversight officials highlight the foundational issues relating to the development and regulation of private equity in developing economies.

I encourage you to mark your calendars to attend the Annual Global Private Equity Conference in Washington DC on 16 and 17 May 2017 and the supervisory authority/regulators’ breakfast presentation on 18 May 2017.

I look forward to seeing many of you there. Do introduce yourself to me if we have not met. I also invite you to share your thoughts on this Bulletin and more generally with Ann Marie Plubell, VP, Regulatory Affairs at EMPEA atplubella@empea.net.

Best wishes to you all,

Mark Kenderdine-DaviesGeneral Counsel, CDC Group plcChair, EMPEA Legal and Regulatory CouncilMember, EMPEA Board

A Letter from the Council Chair

© 2017 EMPEA4

Private Equity in VietnamBy Tony Foster, Freshfields Bruckhaus Deringer and Chris Freund, Mekong Capital

The DealsOne of the first deals by a global private equity firm in Vietnam was in 2006, when TPG and Intel Capital invested in FPT, a local IT firm. Now FPT has grown to the point where it is purchasing companies outside Vietnam.

Another notable foreign transaction recently was the acquisition by a fund managed by Warburg Pincus of an interest in all of the retail assets of Vingroup, one of the largest private sector property developers. This was the largest initial private equity investment ever in Vietnam and has since been scaled up.

In between these two bookends there have been:

• Private equity investments by large international names such as KKR, further deals by TPG, Goldman Sachs, Mount Kellett, CVC and GIC, among others. These investments have tended to be in the US$100 million range and up, but there are typically not a lot of investments in this size range.

• Investments by smaller offshore funds managed by the likes of Navis, TAEL and Gaw Capital. These have tended to be in the US$15 to US$50 million range.

• Numerous investments by Vietnam specific private equity funds such as funds managed by Mekong Capital, Vietnam Investment Group and Private Equity New Markets (f.k.a. BankInvest). These investments are typically in the US$6-20 million range and are much larger in volume than the first two categories.

A constant challenge facing private equity firms of all sizes is that the investment opportunities in Vietnam tend to be smaller than their funds are targeting. This can sometimes force funds to be creative. It also reduces the number of deals.

Private equity investments have been made in both equitised State-owned enterprises (SOEs) and in private sector companies, with the latter predominating. Most investments into equitised companies occurred between

2005-2008 when many funds followed a pre-IPO investment strategy, following some successful investments in the auctions of Vinamilk shares in 2003 and 2005. Most pre-IPO opportunities at the time were equitised SOEs. But with the collapse of the stock market starting in mid-2007, the IPO market dried up. Since then, capital has increasingly flowed to emerging private companies such as Masan Group, VinGroup, MobileWorld, Golden Gate, etc.

Operational ChallengesCorporate governance and management standards in Vietnam remain low in many sectors, which is both a challenge and an opportunity for private equity in Vietnam. Equitised companies often retain many bad habits from the state owned days, such as managers receiving under-the-table commissions on purchases and sub-contracting to related parties of senior executives. Private companies may not face such issues, but they typically under-invest in developing their management teams and are often a “one-man show” with no clear path to long-term sustainability.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 5

Hence successful private equity investors in Vietnam are actively involved in improving their investee companies. Mekong Capital recently conducted an analysis of its past 30 investments and found a strong correlation between the degree to which those companies had implemented Mekong’s Vision Driving Investing approach and their Net Profit CAGR, with less than 10% being outliers.

Regulatory Trends There are various drivers of all the interest in Vietnam. The political backdrop is stable (even more so when compared with other countries more normally regarded as beacons of stability). GDP growth hovers around 6%. There are now more companies of investable size. Warburg Pincus’ investment into Vincom Retail involved around US$300 million. The Government has recently announced it would sell its 90% stake in the Saigon Beer Company in two lots, each of which could fetch US$1 billion. Depending on the sector and the circumstances, valuations are often not unreasonable given the growth possibilities.

Part of this has been driven by liberalization of the Investment Law and the Enterprise Law. The changes make it easier for funds to structure their investments and to invest in more sectors with greater certainty. For example, for the first time the definition of a foreign-invested company is clear. This makes it easier to set up a structure that enables foreign money to be invested into a domestic company if such is necessary in light of foreign ownership limitations.

At the same time foreign ownership limitations are gradually being eliminated either sectorally – as phase-in periods for full foreign

ownership contained in the 2007 WTO accession become effective – or for listed companies such as Vinamilk that, under new regulations, pass the appropriate shareholder resolutions allowing for foreign shareholders to own more than 49%.

The real estate sector, which has attracted several funds, has benefitted from the lifting of the prior ban on foreign ownership of housing in Vietnam.

The Government has been moving forward with its equitisation (privatization) program. While investments in privatized companies are difficult for offshore funds given their complexities, those who understand the process have been able to profit.

Common Structures and InstrumentsPE funds normally invest through convertible or exchangeable bonds, convertible or exchangeable loans or preference shares directly in the Vietnamese investee company. The investor cannot set up a pure holding company in Vietnam. Even if the investee is owned by a local quasi-holding company, the investor tends to invest as close to its money as possible for greater control and visibility.

There are various considerations in determining the appropriate structure for an investment:

• Convertible/exchangeable loans with a term of more than 1 year have to be registered with the State Bank of Vietnam (SBV). The SBV may raise questions if the interest rate (or IRR) is too high (there is no interest rate cap but the SBV has complete discretion as to what it will permit).

• Convertible/exchangeable bonds can only be issued by companies that have been profitable on an operating basis for the previous year.

• Preference shares, though contemplated in the law, have a limited legal foundation and there are many unanswered questions. Dividend and liquidation preference shares do not carry voting rights. Voting preference shares exist but only in specific circumstances that do not apply in this context. The legality or enforceability of hybrid preference shares is debatable. As a result, preferred share investors often acquire ordinary shares as well (and possibly debt too).

As a result of uncertainties, investors tend to try to back up their structures with put options either to the company or to the ultimate owners, if that is feasible. These are sometimes supported by security interests.

Common Risk FactorsThe fundamental question with many investments is that of the enforceability of the documents as agreed. For the larger deals, there is a split on the use of English law or Vietnamese law (English law can be used so it is only if the PE investor has insufficient leverage that Vietnamese law is accepted). But nearly all deals stipulate that disputes will be heard in an offshore arbitral forum (usually Singapore). An award can theoretically be enforced in Vietnam, but in this context the difficulties suggest that enforcement against offshore assets will be easier if they exist.

PE funds (including the Vietnam-specific ones) are all foreign entities and so invest dollars through their Vietnam capital accounts. The investments (except for a loan) are in Vietnamese Dong, so the PE fund is taking the foreign exchange risk. For some years now this has proved to be a reasonable risk to take, especially compared to the currency turmoil in other parts of the world. The Vietnamese Dong has not devalued at all from Sept 2015 – Sept 2016. Returns have to be expressed in VND but some investors attempt to

“Part of this has been driven by liberalization of the Investment Law and the Enterprise Law. The changes make it easier for funds to structure their investments and to invest in more sectors with greater certainty.

© 2017 EMPEA6

use exchange rate adjustments. These are of questionable legality and would be relatively straightforward to challenge. They should therefore be backed up by alternative provisions if the primary ones are found wanting.

If the investment capital is brought into Vietnam through the correct accounts, it (and any dividends) can be repatriated through such accounts without undue difficulty though with a reasonable amount of paperwork. On rare occasions and for short periods, the banks have been short of foreign currency and in such circumstances there is no guarantee that money can be remitted or converted at any particular rate.

ExitsThere have been numerous successful exits by PE funds in Vietnam. Mekong has exited many of the investments in its first two funds through sales to trade buyers and share sales after local IPOs. The latter can take time as liquidity is not huge, so a plan for such sales has to be drawn up that will not disrupt the market. Typically listed companies with strong corporate governance and attractive growth rates quickly reach the foreign ownership cap (usually 49%), resulting in most transactions happening in large block transactions at a premium to the public equity price – and most disposals of listed shares by PE funds have occurred via these “off market transactions”.

There has been no track record of successful listings of Vietnamese companies outside Vietnam. To date, a combination of the Vietnamese rules on foreign ownership, the foreign exchange rules, inadequate familiarity with disclosure principles and cost have conspired to preclude such IPOs.

There are some theoretical problems in converting into ordinary shares prior to a sale. Various regulatory approvals may be needed in respect of the issuance of new shares and in respect

of the non-cash consideration that will be needed for them. There is also an issue about whether such shares will be subject to a lock-up period. Again, proper planning can avoid a lot of the pitfalls. In practice, the conversions have generally been implemented as expected. But the risks are such that investors normally build in fall-back rights (either against existing “founder” shareholders if they exist, or against company cash) in case they are less fortunate.

A specific problem has arisen in respect of the conversion of preference shares into ordinaries. In a recent preference share deal, the local Department of Planning and Investment argued that because the par value of an ordinary share and a preference share is both VND 10,000, the conversion ratio had to be 1:1. The redemption preference therefore has to be considered carefully in case there needs to be a sale followed by a new investment into ordinary shares.

ConclusionVietnam is changing rapidly. The economy has been growing consistently by impressive, and possibly sustainable, amounts of between 5 – 7% a year. There are plenty of opportunities (though often small ones) for investors who are familiar with the market. But as in any emerging market, potential pitfalls abound for those who do not spend the time to develop a real understanding.

About the Authors

Tony Foster is a Partner at Freshfields Bruckhaus Deringer.

Chris Freund is a Partner at Mekong Capital.

“There has been no track record of successful listings of Vietnamese companies outside Vietnam. To date, a combination of the Vietnamese rules on foreign ownership, the foreign exchange rules, inadequate familiarity with disclosure principles and cost have conspired to preclude such IPOs.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 7

Introduction Colombia’s PE industry has reached its first decade (2006-2016). Incorporation of local funds has been successful for an emerging economy, placing Colombia in the spotlight of foreign and domestic GPs willing to incorporate local PE vehicles or to raise capital from local investors, specifically in the real estate and infrastructure sectors. Simultaneously, local investors such as pension funds and insurance companies are increasingly seeking attractive PE opportunities offered by international managers abroad.

As of May of 2016, the Colombian PE association - Colcapital2, reported 82

domestic funds with a total committed capital of almost US$22.000 million, representing an increase of 15% with respect to May of 2015. Of this amount, 54% is associated with domestic investments, of which nearly US$6.7 million are already invested, leaving US$5.3 million available to invest.

Development Per Sector: Infrastructure and Real EstateColombia currently has 11 domestic infrastructure funds with total committed capital of US$5.2 million. This represents a 100% increase on the existing infrastructure initiatives with respect to 2015, that obeys to the significant demand for private financing

of infrastructure projects derived from the US$15 billion 4G toll-road program sponsored by the Colombian government.

In fact, the Colombian government has put in place a robust infrastructure program, focused not only on roads but also on other sectors such as airports, rail, ports, mass transportation systems, hydrocarbons, gas and energy. Pursuant to the Financiera de Desarrollo Nacional, the infrastructure sector needs approximately US$25 billion to finance infrastructure projects in the following years. The Colombian government has only US$4 billion, which represents a huge opportunity to other investors such a local and foreign PE funds.

1. Brigard & Urrutia is a leading full-service business law firm in Colombia. www.bu.com.co2. Our special thanks to the Asociación Colombiana de Fondos de Capital Privado - Colcapital for providing us with the necessary industry information to produce

this article. Colcapital is constantly monitoring the evolution of the industry, producing consolidated and comprehensive information to facilitate the analysis of the evolution of PE industry in Colombia.

Colombia: Ten Years of Development of the PE IndustryLuis Gabriel Morcillo, Brigard & Urrutia Abogados and Lyana De Luca, Brigard & Urrutia Abogados1

© 2017 EMPEA8

With these figures and because the Government hosted a series of clear regulations such as the PPP Act and the creation of the National Agency of Infrastructure - ANI, world-class infrastructure developers are now encouraged to invest in 4G projects. This kind of action also boosted the participation of key investors, such as multilateral agencies, sovereign funds and offshore pension plans, who had previously been absent from Colombia’s infrastructure landscape.

More particularly, this constant necessity available capital to finance the different infrastructure programs triggered two regulatory modifications in the local pension funds investment regime. In 2015, the Ministry of Finance issued Decree 1385 that created a specific allocation for local pension funds to invest in local PE infrastructure funds. Subsequently, in 2016 the Ministry issued Decree 765, which created a new asset class defined as alternative investments with its own mandate to invest in infrastructure assets. PE funds were included within this new bucket in an attempt to stimulate investments in local private equity funds.

On the other hand, since a few years ago, good and steady prices and a rising middle class accessing the real estate sector has confirmed the interest of local investors such as pension funds, insurance companies and family offices, as well as the awareness of local and foreign GPs. Currently, in Colombia there are 22 local real estate Funds, with total commitments of US$2.042 million, representing an increase of 56% with respect to 2015. Local real estate funds are managed by important local developers and large economic groups, such as Santo Domingo’s family through Terranum, Inverlink, Amarilo, Jaguar Capital and important financial groups such as Bancolombia,

Credicorp and BTG Pactual, and the recent alliance of Argos and Conconcreto through Pactia. In addition, foreign groups such as Paladin and Jamestown are willing to raise capital in the country and are also thinking about the possibility of incorporating a local vehicle.

Other kinds of vehicles such as buy-out funds or venture capital initiatives also have a positive but much steadier perspective. Local pension funds are skeptical of committing additional capital, since exits from existing first vintage funds are only until now, occurring and have not been as frequent as desirable. In fact, the Colombian PE industry is still waiting for an outbreak of numerous and successful exits. In addition, the venture capital industry is still taking off and faces some concerns with respect to typical PE. Local fund structures are expensive for entrepreneurs and investors are not increasingly willing to sponsor early stage projects. With this in mind, local incubators such as Ruta N, Innpulsa, Fundación Bavaria and the Colombian branch of NXTP Labs have made enormous efforts to foster venture capital and risk investments. Therefore, there has been an increase of 53% local venture vehicles with respect to 2014, with 9 venture funds representing US$89.5 million.

There are some examples of GPs raising second or third generation funds (for example, Altra, MAS Equity Partners, Tribeca, Terranum Capital), which demonstrates the confidence of local investors, especially pension funds, insurance companies and family offices in the PE industry. However, this trend

will be stronger once the exits wave is ratified with good results and GPs demonstrate their ability to successfully disinvest a PE fund.

Finally, the Colombian PE industry is reaching an initial level of maturity that permits some entities such as Bancoldex3 to explore the possibility of incorporating the first Colombian fund of funds with a Latam regional scope. This proves that governmental authorities like Bancoldex are willing to become general partners and assume the fiduciary responsibility derived of such a role to cooperate with the development of an industry like PE that is in constant growth.

General Regulatory FrameworkFrom a legal perspective, Colombia’s private equity regulations are well developed and are contributing to the development of a robust domestic industry. The fondos de capital privado regime has been in place since 2007 when domestic pension funds were allowed to invest in private equity and pooled fund structures. In 2015 Colombia maintained its standing in the annual LAVCA Scorecard which rates the attractiveness of Latin American countries for private equity. Colombia has 61 points (out of 100) and is ranking as the fourth strongest environment in Latin America for the development of private equity (only after Brazil, Mexico and Chile)4.

The structure of local private equity funds is consistent with global market practices, having a similar general-limited partner structure, and with an additional

“From a legal perspective, Colombia’s private equity regulations are well developed and are contributing to the development of a robust domestic industry.

3. Bancoldex S.A. is the national development bank. 4. The Latin America Venture Capital Association (LAVCA) Scorecard on the Private Equity and Venture Capital Environment in Latin America and the Caribbean,

available at www.lavca.org

EMPEA Legal & Regulatory Bulletin | WINTER 2017 9

administrative figure in charge of a local supervised financial entity (mainly for back office purposes). General partners do not have to be registered companies but must demonstrate at least five years of experience in managing private equity investments. Although local regulation requires the presence of a local administrator supervised by local regulators, it can be said that these entities have been in constant evolution and the sophistication of their operations and back-office activities, which creates fluid relationships with GPs.

Regarding their incorporation process, private equity funds are not subject to a prior approval of the local regulator and are required only to file certain documents with the Colombian Superintendent of Finance to begin operations. Although during certain years the process was not as efficient as defined in the regulations, the Superintendence of Finance has finally adopted the non-objection 15-day period for a faster and easier set up of local funds.

It is worth commenting also that during 2014 and 2015, appraisals and valuation of portfolio assets was the center of attention of all PE stakeholders. The local regulator implemented a third party registered-valuator figure (proveedor de precios or official price vendors) that intended to implement an objective valuation process free from potential conflicts of interests. However, GPs and investors raised their voices against an expensive and non-practical structure in which valuations had to be done by a third party with no experience in the sector in which the fund was invested. Bearing this in mind, the local regulator recently enacted a new rule (Circular 015 of 2016) that permits the Fund to voluntarily adopt the registered price vendor figure or to delegate valuation in the GP or any other independent investment bank, aligning Colombian practices with international standards.

Competitive Taxation RegimeWith respect to tax regulations, the local private equity industry benefits from some competitive advantages that serve to attract foreign investment. Carried interest income is treated as capital gains and not ordinary income and is generally subject to a tax rate of 10%. In addition, the fund itself is not subject to income tax (“Transparency Principle”) and therefore distributions to the investors are taxed as direct gains of the investors depending on whether they are Colombian or offshore residents and particularly, depending on the taxes being paid by each of the underlying assets of the fund. Also, PE Funds are proper deferral instruments to only pay taxes once actual profits are distributed to investors, because the conventional PE waterfall is accepted and distributions made by the Fund may be accounted first as a return of capital, allowing efficient tax planning structures whereby profits are reinvested indefinitely without taxes.

Colombia General OverviewThe improvement of security conditions in recent years has contributed to the re-establishment of investors’ confidence in the country, particularly in light of the end of a 50-year conflict with local communist guerrillas in August 2016. In accordance with the International Monetary Fund, “despite facing a terms-of-trade shock larger than most of its peers, Colombia posted one of the highest growth rates in the region and achieved important social

gains with improvements in poverty reduction and income inequality”5. However, Colombia’s economy will grow only 2.5% compared to 4.45% in 2014 and 3.1% in 2015 due to the drop in oil prices, which had a hard impact on the national economy making tax reform necessary to fill the hole in central government’s budget.

About the Authors

Luis Gabriel Morcillo is a Partner and Associate at Brigard & Urrutia Abogados.

Lyana De Luca is an Associate at Brigard & Urrutia Abogados.

“The improvement of security conditions in recent years has contributed to the re-establishment of investors’ confidence in the country, particularly in light of the end of a 50-year conflict with local communist guerrillas in August 2016.

5. International Monetary Fund, “Colombia: Concluding Statement of the 2016 Article IV Mission“. March 16, 2016. www.imf.org.

© 2017 EMPEA10

In August 2016, the Emirates Securities and Commodities Authority (SCA), the federal securities regulator of the United Arab Emirates (UAE), adopted new investment funds regulations (the 2016 Fund Regulations), which repealed the prior funds regulations adopted in 2012 and amended in 2013 (the 2013 Regulations). This clarified the formation process for the establishment of locally domiciled funds and introduced significant changes to the marketing of foreign domiciled investment funds in the UAE. The 2016 Fund Regulations impose substantial hurdles and costs for managers seeking to promote foreign funds in the UAE and have generally been subject to negative feedback.

Managers wishing to market foreign funds onshore in the UAE now have far fewer options: they can register the fund with SCA and enter into a distribution arrangement with a locally licensed placement agent, engage in reverse solicitation (where the investor inside the UAE initiates the transaction) or rely on a private placement exemption when offering to sovereign entities (which is the lone exemption remaining from the 2013 Regulations). Funds established in a free zone inside the UAE, including funds established in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM), are considered by SCA to be foreign funds.

However, it is widely expected that SCA will issue further clarification regarding additional exemptions, potentially reintroducing the private placement exemptions set out in the 2013 Regulations and introducing additional exemptions for certain other classes of investors, such as multilateral institutions. SCA has not

confirmed the timing for the issuance of the clarification or the specific terms and requirements of any additional exemptions.

Further, it is important to note that the 2016 Fund Regulations do not apply to foreign funds wishing to offer in the DIFC or ADGM. Marketing of foreign fund interests and other securities in these free zones are subject to separate regulations and must be registered with the financial services regulator in the respective free zone without exception.

Background: 2013 Funds Regulations and ExemptionsThe 2013 Regulations introduced the first set of codified fund private placement exemptions in the UAE. Under the 2013 Regulations, foreign funds that were privately placed with the following categories of investors in the UAE were exempt from registration with SCA:

(a) investment portfolios owned by federal or local governmental agencies;

(b) institutions or entities whose purpose is to invest in securities, provided that such institutions are acquiring the fund interests for their own account; and

(c) investment managers with discretionary management authority.

The 2013 Regulations were generally viewed positively as they permitted foreign managers to approach certain types of institutional investors without engaging a local distributor or engaging in a lengthy registration process.

SCA also had adopted certain informal “tolerated” practices including offerings

without registration if the foreign manager (i) was marketing to existing clients of the manager or (ii) was engaging in reverse solicitation where the investor initiated the query. It is unclear whether the first “tolerated” exemption will continue to be permitted. The second “tolerated” exemption has been codified in the 2016 Fund Regulations as described below.

Requirement for Distribution by a SCA Licensed Placement AgentThe 2016 Fund Regulations provide that foreign funds may be promoted in the UAE only if:

(a) the foreign fund is registered with SCA; and

(b) the foreign fund is distributed through a SCA licensed placement agent, unless the fund can qualify for a limited private placement exemption or rely on reverse solicitation.

The 2016 Fund Regulations provide that SCA shall issue a decision within 30 business days of the submission of the

Amendments to Foreign Fund Private Placement Exemptions in the UAEBy James Stull, King & Spalding and Dora Chan, King & Spalding

“The 2016 Fund Regulations impose substantial hurdles and costs for managers seeking to promote foreign funds in the UAE and have generally been subject to negative feedback.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 11

registration application. A foreign fund’s registration expires on 31 December of each year and a renewal application must be submitted at least one month before the expiry of the registration. Pursuant to SCA Board Decision No. 10 of 2016, the fee payable on the initial registration application is AED 35,000 (approximately US$9,500). Thereafter a fee of AED 7,500 (approximately US$2,050) is payable on each annual renewal application.

Reverse SolicitationAs mentioned above, one positive development in the 2016 Fund Regulations is the express ability of foreign managers to offer funds in the UAE under reverse solicitation where an investor initiates the interaction. Reverse promotion is defined as the following scenario: “an initiative made by an investor in the [UAE] submitting an application to offer or buy specific units of foreign mutual funds out of the [UAE], which is not based on promotion by the foreign fund, its promoters or distributors of its units, provided this is substantiated by the concerned entity”.

It is expected that this will become the primary manner through which managers offer foreign funds unless SCA reintroduces additional private placement exemptions. It is critical that a foreign fund seeking to rely on the reverse promotion exemption must keep

proper records in order to prove the offering of the concerned securities was initiated by the UAE investor.

Government Agency and Other ExemptionsThe 2016 Fund Regulations exempts the promotion of foreign funds to federal or local governmental agencies and any companies wholly-owned by such an agency from the requirement to use an SCA licensed placement agent. As such foreign managers can continue to market foreign funds to and visit sovereign entities based in the UAE and other government related investors.

The following are also exempt from the operation of the 2016 Fund Regulations:

(a) funds established by federal or local governmental agencies or companies wholly-owned by such an entity;

(b) the accumulation of money for the purposes of investment in a joint bank account;

(c) the conclusion of group insurance agreements;

(d) social security programs;

(e) employee incentive programs; and

(f) investment plans associated with insurance contracts unless such investments or collected money are directed from such plans to funds.

ConclusionWhile the 2016 Fund Regulations do provide clarity regarding the offering process for funds in the UAE, the loss of foreign fund private placement exemptions greatly increases the challenge for foreign funds that wish to fundraise in the UAE. The introduction of the reverse solicitation exemption is a positive development; however, unless SCA issues the expected clarification and reintroduces the broader exemptions, foreign managers and issuers may reconsider the marketing of their products onshore in the UAE.

About the Authors

James Stull is a Partner with King & Spalding based in the firm’s Dubai and Riyadh offices.

Dora Chan is an Associate with King & Spalding, based in the firm’s Dubai office.

“...one positive development in the 2016 Fund Regulations is the express ability of foreign managers to offer funds in the UAE under reverse solicitation where an investor initiates the interaction.

© 2017 EMPEA12

The Auction Process: Advantages and Disadvantages and the Key StepsBy Mark Davies, King & Spalding and Trinh Chubbock, King & Spalding

Mergers and acquisitions represent a key growth strategy for many corporations. The M&A landscape is becoming increasingly competitive and the balance of power is shifting further in favour of buyers. For attractive businesses, however, sellers may wish to make divestments through an auction process which is designed to elicit competitive bidding among interested parties to facilitate the sale of a business or stake in a company at the highest price and on the best possible terms. This article seeks to explore the auction process and discusses:

(1) the differences between a competitive auction and bilateral negotiations;

(2) the advantages and disadvantages of a competitive auction; and

(3) an overview of the key steps in an auction process.

Auction Process vs. Bilateral NegotiationsBusiness owners deciding to sell a company or business may choose to sell by way of bilateral negotiations or a competitive auction process. Unlike bilateral negotiations where a seller

and a buyer negotiate directly, in a competitive auction, the seller seeks competing bids from potential buyers for the target. Further, in an auction process, the seller will carry out a substantial amount of work before the process is underway and, as a result, generally require the engagement of advisers in the early stages to prepare for auction launch. In bilateral negotiations, the buyer often provides a “shopping list” of requirements for the due diligence investigation. In an auction, however, the seller controls the disclosure process by limiting the scope of information made available and ensuring that disclosure is made in a

“The M&A landscape is becoming increasingly competitive and the balance of power is shifting further in favour of buyers.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 13

controlled manner, usually through the use of a data-room. Finally, an auction process often involves an expedited transaction schedule.

There are circumstances, however, where an auction process is not suitable. If the business is structurally complicated or if the market sector is limited and there are only a handful of viable bidders, the additional complexity of, and costs associated with, an auction process may not be worthwhile. Where significant external factors may affect a transaction, such as regulatory or competition issues or third party consent requirements, the potentially protracted timescale in resolving those matters may undermine a key benefit for the seller – i.e. speed. Further, where such external factors exist, the standardised documentation prepared in connection with an auction process may be impractical or impossible for certain bidders.

Auction Process: Advantages and Disadvantages

Advantages for the SellerAuction sales may provide a number of advantages for the seller. In an auction process, the seller (together with its investment bank or adviser) may comprehensively survey the market to uncover more potential buyers. Further, the seller controls the auction process and can seek to create a competitive environment in order to maximise its bargaining power. By encouraging the potential buyers to bid against one another, simultaneously negotiating with more than one bidder and keeping confidential the number and identity of bidders, the seller may achieve a higher price than otherwise possible under bilateral negotiations. The seller also produces the first draft of the sale and purchase agreement, placing itself in a strong position to obtain more favourable terms and

conditions from the start. The seller may also improve its leverage by imposing an expedited timetable, limiting the scope of disclosure of information and setting the timing of bidders’ due diligence investigation.

Disadvantages for the SellerNevertheless, there are disadvantages the seller must consider. The cost of running an auction sale is inevitably higher compared to bilateral negotiations as a result of higher fees payable to advisers. The seller will generally engage financial, legal and other advisers in the initial stages to assist in establishing a strategy for the auction process. Legal fees will inevitably be higher as the seller’s lawyers are responsible for the preparation of the initial suite of documentation. Having to concurrently negotiate with more than one bidder also adds to the overall costs of the advisers for the seller.

Given the multiple parties in an auction process, the wider dissemination of confidential information also poses a risk to the seller, especially where a bidder is a competitor – and, particularly, where such competitor’s participation in the auction is primarily for information gathering.

The likelihood of the seller negotiating with more than one bidder may also impose additional strains on the seller and the target’s management. Further, the knowledge of the sale alone may lead to negative consequences such as loss of, or a deterioration of morale among, employees, or even loss of business or customers. For these reasons, the seller often seeks to disclose information on a need to know basis (including the fact of the sale) – particularly as any public knowledge of the seller’s failure to sell the target would negatively impact the reputation of the target and the seller’s ability to attract a good price in a subsequent sale.

Buyer PerspectiveOf course, any benefits sought by the seller from an auction process will be to the detriment of the buyer. Given the potential competition posed by other bidders, a potential buyer may end up paying more for the target than it would otherwise pay. Additionally, in order to appear attractive to the seller, a bidder may be willing to accept weaker contractual protections and avoid making substantive changes that are not absolutely necessary to the sale and purchase agreement. Further, if there are other viable bidders, a potential buyer risks a higher chance of not being selected as preferred bidder, resulting in wasted costs and management time. Finally, due to the seller’s control over disclosure of information, a bidder may end up submitting a binding offer without the benefit of the full picture of the target and its business. For these reasons, it is in the interest of a bidder to obtain a period of exclusivity as soon as possible in order to redress the balance and to proceed to the extent possible as if the transaction was a bilateral negotiation.

“Given the multiple parties in an auction process, the wider dissemination of confidential information also poses a risk to the seller, especially where a bidder is a competitor – and, particularly, where such competitor’s participation in the auction is primarily for information gathering.

© 2017 EMPEA14

The Auction Process: Key StepsThe timing and steps in any given auction process will differ from transaction to transaction. However, auction processes tend to involve: the distribution of an information memorandum to bidders; a first round of indicative bids by the bidders; due diligence and review of a draft sale and purchase agreement by bidders; a further round of bidding by a limited number of bidders together with their comments on the draft sale and purchase agreement; and negotiations between the seller and one or more preferred bidders.

Prior to an auction process, however, the seller has a substantial amount of preparation. In addition to lawyers and accountants, sellers almost always instruct a financial adviser in the early stages to prepare the information memorandum and coordinate the process by acting as the point of contact between the seller and the potential buyers. The involvement of an investment bank will lend credibility to the process and enable the seller to reach a wider range of potential buyers through the bank’s contacts.Of the likely bidders, the seller assesses whether there may be any particular constraints to successfully concluding a transaction that may arise. To that end, the seller will likely consider the activities of a bidder and any combined market share for relevant products or services that may raise competition or anti-trust concerns; any external approvals required by a bidder which may slow down the transaction; any required employee consultations; any concerns by a bidder of post-completion operations; and the transaction structure.

Information Memorandum and Indicative BidsAfter potential buyers enter into a confidentiality agreement with the seller, the auction process commences upon the distribution of the process letter and the information

memorandum to the bidders. The process letter will set out the details of the auction process, such as timings, procedures and next steps, and will invite bidders to submit a non-binding indicative bid. Additionally, it often identifies any regulatory, merger clearance or other issues that may reduce the likelihood of concluding a transaction in a timely manner. In order to provide the seller with the greatest level of flexibility, the process letter generally avoids setting out the criteria for evaluating bids and includes a statement that the highest price will not necessarily succeed. The seller will often also reserve their right to amend or discontinue the auction at any time.

The information memorandum is a document that aims to contain reasonably sufficient information about the target to elicit meaningful bids from potential buyers, such as: a description of target’s business, industry and history; the principle assets; historical financial information and future projections; information about management and employees; and depending on sensitivity of the transaction, information about key customers and contracts.

Following submission of indicative bids, the seller and its advisers will assess the offers and will decide which bidders to invite to participate in the next round of bidding where the seller will make available further information and the remaining bidders will conduct their due diligence investigation.

Due Diligence, Site Visits and Management Presentation In preparation for the next stage of the auction process, the seller generally carries out in advance due diligence on the target to identify, and resolve if possible, any issues in order to avoid any undue delay to the process. Unlike in bilateral negotiations, where a buyer often requests the information that it needs to assess the target and its business, in an auction process the seller controls the disclosure process,

“In addition to lawyers and accountants, sellers almost always instruct a financial adviser in the early stages to prepare the information memorandum and coordinate the process by acting as the point of contact between the seller and the potential buyers. The involvement of an investment bank will lend credibility to the process and enable the seller to reach a wider range of potential buyers through the bank’s contacts.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 15

balancing between disclosing as little as possible and disclosing enough to ensure that a bidder may adequately make its assessment. To speed up the process, and to avoid any delays, the seller often produces a seller’s due diligence report, together with other independent reports such as an accountant report, which contains all the material information that a bidder would reasonably require. To aid in the disclosure of information in a controlled, efficient and timely manner, the seller generally uses an online dataroom – although, some sellers choose to use a physical dataroom where information is, or the circumstances of the auction process are, particularly sensitive.

Again, in order to control the disclosure of information, the seller generally prepares and scripts in advance site visits and management presentations and bidders are also expected to provide in advance any questions that they may have. The seller’s advisers are generally present to ensure that the seller handles the disclosure of information as planned and bidders do not raise any questions beyond the pre-set plan or make any unauthorised approaches to employees during any site visits or management presentations.

The seller often makes available at this stage a draft sale and purchase agreement and encourages bidders to review and comment on the agreement. The initial draft is almost always seller-friendly and will reflect the seller’s positions on key transaction terms, such as the form of consideration, conditions for closing, the scope of representations and warranties and limitations on liability.

Final Offer and NegotiationsFollowing the due diligence exercise and review of the sale and purchase agreement, the remaining bidders will be invited to submit their final offers together with their comments on the agreement. The price is often the determining factor; however, certainty

of available funds and a cooperative bidder may be equally important, demonstrating a bidder’s commitment to closing the transaction. As such, a bidder must be strategic and consider, outside of price, how it approaches the sale and purchase agreement. Typically, bidders submit a mark-up of the draft sale and purchase agreement or a key issues list. Submitting a comprehensive mark-up of the draft sale and purchase agreement may demonstrate commitment to the process. However, bidders should limit comments to substantive matters (such as risk allocation provisions) and avoid any stylistic or unnecessary changes. A heavy mark-up or inclusion of open-ended conditions may give the impression that a bidder may be difficult in negotiations. Alternatively, bidders may opt, or may be requested, to submit a key issues list. This may be useful to focus the seller and the relevant bidder on issues that raise the most concern for each of the parties. Generally, if a bidder’s price is in the right range, the seller is unlikely to dismiss the offer as a result of an over-zealous mark-up without further discussions.

Upon the seller’s assessment of any final bids, it will select a preferred bidder (or preferred bidders). During the final negotiations, the seller will try to maintain the momentum to avoid any delays and to resist any efforts by the preferred bidder to introduce new points or to renegotiate accepted points. On the other hand, a preferred bidder will see this as an opportunity to conduct negotiations as much as possible as if the process were a bilateral negotiation. The successful strategy will largely depend on the parties’ respective bargaining power.

Final wordsNumerous companies are aggressively using M&A to enter new markets and/or new sectors. Other companies are making acquisitions to increase their market share.

Some companies are selling down their interests in a particular market or sector in order to raise capital or to focus on their strengths in other markets or sectors. This presents opportunities for companies to enter or expand in a particular market or sector. No matter your company’s goals in acquiring or disposing of an asset, the M&A auction process is one which has advantages and disadvantages for both sellers and buyers. Financial advisers, lawyers and accountants should be engaged early in the auction process, no matter if you are the seller or a bidder, in order to assist your company to succeed in an auction process and to proactively help your company to manage the transactions complexities.

About the Authors

Mark Davies is a Partner in King & Spalding’s Global Transactions Practice.

Trinh Chubbock is a Global Transactions Associate at King & Spalding.

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