Lately, there has been a lot of interest by local companies contemplating “going public”.  What does this mean from a legal perspective and what are the processes and procedural requirements?  In this article, we will address the legislative framework of conducting an initial public offering (“IPO”) in the United Arab Emirates (the “UAE”), the IPO process and ancillary issues such as prospectus requirements and marketing restrictions.

Legislative Framework & UAE Exchanges

During the most recent era beginning with the enactment of the Federal Law No. (2) of 2015 on Commercial Companies (the “Old Companies Law”) until the enactment of the New Companies Law (as defined below), there had been few initial public offerings in the UAE, two of which were listed on the Abu Dhabi Exchange (“ADX”) and one on the Dubai Financial Market (“DFM”).

The UAE has three financial exchange markets, two are onshore – that is, the ADX and the DFM, while the third financial market is NASDAQ Dubai located within the jurisdiction of the Dubai International Financial Centre (the “DIFC”).

The DFM facilitates diversified trading and investments to a large number of investors by setting listing requirements using disclosure, transparency, trading, settlement and governance systems. In fact, most investors trade on NASDAQ Dubai and the DFM seamlessly using the same investor number on the same trading platform.  This changes slightly in terms of the ADX, as it usually sets a few different listing requirements, while still using systems that are similar to those used by the DFM. The DFM and the ADX are subject to the same federal rules and regulations; therefore, they have the same cost and fees.

Having said this, the UAE government have taken recently significant steps to energize business transactions in general and equity capital markets in specific. Some of these changes are the introduction of a new legal framework for doing business in the UAE supported by several regulations to enhance the incentives given to investors and simplify the process further.

A chronological order by date of issuing some of these new legislations relevant to onshore UAE capital markets can be seen below:

• the Chairman of UAE Securities and Commodities Authority (“SCA”) Board Decision No. (03 R.M.) of 2020 concerning adopting the Corporate Governance Guide for Public Joint Stock Companies (New Governance Code);
• the Federal Decree-Law No. (32) of 2021 on Commercial Companies (the “New Companies Law”); and
• the Chairman of UAE Securities and Commodities Authority Board Decision No. (1/TM) of 2022 on the Regulations on Special Purpose Acquisition Companies.

As a step further by Dubai Government, Sheikh Mohammed Bin Rashid Al Maktoum, Ruler of Dubai, issued Decree No. (3) of 2021 on the Listing of the Shares of Shareholding Companies in the Exchange Market in the Emirate of Dubai, which came into effect on 4 February 2021.

The Dubai decree requires public joint stock companies incorporated in Dubai (including those incorporated in free zones) to list their shares in the securities markets in Dubai, i.e. DFM and NASDAQ Dubai.

A further push was given by the Dubai government recently by the landmark DEWA initial public offering (IPO) raising AED 22.32 billion (USD 6.1 billion) in proceeds and on listing DEWA had a market capitalization of AED 124 billion making it the largest IPO in the UAE, the largest company listed on the Dubai Financial Market, and the second largest public listing in the Middle East and North Africa after Aramco IPO listed on the Saudi exchange market ‘Tadawul’.

IPO Process

An IPO is a process by which a company offers its shares, for the first time, to the public by way of drafting and publishing a prospectus on the company and carrying out a public subscription of its shares, after submitting required documentation to the relevant governmental authorities and obtaining their approvals in relation to the same.

Under the laws and regulations of the UAE, a company may only offer its share to the public if it takes the legal form of a public joint stock company.  A company wishing to execute an IPO will be either a newly incorporated public joint stock company or a company that undergoes a conversion process to become a public joint stock company.

Generally speaking, companies that choose to go public in the UAE and offer their shares in an IPO usually seek to raise their capital in global markets.  This is supported and facilitated by the local regulators and the regulatory schemes set by the governmental authorities.

Despite the fact that an IPO is a process carried out in a very similar manner across the globe, the mechanics of such procedure differ from one country to another in terms of the applicable laws and regulations, required documentation, governmental approvals, and timeline of its procedures. The IPO process in the UAE slightly varies according to the business and structure of the company undergoing the IPO process, i.e. whether the company is a newly established public joint stock company or a company undergoing a conversion process to become a public joint stock company, in which emirate the company has its place of business and on which market the company will be listed. 

The ADX and the DFM are subject to the SCA’s supervisory authority, which has absolute power over both exchange markets. As the supervisory regulator, the SCA has absolute discretion, in accordance with the applicable laws and regulations, to accept or reject applications for initial and secondary offerings, promoting and marketing securities, listing and delisting; and capital restructuring whether by way of capital increase or reduction. Further, the SCA can regulate and monitor the markets and intervene in case of manipulation or volatility of the markets by suspending trading, imposing fines, or cancelling licences, consents or approvals for markets, brokers, market makers, issuers or investors.

The SCA also regulates the requirements for trading, settlement, disclosure, listing and corporate governance in accordance with the applicable laws and regulations. In summary, the SCA has absolute and general powers and authority to develop the UAE onshore capital markets.

The IPO process for onshore UAE companies slightly varies according to:

• the business and structure of the company (i.e., whether the company is a newly established public joint stock company or a company undergoing a conversion process to become a public joint stock company);
• which emirate the company’s place of business is located; and
• which market the company will be listed on.

Regarding whether a due diligence is required and advised during an IPO process, it should be noted that notwithstanding any risks, liabilities and pitfalls relating to the company’s business or any market risks occurring during the IPO process, the IPO is a multi-pillar process and therefore should involve no potential legal risks, liabilities or pitfalls. Any negligence on the part of the company or its advisers may expose the company and its founders to risk.

Usually financial due diligence would cover the financial statements for the previous two years and working capital for the 12 months following the IPO. A legal due diligence should cover the corporate, finance, material agreements, dispute resolution (i.e., litigation, arbitration and administrative proceedings) and any red flag issues that would or may have a material adverse effect on the company applying for an IPO. Commercial due diligence would be also required for the prospectus, early look presentations and the bookbuilding process (if applicable).

A point to note on legal due diligence is that for the purposes of the international offering memorandum or circular (which is not a requirement by the SCA but rather is prepared only if the IPO is being offered and promoted outside the UAE) that a U.S. 10b-5 documentary due diligence is carried out. This is specifically required by the U.S. Securities and Exchange Commission if the IPO is offered and promoted in the U.S. on a Rule 144A offering.

The main purpose of a U.S. 10b-5 documentary due diligence is to ensure that the prospectus is accurate and complete and is without any misstatement or omission of a material fact. Therefore, the documentary review should include the following objectives:                                           

• to provide a factual basis for statements contained in the prospectus;
• to find evidence of circumstances that are or that may become relevant to a decision to invest in the securities, whether these are negative or positive aspects;
• to ensure the offering will not give rise to any violation of a law, regulation, material contract, etc.; and
• to establish the issuer’s group of companies’ constitutive documents, material contracts, permits, etc., are in proper legal order and that the associated risks are disclosed in the prospectus.

On a related note, share pricing and the allocation process in an IPO are governed by the New Companies Law and the relevant SCA’s regulations. The New Companies Law has now allowed for the nominal value of shares in a joint stock company to be equal to the amount specified in the articles of association of the company. There are no longer restrictions on such amount, which can therefore be lower than AED 1 or higher than AED 100.

The New Companies Law have further removed certain restrictions that used to exist under the Old Companies Law and relating to the sale of shares upon conversion of a company, including the maximum percentage of shares which may be sold in a public offering and the restriction on the founders (the shareholders prior to the conversion) on trading their shares once the converted company is listed.  Moreover, the stipulation that a company must have achieved an average of 10% operational profits over the past two financial years prior to approving its conversion has been removed by the New Companies Law.  Some of the other changes introduced by the New Companies Law that would be relevant to the IPO process include the following:

• rather than specify that founders must subscribe to no less than 30% and no more than 70% of the issued share capital, the New Companies Law provides that the founders must subscribe to the percentage specified in the prospectus but subject to the requirements of the SCA;
• the New Companies Law no longer provides for a minimum period for the public to subscribe for shares (10 business days under the Old Companies Law), and instead provides that the prospectus shall specify the minimum period, although the maximum period remains 30 business days; and
• allows the founders to subscribe for any unsubscribed shares upon the expiry of the subscription period, but subject to the requirements of the SCA. This is different from the position in the Old Companies Law, which provides that the founders may subscribe to up to 70% of the shares, and in the event that there remain any unsubscribed shares, then the incorporation shall be revoked.

Prospectus Requirements

For the purposes of an IPO, a prospectus must be filed simultaneously when obtaining approvals from the SCA. To ensure transparency in the market, all companies are subject to the same rules and procedures, and no exemptions are available. The final draft of the prospectus must be approved prior to the offering.

According to the relevant onshore regulations, a prospectus must include the following:  

• a brief on the company’s historical financial statements;
• the company’s working capital and future forecasts;
• a business description;
• risk factors;
• material agreements and litigation; and
• corporate governance structures.

The New Companies Law further allows that the prospectus may also provide for an extension to the subscription period, which shall be specified for a duration in the prospectus. This varies the position under the Old Companies Law, which provides that any such extension may be for an additional period of no more than 10 business days.

Statutory liabilities typically arise out of the prospectus. The parties that may be held liable in this regard are usually the management and IPO advisers (limited to the type of services provided) of the company.

Defences available to liable parties include that:

• they were unaware of any inaccuracy or incompleteness of the information contained in the prospectus; or
• such information had been correct when it was included in the prospectus and that:
  • it had changed due to circumstances beyond these parties’ control and without their knowledge; and 
  • they had exercised due care when they announced such information and included it in the prospectus. 

However, there is no guarantee that the SCA or the competent court will accept such defences.

Marketing

Typical marketing methods include announcements, the prospectus and early look presentations. These are announced in public newspapers, media and exchange markets websites and through roadshows. A press release agency is usually engaged to market the securities – especially in IPOs.

Any entity carrying out the marketing of equity securities must be licensed to undertake such action, except in relation to marketing directed at qualified investors (excluding high-net-worth individuals). Additionally, such equity securities cannot be subject to confidentiality restrictions and such securities must be approved by the SCA if promoted inside the UAE, unless they are marketed to qualified investors (excluding high-net-worth individuals).

Bookbuilding is also common in the UAE and has been used in the recent UAE onshore IPOs.

 

How can we help?

Lawyers are usually responsible for overseeing the entire offering process from a legal perspective and ensuring that it complies with the applicable laws and regulations. In particular, lawyers are responsible for the accuracy and legality of information contained in the prospectus, as well as ensuring that the company follow the steps required by the relevant authorities in respect of the offering process. In light of this responsibility, lawyers prepare the necessary drafts and documents.

GLA can therefore assist UAE issuers and their advisers who are considering an IPO or secondary fundraising under the New Companies Law specifically in relation to any of the below:

• Eligibility Advice – to assess from a legal perspective the eligibility of the issuer for an onshore IPO
• Due Diligence
• Drafting or reviewing the prospectus according to the UAE laws and regulations
• Advising on the UAE aspects of an international offering memorandum or circular
• Preparing the Arabic version of the prospectus submitted to the SCA
• Advising on the IPO announcements and applications to the SCA and relevant exchange markets

Author:  Yousef Alamly, Partner & Head of Corporate for UAE, GLA & Company

For further information, please contact Alex Saleh ( alex.saleh@glaco.com) or Yousef Alamly (y.alamly@glaco.com)