Book an appointment with us, or search the directory to find the right lawyer for you directly through the app.Find out more
We are excited to share the latest edition of the Law Update, beautifully and appropriately titled “Sustainable Horizons: The Saudi Arabian Vision.” Giving special honor to the Kingdom’s 2030 vision, this update focuses on a collection of both informative and inspiring articles.
For those in construction, you can learn about how the tendering environment impacts risk-pricing for contractors, the updates on the legal framework of the construction industry and how contractors can protect themselves against financial difficulties.
There is good news too from the kingdom’s banking sector, from which the practice of “Open Banking” is being pushed for! But what is open banking? We’re answering that too.
Also . . . Are there any women trail blazers in Saudi Arabia you can name? We’ll help you with that. We cover how the Middle East has been making strides in empowering women in the entrepreneurial space,most notably in STEM fields.Read the full edition
Jiwon Ha - Senior Counsel - Corporate / Mergers and Acquisitions / Commercial / Corporate Structuring / Construction and Infrastructure / Regulatory
Cheil is the de facto financial holding company of Samsung Group, South Korea’s biggest conglomerate which owns the world’s largest electronics company. Samsung C&T is the construction and trading arm of Samsung Group, which built Dubai’s Burj Khalifa, the world’s tallest building. However, for the last few months the proposed takeover has come under attack from a hedge fund, Elliott Associates LP and the third largest shareholder of Samsung C&T which challenged the valuation process used in the transaction. Despite the outcome of the shareholders’ vote approving the takeover, this battle is likely to be prolonged as it raises questions about South Korea’s corporate governance standards.
In this article, we briefly describe the statutory valuation method used in Korea and compare it to the current law in the UAE relating to the subject of asset valuation, which remains a topic that all listed companies, consultants and government authorities need to be conversant with.
Market based valuation – Korea
Korean law mandates that merger ratios be decided based on recent share prices, on the premise that such share prices, which are market prices and are deemed to always incorporate and reflect all the information made available to market participants at any given time, are the most reliable and objective tools in valuing the companies to be merged. In cases of a merger between listed corporations, the merger price is calculated in accordance with Article 176-5, Paragraph 1, Item 1 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act in Korea, and the merger ratio is calculated accordingly. Therefore the merger ratio in Korea is a matter of simple maths and companies are not allowed to exercise their discretion in determining the ratio; nevertheless they can set up the timing of the merger monitoring the stock changes and may use a certain level of influence over the market itself.
This type of market-based valuation in determining merger ratios is commonly used in mature markets such as the UK and the US, so long as such a merger ratio calculated in accordance with the statutory requirements are approved by the board of directors who have a fiduciary duty of loyalty to act in the best interest of the company and its shareholders at all times. For the board to fulfil their fiduciary duties, it must be clear that the price is fair to all shareholders and fully recognizes the value of the company. Although the merger formula is inflexible in certain jurisdictions that does not excuse the board from discharging its duties when assessing whether or not to enter into a proposed transaction.
Asset based valuation – UAE
Before the 2015 Commercial Companies Law (Federal Law No. 2 of 2015) the UAE had no explicit provisions concerning takeovers or merger control requirements. Now Article 292 of the 2015 law stipulates that:
“any person or group of associated persons or related parties desirous of purchasing or undertaking any transaction involving the acquisition of shares of capital stock or convertible Securities in a Public Joint Stock Company (“PJSC”) in the UAE, which offered its shares for public subscription or listed in a Financial Market in the UAE, shall comply with the Securities and Commodities Authority (“SCA”)’s provisions and resolutions on the rules, conditions and procedures for acquisition.“
It is expected that the SCA will develop a new takeover code in due course as the above provision implies. We set out below some of the current requirements governing valuation in takeovers applicable to companies listed in the UAE as a reference.
Further, in cases where certain companies find difficulty in obtaining the opinion of an appropriate external valuer to support an asset valuation, TKO allows the DFSA to permit informal valuations where the interests of shareholders appear on balance to be best served.
Based on these provisions it seems that there is a certain amount of flexibility for market players, including companies and external advisors working in close coordination with relevant government authorities, to devise practical solutions to prevent unfair takeovers even if the market is not in fact efficient.
Market price is a better measure than asset valuation to determine the merger ratio since it is a measure incorporating tangible synergies and asset valuation by market players so long as the market functions efficiently. However, even after several decades of empirical research and studies, economists have not yet reached a consensus about whether the market (a financial market in particular) is efficient. Often the market fails and it is always important to note that any proposed merger needs to be fairly assessed based on the fair values of the two companies.
Given the absence of a separate legal regime for a statutory valuation method under UAE law, we expect the government in time to examine the extent to which similar provisions could apply to companies operating under the civil law system here and further to set out clear guidance on the regulatory framework for the valuation of listed companies as part of its continuing efforts to introduce international best business practices in the UAE.
To learn more about our services and get the latest legal insights from across the Middle East and North Africa region, click on the link below.