Rethinking Due Diligence in GCC M&A: From Checklists to Stress Testing

4 min 23 sec

Written by

Ahmad Mohammad Saleh

Senior Associate

ahmad.saleh@tamimi.com View LinkedIn Profile

Deals in the GCC are not slowing down — but the way risk is assessed within them may be evolving. Due diligence in the region has traditionally been a structured, somewhat backward-looking exercise: a review of financial performance, contractual arrangements, regulatory compliance, and litigation exposure. These elements remain fundamental, but on their own they may not provide a complete picture of the risks or red flags that matter most. Increasingly, the key question is not limited to what a target business looks like today, but extends to how it is likely to operate if the assumptions underlying the deal are tested.

Recent regional developments have not led to a retreat from investment activity in the GCC. Investors continue to pursue opportunities and build long-term positions across Kuwait, Saudi Arabia, and the wider region. What may be taking a turn is the importance of approaching due diligence — and the resulting transaction structure — with a more deliberate and tailored focus on risk.

 From snapshot to stress test

A more forward-looking due diligence exercise typically involves closer consideration of how a business functions in practice, rather than relying solely on the contractual or financial position reflected on paper. Certain areas warrant particularly close attention.

Insurance, for example, takes on greater importance where parties are assessing how an organisation would respond to business interruption. Rather than simply confirming that policies are in place, it is helpful to consider the scope of coverage and any material exclusions, the extent to which business interruption is meaningfully addressed, and the claims history and practical enforceability of the policy.

The existence of insurance is often less important than whether it would respond effectively in practice. This is particularly relevant in sectors where operational disruption can have an outsized impact on valuation, and where the cost of remediation may fall disproportionately on one party if not addressed at the diligence stage.

Material contracts remain central to any diligence exercise, but particular attention should be given to the provisions that govern how those contracts operate under strain, including termination and suspension rights, force majeure or hardship provisions, pricing and adjustment mechanisms, and the degree of discretion afforded to counterparties. These provisions can be critical in determining how resilient key commercial relationships are, and whether performance can be maintained in more challenging circumstances.

Local law assessments are crucial in this regard. Under Kuwaiti law, for instance, Article 199 of the Civil Code allows a judge to rebalance a contract where unforeseeable extraordinary circumstances render performance oppressive, even where the contract does not contain an express hardship clause. This makes it important, when reviewing material contracts governed by Kuwaiti law, to consider not only the drafted force majeure and hardship provisions themselves, but also how a Kuwaiti court might apply this statutory safety valve in practice. Understanding how local courts are likely to interpret these provisions in the event of a dispute is often just as important as the wording used in the contract itself.

 From due diligence findings to transaction structuring

The outcomes of due diligence increasingly feed directly into how transactions are structured and documented. Where potential vulnerabilities are identified, parties may address them through a combination of price adjustments, targeted conditions precedent, specific covenants or undertakings, and other risk allocation provisions.

In some cases, this also informs how material adverse-effect provisions are drafted and negotiated, particularly where certain risks cannot be fully tested through diligence in advance of signing. Parties are also increasingly considering these findings when negotiating warranty and indemnity provisions, tailoring their scope to the specific risks identified during diligence.

 Rethinking closing mechanics in the SPA

Alongside a more nuanced approach to diligence, SPA mechanics may also require careful calibration, particularly in transactions with a longer period between signing and closing. In such cases, parties may wish to consider the scope and precision of conditions precedent, the length and flexibility of long-stop dates, and the extent of interim operating covenants. Introducing flexibility can be important in accommodating uncertainty, but overly broad or loosely defined provisions may create ambiguity or increase the potential for dispute.

Local timing considerations also matter. Where a transaction involves a merger under Kuwaiti law, for example, Article 258 of the Companies Law requires the merger resolution to be published, after which creditors of the merging companies have 30 days to object; the merger cannot be finalised until this objection period has lapsed or any objection is resolved.

Similarly, where target shares are held in a Kuwaiti limited liability company, Article 100 of the Companies Law generally requires the consent of the other partners, or a 15-day publication process if consent is withheld, before a transfer to a third party becomes effective.

These statutory windows should be factored into the drafting of long-stop dates and conditions precedent, and it is important to understand the practical timelines and current practice of the relevant Kuwaiti government agencies on the ground.

This balance becomes especially important in transactions where no escrow mechanism is used. In the absence of escrow, parties may rely more heavily on contractual protections to allocate risk effectively. These may include clearly defined and limited termination rights, deferred consideration or earn-out structures, and appropriately scoped warranties and indemnities. The objective is to allow sufficient flexibility to navigate changing circumstances, while maintaining a clear and workable framework for completion.