Legal & Regulatory Bulletin

Legal & Regulatory Bulletin 20

CONTENTS

4 Private Equity in Vietnam

7 Colombia: Ten Years of Development of the PE Industry

10 Amendments to Foreign Fund Private Placement Exemptions in the UAE

12 The Auction Process: Advantages and Disadvantages and the Key Steps WINTER 2017 WINTER Issue no. 20 | 20 no. Issue About EMPEA EMPEA Legal & Regulatory Council

EMPEA is the global industry association for Mark Kenderdine-Davies (Chair) Gordon Myers private capital in emerging markets. We are an CDC Group plc IFC independent non-profit organization with over Carolyn Campbell Peter O’Driscoll 300 member firms, comprising institutional Emerging Capital Partners Orrick, Herrington & Sutcliffe LLP investors, fund managers and industry advisors, Antonio Felix de Araujo Cintra Chike Obianwu who together manage more than US$1 trillion TozziniFreire Advogados Templars of assets and have offices in more than 100 John Daghlian Bayo Odubeko countries across the globe. Our members share O’Melveny & Myers Norton Rose Fulbright EMPEA’s belief that private capital is a highly Mark Davies Paul Owers suited investment strategy in emerging markets, King & Spalding Actis delivering attractive long-term investment returns and promoting the sustainable growth Barbara Day George Springsteen OPIC IFC Asset Management Company of companies and economies. We support our members through global authoritative Folake Elias-Adebowale Udo Udoma & Belo-Osagie Mara Topping intelligence, conferences, networking, education White & Case LLP and advocacy. Laura Friedrich Shearman & Sterling LLP Cindy Valentine For more information, visit empea.org. King & Wood Mallesons Geoffrey Kittredge SJ Berwin Debevoise & Plimpton Nigel Wellings Prakash Mehta Clifford Chance Publication Editorial Team Akin Gump Strauss Hauer & Feld LLP Harald Zeiter Ann Marie Plubell Zia Mody Capital Dynamics Vice President, Regulatory Affairs AZB & Partners

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DISCLAIMER: This material should not be construed as professional legal advice and is intended To learn more about EMPEA or to request solely as commentary on legal and regulatory developments affecting the private equity a membership application, please send an community in emerging markets. The views expressed in this bulletin are those of the authors email to [email protected]. 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 [email protected].

I would like to take this opportunity EMPEA Regulatory Affairs Resources: to wish you a very Happy New Year • EMPEA’s regulatory advocacy resources support members and welcome you to the Winter Edition as they seek to encourage legal and regulatory enabling environments in emerging markets that don’t disadvantage of our Bulletin. private investment. Contact: Ann Marie Plubell, VP, Regulatory Affairs at [email protected]. The Bulletin features contributions from lawyers and private equity executives based in Bogota, Dubai, Hanoi, Ho Chi Minh • EMPEA Guidelines set out key legal and tax regimes optimal City and Tokyo on legal, regulatory and market matters. The for the development of private equity and are now available variety of the content reflects EMPEA’s global footprint. in numerous languages including Arabic, Burmese, Chinese (simplified character), Portuguese, Vietnamese, Russian and I hope that the articles will pique the interest of practitioners Spanish on the EMPEA website. in the emerging markets private capital investment community • EMPEA Legal & Regulatory Council draws on deep subject and thank the contributors for putting pen to paper. matter expertise in the emerging markets practice to address trending concerns. In this Bulletin our contributors present: • EMPEA Legal & Regulatory Bulletin publishes key Private Equity in Vietnam: a reflection on the Vietnamese perspectives and insights of leading practitioners on private equity market over the last decade. The contributors, current challenges and concerns of the emerging markets a seasoned lawyer and a private equity firm owner, have community plus the occasional overview of the market in both lived in the country for more than 20 years observing particular countries. its evolution from a command to a quasi-market economy • EMPEA education courses and resources for emerging with a maturing private equity market and changing laws market regulators, pension and policy oversight officials and regulations. highlight the foundational issues relating to the development and regulation of private equity in developing economies. Private Equity in Colombia: an overview of the Colombian private equity market over the last decade with a focus on the I encourage you to mark your calendars to attend the Annual development of the domestic fund management community Global Private Equity Conference in Washington DC on 16 and the role of local institutional investors. and 17 May 2017 and the supervisory authority/regulators’ breakfast presentation on 18 May 2017. Recent Amendments to the exemptions for foreign funds making private placements in the United Arab Emirates: an I look forward to seeing many of you there. Do introduce overview and analysis of fund formation and fundraising issues yourself to me if we have not met. I also invite you to in the United Arab Emirates. share your thoughts on this Bulletin and more generally with Ann Marie Plubell, VP, Regulatory Affairs at EMPEA at Merger and acquisitions strategy and the use of the auction [email protected]. process: an analysis of M&A strategy and the pros and cons of divesting portfolio investments via an auction process. Best wishes to you all,

Mark Kenderdine-Davies General Counsel, CDC Group plc Chair, EMPEA Legal and Regulatory Council Member, EMPEA Board

EMPEA Legal & Regulatory Bulletin | WINTER 2017 3 Private Equity in Vietnam By Tony Foster, Freshfields Bruckhaus Deringer and Chris Freund, Mekong Capital

The Deals • Investments by smaller offshore 2005-2008 when many funds followed funds managed by the likes of Navis, a pre-IPO investment strategy, following One of the first deals by a global private TAEL and Gaw Capital. These have some successful investments in the equity firm in Vietnam was in 2006, tended to be in the US$15 to US$50 auctions of Vinamilk shares in 2003 and when TPG and Intel Capital invested in million range. 2005. Most pre-IPO opportunities at the FPT, a local IT firm. Now FPT has grown time were equitised SOEs. But with the to the point where it is purchasing • Numerous investments by Vietnam collapse of the stock market starting companies outside Vietnam. specific private equity funds such as in mid-2007, the IPO market dried up. funds managed by Mekong Capital, Since then, capital has increasingly Another notable foreign transaction Vietnam Investment Group and flowed to emerging private companies recently was the acquisition by a fund Private Equity New Markets (f.k.a. such as Masan Group, VinGroup, managed by Warburg Pincus of an BankInvest). These investments are MobileWorld, Golden Gate, etc. interest in all of the retail assets of typically in the US$6-20 million range Vingroup, one of the largest private and are much larger in volume than Operational Challenges sector property developers. This was the the first two categories. Corporate governance and management largest initial private equity investment A constant challenge facing private standards in Vietnam remain low in ever in Vietnam and has since been equity firms of all sizes is that the many sectors, which is both a challenge scaled up. investment opportunities in Vietnam and an opportunity for private equity tend to be smaller than their funds are in Vietnam. Equitised companies In between these two bookends there targeting. This can sometimes force often retain many bad habits from the have been: funds to be creative. It also reduces the state owned days, such as managers • Private equity investments by large number of deals. receiving under-the-table commissions international names such as KKR, on purchases and sub-contracting to further deals by TPG, Goldman Sachs, Private equity investments have been related parties of senior executives. Mount Kellett, CVC and GIC, among made in both equitised State-owned Private companies may not face such others. These investments have tended enterprises (SOEs) and in private issues, but they typically under-invest to be in the US$100 million range and sector companies, with the latter in developing their management teams up, but there are typically not a lot of predominating. Most investments into and are often a “one-man show” with investments in this size range. equitised companies occurred between no clear path to long-term sustainability.

4 © 2017 EMPEA Hence successful private equity investors ownership contained in the 2007 • Convertible/exchangeable bonds can in Vietnam are actively involved in WTO accession become effective – or only be issued by companies that have improving their investee companies. for listed companies such as Vinamilk been profitable on an operating basis Mekong Capital recently conducted an that, under new regulations, pass the for the previous year. analysis of its past 30 investments and appropriate shareholder resolutions • Preference shares, though found a strong correlation between the allowing for foreign shareholders to contemplated in the law, have a degree to which those companies had own more than 49%. limited legal foundation and there implemented Mekong’s Vision Driving are many unanswered questions. Investing approach and their Net Profit The real estate sector, which has Dividend and liquidation preference CAGR, with less than 10% being outliers. attracted several funds, has benefitted shares do not carry voting rights. Regulatory Trends from the lifting of the prior ban on Voting preference shares exist but foreign ownership of housing in Vietnam. only in specific circumstances that do There are various drivers of all the not apply in this context. The legality interest in Vietnam. The political The Government has been moving or enforceability of hybrid preference backdrop is stable (even more so forward with its equitisation shares is debatable. As a result, when compared with other countries (privatization) program. While preferred share investors often acquire more normally regarded as beacons of investments in privatized companies are ordinary shares as well (and possibly stability). GDP growth hovers around difficult for offshore funds given their debt too). 6%. There are now more companies complexities, those who understand the of investable size. Warburg Pincus’ As a result of uncertainties, investors investment into Vincom Retail involved process have been able to profit. tend to try to back up their structures around US$300 million. The Government with put options either to the company has recently announced it would sell its Common Structures or to the ultimate owners, if that is 90% stake in the Saigon Beer Company and Instruments feasible. These are sometimes supported by security interests. in two lots, each of which could fetch PE funds normally invest through US$1 billion. Depending on the sector convertible or exchangeable bonds, and the circumstances, valuations Common Risk Factors convertible or exchangeable loans are often not unreasonable given the The fundamental question with many or preference shares directly in the growth possibilities. investments is that of the enforceability Vietnamese investee company. The of the documents as agreed. For the investor cannot set up a pure holding Part of this has been driven by larger deals, there is a split on the use of company in Vietnam. Even if the liberalization of the Investment Law English law or Vietnamese law (English investee is owned by a local quasi- and the Enterprise Law. The changes law can be used so it is only if the PE make it easier for funds to structure holding company, the investor tends to investor has insufficient leverage that their investments and to invest in invest as close to its money as possible Vietnamese law is accepted). But nearly more sectors with greater certainty. for greater control and visibility. all deals stipulate that disputes will For example, for the first time the There are various considerations in be heard in an offshore arbitral forum definition of a foreign-invested company determining the appropriate structure (usually Singapore). An award can is clear. This makes it easier to set up a for an investment: theoretically be enforced in Vietnam, but structure that enables foreign money to in this context the difficulties suggest • Convertible/exchangeable loans with be invested into a domestic company that enforcement against offshore assets if such is necessary in light of foreign a term of more than 1 year have to will be easier if they exist. ownership limitations. be registered with the State Bank of Vietnam (SBV). The SBV may raise PE funds (including the Vietnam-specific At the same time foreign ownership questions if the interest rate (or IRR) is ones) are all foreign entities and so invest limitations are gradually being too high (there is no interest rate cap dollars through their Vietnam capital eliminated either sectorally – as but the SBV has complete discretion accounts. The investments (except for a phase-in periods for full foreign as to what it will permit). loan) are in Vietnamese Dong, so the PE fund is taking the foreign exchange risk. For some years now this has proved to Part of this has been driven by liberalization of be a reasonable risk to take, especially the Investment Law and the Enterprise Law. The compared to the currency turmoil in other changes make it easier for funds to structure parts of the world. The Vietnamese Dong has not devalued at all from Sept 2015 – their investments and to invest in more sectors Sept 2016. Returns have to be expressed “with greater certainty. in VND but some investors attempt to

EMPEA Legal & Regulatory Bulletin | WINTER 2017 5 There has been use exchange rate adjustments. These of the non-cash consideration that will are of questionable legality and would be be needed for them. There is also an no track record of relatively straightforward to challenge. issue about whether such shares will successful listings They should therefore be backed up by be subject to a lock-up period. Again, of Vietnamese alternative provisions if the primary ones proper planning can avoid a lot of the companies outside are found wanting. pitfalls. In practice, the conversions have generally been implemented “Vietnam. To date, If the investment capital is brought into as expected. But the risks are such a combination of Vietnam through the correct accounts, that investors normally build in fall- the Vietnamese it (and any dividends) can be repatriated back rights (either against existing through such accounts without undue “founder” shareholders if they exist, rules on foreign difficulty though with a reasonable or against company cash) in case they ownership, the amount of paperwork. On rare occasions are less fortunate. foreign exchange and for short periods, the banks have been short of foreign currency and A specific problem has arisen in respect rules, inadequate in such circumstances there is no of the conversion of preference shares familiarity with guarantee that money can be remitted into ordinaries. In a recent preference disclosure principles or converted at any particular rate. share deal, the local Department of Planning and Investment argued that and cost have Exits because the par value of an ordinary conspired to There have been numerous successful share and a preference share is both VND preclude such IPOs. exits by PE funds in Vietnam. Mekong 10,000, the conversion ratio had to be has exited many of the investments in 1:1. The redemption preference therefore its first two funds through sales to trade has to be considered carefully in case buyers and share sales after local IPOs. there needs to be a sale followed by a The latter can take time as liquidity is new investment into ordinary shares. not huge, so a plan for such sales has to be drawn up that will not disrupt Conclusion the market. Typically listed companies Vietnam is changing rapidly. The with strong corporate governance and economy has been growing consistently attractive growth rates quickly reach by impressive, and possibly sustainable, the foreign ownership cap (usually amounts of between 5 – 7% a year. 49%), resulting in most transactions There are plenty of opportunities happening in large block transactions (though often small ones) for investors at a premium to the public equity price who are familiar with the market. But – and most disposals of listed shares by as in any emerging market, potential PE funds have occurred via these “off pitfalls abound for those who do market transactions”. not spend the time to develop a real understanding. There has been no track record of successful listings of Vietnamese About the Authors companies outside Vietnam. To date, a combination of the Vietnamese rules on foreign ownership, the foreign Tony Foster is a Partner exchange rules, inadequate familiarity at Freshfields Bruckhaus with disclosure principles and cost have Deringer. conspired to preclude such IPOs.

There are some theoretical problems in converting into ordinary shares prior Chris Freund is a Partner to a sale. Various regulatory approvals at Mekong Capital. may be needed in respect of the issuance of new shares and in respect

Introduction domestic funds with a total committed of infrastructure projects derived capital of almost US$22.000 million, from the US$15 billion 4G toll-road Colombia’s PE industry has reached its representing an increase of 15% with program sponsored by the Colombian first decade (2006-2016). Incorporation respect to May of 2015. Of this amount, government. of local funds has been successful 54% is associated with domestic for an emerging economy, placing investments, of which nearly US$6.7 In fact, the Colombian government Colombia in the spotlight of foreign million are already invested, leaving has put in place a robust infrastructure and domestic GPs willing to incorporate US$5.3 million available to invest. program, focused not only on roads local PE vehicles or to raise capital but also on other sectors such as from local investors, specifically in the Development Per Sector: airports, rail, ports, mass transportation real estate and infrastructure sectors. systems, hydrocarbons, gas and energy. Simultaneously, local investors such as Infrastructure and Real Estate Pursuant to the Financiera de Desarrollo pension funds and insurance companies Colombia currently has 11 domestic Nacional, the infrastructure sector needs are increasingly seeking attractive PE infrastructure funds with total approximately US$25 billion to finance opportunities offered by international committed capital of US$5.2 million. infrastructure projects in the following managers abroad. This represents a 100% increase on years. The Colombian government has the existing infrastructure initiatives only US$4 billion, which represents a As of May of 2016, the Colombian PE with respect to 2015, that obeys to the huge opportunity to other investors such association - Colcapital2, reported 82 significant demand for private financing a local and foreign PE funds.

1. Brigard & Urrutia is a leading full-service business law firm in Colombia.www.bu.com.co 2. 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.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 7 With these figures and because the Credicorp and BTG Pactual, and will be stronger once the exits wave Government hosted a series of clear the recent alliance of Argos and is ratified with good results and GPs regulations such as the PPP Act and Conconcreto through Pactia. In demonstrate their ability to successfully the creation of the National Agency addition, foreign groups such as disinvest a PE fund. of Infrastructure - ANI, world-class Paladin and Jamestown are willing to infrastructure developers are now raise capital in the country and are Finally, the Colombian PE industry is encouraged to invest in 4G projects. also thinking about the possibility of reaching an initial level of maturity This kind of action also boosted the incorporating a local vehicle. that permits some entities such as participation of key investors, such as Bancoldex3 to explore the possibility multilateral agencies, sovereign funds Other kinds of vehicles such as buy- of incorporating the first Colombian and offshore pension plans, who had out funds or venture capital initiatives fund of funds with a Latam regional previously been absent from Colombia’s also have a positive but much steadier scope. This proves that governmental infrastructure landscape. perspective. Local pension funds are authorities like Bancoldex are willing to skeptical of committing additional become general partners and assume More particularly, this constant capital, since exits from existing the fiduciary responsibility derived necessity available capital to finance first vintage funds are only until of such a role to cooperate with the the different infrastructure programs now, occurring and have not been development of an industry like PE that triggered two regulatory modifications as frequent as desirable. In fact, the is in constant growth. in the local pension funds investment Colombian PE industry is still waiting for regime. In 2015, the Ministry of an outbreak of numerous and successful General Regulatory Finance issued Decree 1385 that exits. In addition, the venture capital Framework created a specific allocation for local industry is still taking off and faces pension funds to invest in local PE some concerns with respect to typical From a legal perspective, Colombia’s infrastructure funds. Subsequently, PE. Local fund structures are expensive private equity regulations are well in 2016 the Ministry issued Decree for entrepreneurs and investors are not developed and are contributing to the 765, which created a new asset class increasingly willing to sponsor early development of a robust domestic defined as alternative investments stage projects. With this in mind, local industry. The fondos de capital privado with its own mandate to invest in incubators such as Ruta N, Innpulsa, regime has been in place since 2007 infrastructure assets. PE funds were Fundación Bavaria and the Colombian when domestic pension funds were included within this new bucket in an branch of NXTP Labs have made allowed to invest in private equity attempt to stimulate investments in enormous efforts to foster venture and pooled fund structures. In 2015 local private equity funds. capital and risk investments. Therefore, Colombia maintained its standing in there has been an increase of 53% local the annual LAVCA Scorecard which On the other hand, since a few years venture vehicles with respect to 2014, rates the attractiveness of Latin ago, good and steady prices and with 9 venture funds representing American countries for private equity. a rising middle class accessing the US$89.5 million. Colombia has 61 points (out of 100) real estate sector has confirmed the and is ranking as the fourth strongest interest of local investors such as There are some examples of GPs raising environment in Latin America for the pension funds, insurance companies second or third generation funds (for development of private equity (only and family offices, as well as the example, Altra, MAS Equity Partners, after Brazil, Mexico and Chile)4. awareness of local and foreign GPs. Tribeca, Terranum Capital), which Currently, in Colombia there are 22 demonstrates the confidence of local The structure of local private equity local real estate Funds, with total investors, especially pension funds, funds is consistent with global market commitments of US$2.042 million, insurance companies and family offices practices, having a similar general-limited representing an increase of 56% with in the PE industry. However, this trend partner structure, and with an additional respect to 2015. Local real estate funds are managed by important local developers and large economic From a legal perspective, Colombia’s private groups, such as Santo Domingo’s equity regulations are well developed and are family through Terranum, Inverlink, Amarilo, Jaguar Capital and important contributing to the development of a robust financial groups such as Bancolombia, “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

8 © 2017 EMPEA administrative figure in charge of a local The improvement of security conditions in recent supervised financial entity (mainly for back office purposes). General partners years has contributed to the re-establishment of do not have to be registered companies investors’ confidence in the country, particularly but must demonstrate at least five in light of the end of a 50-year conflict with local years of experience in managing private equity investments. Although local communist guerrillas in August 2016. regulation requires the presence of a “ local administrator supervised by local regulators, it can be said that these entities have been in constant evolution Competitive Taxation Regime gains with improvements in poverty and the sophistication of their operations reduction and income inequality”5. With respect to tax regulations, the and back-office activities, which creates However, Colombia’s economy will grow local private equity industry benefits fluid relationships with GPs. only 2.5% compared to 4.45% in 2014 from some competitive advantages that and 3.1% in 2015 due to the drop in oil serve to attract foreign investment. Regarding their incorporation process, prices, which had a hard impact on the Carried interest income is treated as private equity funds are not subject to national economy making tax reform capital gains and not ordinary income a prior approval of the local regulator necessary to fill the hole in central and is generally subject to a tax rate of and are required only to file certain government’s budget. documents with the Colombian 10%. In addition, the fund itself is not Superintendent of Finance to begin subject to income tax (“Transparency operations. Although during certain Principle”) and therefore distributions About the Authors to the investors are taxed as direct years the process was not as efficient Luis Gabriel Morcillo gains of the investors depending as defined in the regulations, the is a Partner and Associate on whether they are Colombian or Superintendence of Finance has finally at Brigard & Urrutia offshore residents and particularly, adopted the non-objection 15-day Abogados. period for a faster and easier set up depending on the taxes being paid of local funds. by each of the underlying assets of the fund. Also, PE Funds are proper It is worth commenting also that during deferral instruments to only pay taxes Lyana De Luca is an 2014 and 2015, appraisals and valuation once actual profits are distributed to Associate at Brigard & of portfolio assets was the center of investors, because the conventional PE Urrutia Abogados. attention of all PE stakeholders. The local waterfall is accepted and distributions regulator implemented a third party made by the Fund may be accounted registered-valuator figure (proveedor first as a return of capital, allowing de precios or official price vendors) that efficient tax planning structures intended to implement an objective whereby profits are reinvested valuation process free from potential indefinitely without taxes. conflicts of interests. However, GPs and investors raised their voices against an Colombia General Overview expensive and non-practical structure The improvement of security conditions in which valuations had to be done by in recent years has contributed to a third party with no experience in the the re-establishment of investors’ sector in which the fund was invested. confidence in the country, particularly Bearing this in mind, the local regulator in light of the end of a 50-year conflict recently enacted a new rule (Circular with local communist guerrillas in 015 of 2016) that permits the Fund to August 2016. In accordance with the voluntarily adopt the registered price International Monetary Fund, “despite vendor figure or to delegate valuation facing a terms-of-trade shock larger in the GP or any other independent than most of its peers, Colombia posted investment bank, aligning Colombian one of the highest growth rates in the practices with international standards. region and achieved important social

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

EMPEA Legal & Regulatory Bulletin | WINTER 2017 9 Amendments to Foreign Fund Private Placement Exemptions in the UAE By James Stull, King & Spalding and Dora Chan, King & Spalding

In August 2016, the Emirates Securities confirmed the timing for the issuance The 2016 Fund and Commodities Authority (SCA), of the clarification or the specific terms the federal securities regulator of the and requirements of any additional Regulations impose United Arab Emirates (UAE), adopted exemptions. substantial hurdles new investment funds regulations and costs for (the 2016 Fund Regulations), which Further, it is important to note that the repealed the prior funds regulations 2016 Fund Regulations do not apply to managers seeking adopted in 2012 and amended in foreign funds wishing to offer in the “to promote foreign 2013 (the 2013 Regulations). This DIFC or ADGM. Marketing of foreign funds in the UAE clarified the formation process for the fund interests and other securities in establishment of locally domiciled funds these free zones are subject to separate and have generally and introduced significant changes regulations and must be registered with been subject to to the marketing of foreign domiciled the financial services regulator in the negative feedback. investment funds in the UAE. The 2016 respective free zone without exception. Fund Regulations impose substantial hurdles and costs for managers seeking Background: 2013 Funds without registration if the foreign to promote foreign funds in the UAE Regulations and Exemptions manager (i) was marketing to existing and have generally been subject to negative feedback. The 2013 Regulations introduced clients of the manager or (ii) was the first set of codified fund private engaging in reverse solicitation where Managers wishing to market foreign placement exemptions in the UAE. the investor initiated the query. It is funds onshore in the UAE now have far Under the 2013 Regulations, foreign unclear whether the first “tolerated” fewer options: they can register the fund funds that were privately placed with exemption will continue to be permitted. with SCA and enter into a distribution the following categories of investors in The second “tolerated” exemption arrangement with a locally licensed the UAE were exempt from registration has been codified in the 2016 Fund placement agent, engage in reverse with SCA: Regulations as described below. solicitation (where the investor inside the UAE initiates the transaction) or (a) investment portfolios owned by Requirement for rely on a private placement exemption federal or local governmental Distribution by a SCA agencies; when offering to sovereign entities Licensed Placement Agent (which is the lone exemption remaining (b) institutions or entities whose purpose from the 2013 Regulations). Funds is to invest in securities, provided The 2016 Fund Regulations provide that established in a free zone inside the that such institutions are acquiring foreign funds may be promoted in the UAE, including funds established in the the fund interests for their own UAE only if: Dubai International Financial Centre account; and (DIFC) or the Abu Dhabi Global Market (a) the foreign fund is registered with (c) investment managers with (ADGM), are considered by SCA to be SCA; and discretionary management authority. foreign funds. (b) the foreign fund is distributed through a SCA licensed placement However, it is widely expected that The 2013 Regulations were generally agent, unless the fund can qualify SCA will issue further clarification viewed positively as they permitted for a limited private placement regarding additional exemptions, foreign managers to approach certain exemption or rely on reverse potentially reintroducing the private types of institutional investors without solicitation. placement exemptions set out in the engaging a local distributor or engaging 2013 Regulations and introducing in a lengthy registration process. additional exemptions for certain The 2016 Fund Regulations provide that other classes of investors, such as SCA also had adopted certain informal SCA shall issue a decision within 30 multilateral institutions. SCA has not “tolerated” practices including offerings business days of the submission of the

10 © 2017 EMPEA ...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. registration application. A foreign fund’s proper records in order to prove the Conclusion “registration expires on 31 December offering of the concerned securities was of each year and a renewal application initiated by the UAE investor. While the 2016 Fund Regulations do must be submitted at least one month provide clarity regarding the offering before the expiry of the registration. Government Agency and process for funds in the UAE, the loss Pursuant to SCA Board Decision No. 10 Other Exemptions of foreign fund private placement of 2016, the fee payable on the initial exemptions greatly increases the The 2016 Fund Regulations exempts the registration application is AED 35,000 challenge for foreign funds that wish to promotion of foreign funds to federal (approximately US$9,500). Thereafter fundraise in the UAE. The introduction or local governmental agencies and a fee of AED 7,500 (approximately of the reverse solicitation exemption is a US$2,050) is payable on each annual any companies wholly-owned by such positive development; however, unless renewal application. an agency from the requirement to use an SCA licensed placement agent. As SCA issues the expected clarification and Reverse Solicitation such foreign managers can continue reintroduces the broader exemptions, foreign managers and issuers may As mentioned above, one positive to market foreign funds to and visit reconsider the marketing of their development in the 2016 Fund sovereign entities based in the UAE and products onshore in the UAE. Regulations is the express ability of other government related investors. foreign managers to offer funds in the UAE under reverse solicitation where The following are also exempt from the an investor initiates the interaction. operation of the 2016 Fund Regulations: About the Authors Reverse promotion is defined as the following scenario: “an initiative made (a) funds established by federal or local James Stull is a Partner by an investor in the [UAE] submitting governmental agencies or companies with King & Spalding an application to offer or buy specific wholly-owned by such an entity; based in the firm’s Dubai and Riyadh offices. units of foreign mutual funds out of the (b) the accumulation of money for the [UAE], which is not based on promotion purposes of investment in a joint by the foreign fund, its promoters or bank account; Dora Chan is an Associate distributors of its units, provided this is with King & Spalding, substantiated by the concerned entity”. (c) the conclusion of group insurance agreements; based in the firm’s Dubai office. It is expected that this will become (d) social security programs; the primary manner through which (e) employee incentive programs; and managers offer foreign funds unless SCA reintroduces additional private (f) investment plans associated with placement exemptions. It is critical that insurance contracts unless such a foreign fund seeking to rely on the investments or collected money are reverse promotion exemption must keep directed from such plans to funds.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 11 The Auction Process: Advantages and Disadvantages and the Key Steps By Mark Davies, King & Spalding and Trinh Chubbock, King & Spalding

Mergers and acquisitions represent (1) the differences between a and a buyer negotiate directly, in a a key growth strategy for many competitive auction and bilateral competitive auction, the seller seeks corporations. The M&A landscape is negotiations; competing bids from potential buyers becoming increasingly competitive and for the target. Further, in an auction (2) the advantages and disadvantages the balance of power is shifting further process, the seller will carry out a of a competitive auction; and in favour of buyers. For attractive substantial amount of work before the businesses, however, sellers may (3) an overview of the key steps in an process is underway and, as a result, wish to make divestments through auction process. generally require the engagement an auction process which is designed of advisers in the early stages to to elicit competitive bidding among Auction Process vs. prepare for auction launch. In bilateral interested parties to facilitate the negotiations, the buyer often provides sale of a business or stake in a Bilateral Negotiations a “shopping list” of requirements for company at the highest price and Business owners deciding to sell a the due diligence investigation. In an on the best possible terms. This article company or business may choose to auction, however, the seller controls the seeks to explore the auction process sell by way of bilateral negotiations or disclosure process by limiting the scope and discusses: a competitive auction process. Unlike of information made available and bilateral negotiations where a seller 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.

12 “© 2017 EMPEA controlled manner, usually through the conditions from the start. The seller Given the use of a data-room. Finally, an auction may also improve its leverage by process often involves an expedited imposing an expedited timetable, multiple parties transaction schedule. limiting the scope of disclosure of in an auction information and setting the timing of process, the wider There are circumstances, however, bidders’ due diligence investigation. where an auction process is not dissemination suitable. If the business is structurally Disadvantages for the Seller “of confidential complicated or if the market sector is Nevertheless, there are disadvantages information also limited and there are only a handful the seller must consider. The cost of of viable bidders, the additional running an auction sale is inevitably poses a risk to the complexity of, and costs associated higher compared to bilateral seller, especially with, an auction process may not be negotiations as a result of higher fees where a bidder is a worthwhile. Where significant external payable to advisers. The seller will factors may affect a transaction, such generally engage financial, legal and competitor – and, as regulatory or competition issues other advisers in the initial stages particularly, where or third party consent requirements, to assist in establishing a strategy such competitor’s the potentially protracted timescale for the auction process. Legal fees in resolving those matters may will inevitably be higher as the participation in the undermine a key benefit for the seller’s lawyers are responsible for auction is primarily seller – i.e. speed. Further, where the preparation of the initial suite of for information such external factors exist, the documentation. Having to concurrently standardised documentation prepared negotiate with more than one bidder gathering. in connection with an auction process also adds to the overall costs of the may be impractical or impossible for advisers for the seller. Buyer Perspective certain bidders. Of course, any benefits sought by the Given the multiple parties in an auction seller from an auction process will be to Auction Process: Advantages process, the wider dissemination of the detriment of the buyer. Given the confidential information also poses potential competition posed by other and Disadvantages a risk to the seller, especially where bidders, a potential buyer may end a bidder is a competitor – and, up paying more for the target than it Advantages for the Seller particularly, where such competitor’s would otherwise pay. Additionally, in Auction sales may provide a number of participation in the auction is primarily order to appear attractive to the seller, a advantages for the seller. In an auction for information gathering. bidder may be willing to accept weaker process, the seller (together with contractual protections and avoid its investment bank or adviser) may The likelihood of the seller negotiating making substantive changes that are comprehensively survey the market to with more than one bidder may also not absolutely necessary to the sale and uncover more potential buyers. Further, impose additional strains on the seller purchase agreement. Further, if there the seller controls the auction process and the target’s management. Further, are other viable bidders, a potential and can seek to create a competitive the knowledge of the sale alone may buyer risks a higher chance of not being environment in order to maximise its lead to negative consequences such selected as preferred bidder, resulting bargaining power. By encouraging the as loss of, or a deterioration of morale in wasted costs and management time. potential buyers to bid against one among, employees, or even loss of Finally, due to the seller’s control over another, simultaneously negotiating business or customers. For these disclosure of information, a bidder with more than one bidder and reasons, the seller often seeks may end up submitting a binding offer keeping confidential the number and to disclose information on a need without the benefit of the full picture identity of bidders, the seller may to know basis (including the fact of of the target and its business. For these achieve a higher price than otherwise the sale) – particularly as any public reasons, it is in the interest of a bidder possible under bilateral negotiations. knowledge of the seller’s failure to sell to obtain a period of exclusivity as The seller also produces the first draft the target would negatively impact soon as possible in order to redress the of the sale and purchase agreement, the reputation of the target and the balance and to proceed to the extent placing itself in a strong position to seller’s ability to attract a good price in possible as if the transaction was a obtain more favourable terms and a subsequent sale. bilateral negotiation.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 13 In addition to The Auction Process: memorandum to the bidders. The Key Steps process letter will set out the details of lawyers and the auction process, such as timings, accountants, sellers The timing and steps in any given procedures and next steps, and will almost always auction process will differ from invite bidders to submit a non-binding transaction to transaction. However, indicative bid. Additionally, it often instruct a financial auction processes tend to involve: identifies any regulatory, merger “adviser in the early the distribution of an information clearance or other issues that may memorandum to bidders; a first round reduce the likelihood of concluding stages to prepare of indicative bids by the bidders; due a transaction in a timely manner. In the information diligence and review of a draft sale order to provide the seller with the and purchase agreement by bidders; a memorandum and greatest level of flexibility, the process further round of bidding by a limited letter generally avoids setting out the coordinate the number of bidders together with criteria for evaluating bids and includes process by acting their comments on the draft sale and a statement that the highest price will purchase agreement; and negotiations as the point of not necessarily succeed. The seller will between the seller and one or more contact between often also reserve their right to amend preferred bidders. the seller and the or discontinue the auction at any time. Prior to an auction process, however, potential buyers. The information memorandum is the seller has a substantial amount The involvement of a document that aims to contain of preparation. In addition to lawyers reasonably sufficient information an investment bank and accountants, sellers almost always about the target to elicit meaningful instruct a financial adviser in the early will lend credibility bids from potential buyers, such as: stages to prepare the information to the process and a description of target’s business, memorandum and coordinate the industry and history; the principle enable the seller to process by acting as the point of assets; historical financial information reach a wider range contact between the seller and the and future projections; information of potential buyers potential buyers. The involvement of an investment bank will lend credibility about management and employees; through the bank’s to the process and enable the seller and depending on sensitivity of the contacts. to reach a wider range of potential transaction, information about key buyers through the bank’s contacts. customers and contracts. Of the likely bidders, the seller assesses whether there may be any particular Following submission of indicative bids, constraints to successfully concluding the seller and its advisers will assess the a transaction that may arise. To that offers and will decide which bidders to end, the seller will likely consider invite to participate in the next round the activities of a bidder and any of bidding where the seller will make combined market share for relevant available further information and the products or services that may raise remaining bidders will conduct their competition or anti-trust concerns; due diligence investigation. any external approvals required by a bidder which may slow down the Due Diligence, Site Visits and transaction; any required employee Management Presentation consultations; any concerns by a bidder In preparation for the next stage of the of post-completion operations; and the auction process, the seller generally transaction structure. carries out in advance due diligence on the target to identify, and resolve Information Memorandum and if possible, any issues in order to avoid Indicative Bids any undue delay to the process. Unlike After potential buyers enter into in bilateral negotiations, where a buyer a confidentiality agreement with often requests the information that the seller, the auction process it needs to assess the target and its commences upon the distribution of business, in an auction process the the process letter and the information seller controls the disclosure process,

14 © 2017 EMPEA balancing between disclosing as little of available funds and a cooperative Some companies are selling down their as possible and disclosing enough to bidder may be equally important, interests in a particular market or sector ensure that a bidder may adequately demonstrating a bidder’s commitment in order to raise capital or to focus make its assessment. To speed up to closing the transaction. As such, a on their strengths in other markets or the process, and to avoid any delays, bidder must be strategic and consider, sectors. This presents opportunities the seller often produces a seller’s outside of price, how it approaches for companies to enter or expand in a due diligence report, together with the sale and purchase agreement. particular market or sector. other independent reports such as Typically, bidders submit a mark-up of an accountant report, which contains the draft sale and purchase agreement No matter your company’s goals in all the material information that a or a key issues list. Submitting a acquiring or disposing of an asset, the bidder would reasonably require. To comprehensive mark-up of the draft M&A auction process is one which has aid in the disclosure of information sale and purchase agreement may advantages and disadvantages for both in a controlled, efficient and timely demonstrate commitment to the sellers and buyers. Financial advisers, manner, the seller generally uses an process. However, bidders should lawyers and accountants should be online dataroom – although, some limit comments to substantive matters engaged early in the auction process, sellers choose to use a physical (such as risk allocation provisions) no matter if you are the seller or a dataroom where information is, or the and avoid any stylistic or unnecessary bidder, in order to assist your company circumstances of the auction process changes. A heavy mark-up or inclusion to succeed in an auction process and are, particularly sensitive. of open-ended conditions may give to proactively help your company to the impression that a bidder may be manage the transactions complexities. Again, in order to control the disclosure difficult in negotiations. Alternatively, of information, the seller generally bidders may opt, or may be About the Authors prepares and scripts in advance site requested, to submit a key issues list. visits and management presentations This may be useful to focus the seller Mark Davies is a and bidders are also expected to and the relevant bidder on issues that Partner in King & provide in advance any questions that raise the most concern for each of the Spalding’s Global they may have. The seller’s advisers parties. Generally, if a bidder’s price is Transactions Practice. are generally present to ensure that in the right range, the seller is unlikely the seller handles the disclosure of to dismiss the offer as a result of an information as planned and bidders over-zealous mark-up without Trinh Chubbock is a do not raise any questions beyond the further discussions. Global Transactions pre-set plan or make any unauthorised Associate at King & approaches to employees during any Upon the seller’s assessment of any Spalding. site visits or management presentations. final bids, it will select a preferred bidder (or preferred bidders). During The seller often makes available at the final negotiations, the seller will try this stage a draft sale and purchase to maintain the momentum to avoid agreement and encourages bidders any delays and to resist any efforts to review and comment on the by the preferred bidder to introduce agreement. The initial draft is new points or to renegotiate accepted almost always seller-friendly and will points. On the other hand, a preferred reflect the seller’s positions on key bidder will see this as an opportunity transaction terms, such as the form of to conduct negotiations as much consideration, conditions for closing, as possible as if the process were a the scope of representations and bilateral negotiation. The successful warranties and limitations on liability. strategy will largely depend on the parties’ respective bargaining power. Final Offer and Negotiations Following the due diligence exercise and review of the sale and purchase Final words agreement, the remaining bidders will Numerous companies are aggressively be invited to submit their final offers using M&A to enter new markets and/ together with their comments on or new sectors. Other companies are the agreement. The price is often the making acquisitions to increase their determining factor; however, certainty market share.

EMPEA Legal & Regulatory Bulletin | WINTER 2017 15  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 Regulatory Affairs at [email protected].

Aﬀ airs  EMPEA Guidelines set out key legal and tax regimes optimal for the development of private equity and are now available in seven languages including Arabic, Burmese, Chinese (simplifi ed Resources: character), Portuguese and Spanish on EMPEA.org.

 EMPEA Legal & Regulatory Council draws on deep subject matter expertise in the emerging markets practice to address trending concerns such as insights on enforcement and oversight, confl icts of interest management between investors and fund managers, views on maturing funds’ portfolios, expense transparency, changing oversight priorities and emerging challenges such as cybersecurity and privacy.

 EMPEA Legal & Regulatory Bulletin publishes key perspectives and insights of in-house legal offi cers and leading practitioners into the current challenges and concerns of the emerging markets community. Articles are available on EMPEA's online resource library at EMPEA.org and accessible by keyword search as well as regional relevance.

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

 EMPEA General Counsel Member Community engages the unique perspective of general counsels, legal offi cers and inside counsel on issues of concern, best practices and emerging topics related to providing legal services and assuring integrity to their fi rms and institutions.