First: The 30% Threshold under the Mandatory Takeover Rule

The mandatory takeover rule seeks to protect minority shareholders from the risk of the emergence of a new controlling shareholder who may potentially harm minority rights, prejudice the company’s interests, or misuse the company’s assets. Kuwaiti law considers the ownership of more than 30% of a company’s shares as resulting in the emergence of a new controller, thereby triggering the obligation to launch a mandatory takeover offer.

Exceeding the 30% threshold does not, in itself, necessarily result in the emergence of a controller capable of exercising the threats that the mandatory takeover rule was enacted to address, namely effecting fundamental and material changes to the company’s activities or specifically jeopardizing the interests of minority shareholders. This is evidenced by the fact that the new Kuwaiti Companies Law has vested the authority to approve material amendments affecting the interests of the company and its shareholders in the Extraordinary General Assembly, rather than the Board of Directors or even the Ordinary General Assembly. By way of example, the Extraordinary General Assembly is exclusively competent to amend the company’s articles of association, increase or decrease the company’s capital, sell or dispose of the entire project for which the company was established, dissolve, merge, or transform the company. Notably, all such resolutions must be adopted by a majority exceeding half of the total shares, a threshold that cannot be achieved merely by exceeding the 30% ownership level.

Furthermore, the new Kuwaiti Companies Law provides strong and effective protection for minority shareholders against the risk posed by both existing and new controlling shareholders. Article 180 prohibits the General Assembly from increasing shareholders’ financial burdens, reducing the percentage of net profits required to be distributed as stipulated in the company’s articles, or imposing new conditions relating to shareholders’ rights to attend and vote at General Assembly meetings, except with the written consent of all shareholders and the approval of the Capital Markets Authority.

In this context, the Capital Markets Authority recently issued Resolution No. 16 of 2021, which increased the majority required to approve a voluntary delisting from the stock exchange. Previously, approval by the Ordinary General Assembly, namely a simple majority of those present, was sufficient. Following the amendment, approval of at least 75% of the General Assembly votes is now required to approve voluntary delisting. This amendment aims to protect minority shareholders from resolutions driven by simple majorities or controlling groups that may prejudice minority rights. Accordingly, the Executive Regulations have established a strong safeguard for minority shareholders against one of the most significant tools a new controller could use, namely delisting from the stock exchange and depriving minorities of the opportunity to trade on the Kuwaiti market.

Based on the foregoing, even if a new acquirer succeeds in obtaining 30% of the shares and is able to appoint a majority of the Board of Directors or exercise voting rights based on this percentage, they will not be able to infringe upon the fundamental rights of shareholders or cause them harm, as long as the new Kuwaiti Companies Law grants the Extraordinary General Assembly the authority to introduce material and fundamental changes to the company’s activities, rather than the Board of Directors or the Ordinary General Assembly.

The core issue of protecting minority shareholders and the company’s interests from the risks associated with a potential acquirer does not primarily stem from change-of-control transactions themselves. Rather, it lies in the effectiveness of corporate law and governance rules, which are intended to safeguard minority shareholders. If such rules fail to provide adequate protection, the extent of control transfer becomes irrelevant, as a controlling shareholder—without any transfer of control—would still be able to create the very risks and threats that the mandatory takeover rule seeks to prevent.

Second: The Price of the Mandatory Takeover Offer

If the objective of the mandatory takeover rule is to ensure a fair exit opportunity for minority shareholders, this objective is inherently linked to the price of the mandatory purchase offer submitted by the person who exceeds the mandatory takeover threshold. Accordingly, the Executive Regulations require that the mandatory takeover offer price be the highest price offered by the bidder during the preceding six months, or the weighted average of the daily trading price.

From our perspective, however, a bidder may be able to time the market or structure their acquisitions in a manner that circumvents the “highest price” requirement. For example, the bidder could acquire 10% of the company’s shares at a price of one Kuwaiti dinar per share, then after six months acquire an additional 21% at a price of half a dinar per share. Under this scenario, the mandatory takeover offer would be triggered, but at a price of half a dinar rather than one dinar, as this would constitute the highest price offered during the preceding six months. Consequently, the controlling stake would have been acquired at two different prices, and minority shareholders would be deprived of any price premium.

The issue becomes more pronounced where the bidder agrees with the controlling shareholder to acquire their stake at a price below market value, without any premium, or even below market value for commercial considerations. In such a case, the mandatory takeover offer would be triggered, but without reflecting the fair value of the shares. This would ultimately discourage minority shareholders from participating in the offer, as the mandatory takeover mechanism would have failed to ensure a fair price for minority shareholders.

Third: Disclosure of the Mandatory Takeover Offer

By examining Article Two of Chapter Three of Part Nine (Takeovers and Mergers), it is evident that the Executive Regulations require the mandatory takeover offeror to disclose their commitment to submitting the takeover offer document. However, neither this article nor the subsequent article—which addresses the contents of the takeover offer document—requires the offeror to disclose their objectives and commercial plans for the company pursuant to the mandatory takeover offer. This omission prevents minority shareholders from making an informed investment decision as to whether to participate in the mandatory takeover offer. If the offeror has high-risk commercial objectives, minority shareholders would choose to participate, and vice versa.

In the practical context of Kuwait, this issue materialized in 2016 when Adeptio, a UAE-based company, acquired 67% of Americana Kuwait. As a result of this transaction, a mandatory takeover offer was triggered. However, the new controlling shareholder did not disclose its intention to delist the company from the Kuwait Stock Exchange until after the mandatory takeover period had ended. Consequently, minority shareholders lost their opportunity to trade on the Kuwait Stock Exchange and, more importantly, did not benefit from the protection intended under the mandatory takeover regime.

One legal system that expressly and directly requires disclosure of the risks of delisting following the completion of a takeover offer is Chinese law. Article 29(2) of the Chinese Takeover Regulations explicitly mandates that the takeover offeror disclose the risks associated with delisting after the implementation of the takeover. Moreover, Article 29(1) requires the offeror to disclose its commercial plans and objectives for the company and its assets, as well as any amendments it intends to introduce to the company’s constitutional documents.

Dr. Fahad Al-Shammari
Associate Professor of Commercial Law, Kuwait University