Mergers and Acquisitions Regulations in Lebanon

M&A activity in Lebanon has been traditionally embryonic compared to its neighboring Gulf countries, considering the size of the Lebanese market which consists of SMEs and small family businesses, and that merger and acquisition transactions among such entities are usually carried out privately in the absence of any disclosure requirements or specific M&A regulations.

Nonetheless, the banking sector was subject to a special treatment, as it benefitted from a dedicated law aiming at encouraging the mergers and acquisitions among banks in Lebanon, under the strict supervision of the Lebanese Central Bank. The purpose of such laws and regulations was to address the situation of banks in difficulty that showed good management, to maintain the rights of depositors and employees, and to preserve the stability of the market through incentives and soft loans granted to the acquiring banks. Consequently, this law contributed to the improvement of the sustainability and reliability of the banking sector in Lebanon.

In 1996, the Beirut Stock Exchange (BSE) re-launched the trading activity in its hall, following a thirteen-year compulsory suspension. The Committee of the BSE, which is responsible for managing, regulating and developing the markets, protecting the interests of the investors trading at the Stock Exchange, monitoring the activities of the issuing companies and providing information to the issuers and traders at the Stock Exchange on an equal footing, organized part of the M&A for listed companies.

Recently, a new Financial Markets Law was enacted and a Capital Market Authority (CMA) was established accordingly in August 2011. The CMA is an independent and autonomous regulatory body that aims to regulate and supervise the activities of capital markets in Lebanon and to create the adequate legal framework for the development of the Lebanese Financial Markets, including the issuance of all regulations pertaining to mergers and acquisitions (M&A) for listed companies.

M&A REGULATIONS IN LISTED COMPANIES

REGULATORY FRAMEWORK

Public M&A is regulated by the Lebanese Commercial Law (articles 210 to 213 of Legislative Decree 304 of December 24, 1942 and its modifications), and Decree 7667 of December 16, 1995 regarding the implementation of the BSE by-laws.

The CMA is the regulatory body and the enforcing authority in connection with acquisition of shares in public companies and the execution of M&A bids. Its control unit regulates the capital markets and its sanctions committee examines violation cases transmitted by the Board, investigates them and takes the necessary decisions further to proceedings involving all concerned parties, as specified in its rules of operation.

STRUCTURAL CONSIDERATIONS

Lebanese law does not mention structural differences between friendly acquisitions (in which the target is willing to be acquired) and hostile takeovers (where the target is opposed to the acquisition). An acquisition is structured as a tender offer by the bidder and regulated by article 161 of the decree 7667 /1995 which states that:

“Any investor or group of investors […] wishing to own more than 10% of the voting rights in a company quoted in the official or secondary market, or wishing to acquire the absolute or specified majority in this company, should present a draft for a tender public offer or bartering via a financial broker.”

The period of the offer in a bidding transaction should not take less than ten Stock Exchange sessions, and there are no limitation of initial offer price limit. However, article 168 of decree 7667/1995 states:

“In the event an investor or another group of investors presents a counter-proposal, this counter-proposal cannot be accepted unless the counter-price exceeds the price of the current offer by more than 5%”.

M&A REGULATIONS IN BANKS

REGULATORY FRAMEWORK

M&A of banks are regulated by the Lebanese Code of Money and Credit (articles 132/b-d and 133/b-d), the provisions of Law 192 of January 4, 1993 and their amendments regarding the facilitation of banks’ M&A as well as Law 308 of April 3, 2001 organizing the issuance and trade of stocks and bonds and acquisition of real estate by banks.

The regulatory body is the Central Council of the Lebanese Central Bank which set all regulations concerning purchases of shares in banks, and those concerning the banks’ M&A.

The Central Council of the Lebanese Central Bank, after consultation with the Banking Control Commission, supervises all takeovers in the banking and financial services sector, ensures that all regulated entities comply with applicable laws and regulations, and has all discretionary powers to approve or reject any takeover within the banking and financial services sector.

STRUCTURAL CONSIDERATIONS

Any subscription or transaction in the Lebanese banks’ shares is subject to prior approval of the Central Council of the Lebanese Central Bank as follows:

• if the subscriber acquires more than 5% of the bank’s shares or from the voting rights related to these shares, whichever is greater;
• if the subscriber owns at the time of the subscription 5% or more of the bank’s shares or from the voting rights related to these shares whichever is greater.

Any merger that includes a bank or a financial institution shall be contingent upon the approval of the Central Council of the Lebanese Central Bank. Consequently, the deals are governed by the Central Council of the Lebanese Central Bank.

The Central Council shall take, after consultation with the Banking Control Commission, a provisional decision approving or rejecting the merger within sixty days from the filing of the bank’s application and the attachments specified by the Law.

In case of approval, the Central Council shall specify the conditions, deadlines and guarantees required for its final decision. The Central Council shall take a final decision on the merger within thirty days from the submission date of documents that prove the fulfillment of conditions and guarantees required by the Council. In case the Central Council has not taken a final decision on the matter within the above-mentioned deadlines, the Central Bank shall be deemed to have taken an implicit decision of rejecting the merger request as submitted.

TAX INCENTIVES

In order to encourage M&A activity within the banking sector, the legislator granted the banks with several tax incentives, including the following:

1. Article 7 of Law 192 of January 4, 1993 states that: “During the year that follows the year in which the Central Council took its final decision on approving the merger, the Council may exempt the merging bank from income tax for an amount equivalent to taxes due on a portion of its profits, provided this portion does not exceed the cost of the merging operation and a ceiling of two billion Lebanese pounds. […] The merged bank (s) shall also be exempted from the tax stipulated in article 45 of the Income Tax Code, in case of approval of the revaluation of its (their) fixed assets”.

1. Article 8 of Law 192 of January 4, 1993 states that: “All formalities and procedures required by the merging operation, including the issuance of new shares, shall be exempted from stamp, transfer and notary public fees, and from all registration fees with public administrations.”

1. The new parent bank can benefit from payroll and capital gain tax exemptions. Employees to be dismissed as a result of the merger or acquisition also benefit from some tax exemptions and end-of service indemnities between six and thirty six months’ salary depending on the duration of their employment. No income tax is deducted from this compensation.

CONCLUSION

Despite the regional upheavals, Lebanon has witnessed M&A in the banking sector as well as in other sectors such as the insurance, information and communication technologies industries. We expect such activities to increase in the near future as a result of the establishment of the CMA and the enacting of new financial markets laws and regulations aiming to build confidence among the investors in Lebanon; as well as the prospect of privatizing some utility companies and governmental institutions, which will be a boosting factor for the Beirut Stock Exchange, and would consequentially lead to more M&A activity among listed companies.