The introduction of the new Commercial  Companies Law (New CCL), which came into effect on 17 April 2019 repealing the old Commercial Companies Law (No 4/74) (Old CCL), brings a number of measures aimed at creating a more transparent and robust corporate governance regime in Oman.

This alert is one of a series of alerts on the key changes introduced by the New CCL. In this alert, Nick Simpson look at the regulatory regime governing Omani mergers in light of the New CCL and explore some of the benefits to approaching business consolidation through merger rather than acquisition.

Background

The Omani commercial landscape frequently experiences a variety of mergers and acquisitions (M&A) in which the ownership of companies, other business organisations, or their operating units are transferred or consolidated with other entities.  Naturally, M&A can therefore allow enterprises to grow or downsize, and change the nature of their business or competitive position.

From a legal point of view, a merger is a legal consolidation of two entities into one entity, whereas an acquisition occurs when one entity takes ownership of another entity's equity interests or assets.

Why merge as opposed to acquire?

Oman, similar to other civil law jurisdictions, provides for a legally recognised merger framework whereby two or more companies can combine to form one company.   Without recourse to the legally recognised merger process, the transfer of business and assets to another entity can be difficult to effect.  For example, a transfer of the business is likely to require approval from some or all suppliers, customers and lenders of the selling business to make a valid legal transfer of their rights and obligations to the buyer.  This is often very time-consuming and raises difficulties about how those who do not consent (including those who do not respond) are dealt with and leaves residual liabilities with the seller that cannot be transferred as a result of such refusal (or failure to respond).  This is clearly what the merger rules under the Omani laws are designed to address by providing a sound and practical legal basis for a merger of businesses.

Structure of a merger

Oman law allows for mergers by incorporation and mergers by consolidation – both options have been explored below.

Merger by incorporation

What does it mean?

Only one company is dissolved and its assets and liabilities are transferred to the other existing company which will continue.

Which company is dissolved?

Only the merging company is dissolved.

How does the valuation work?

The net assets of the company which is intended to be dissolved will have to be evaluated in accordance with either:

1. its last audited balance sheet; or
2. the procedures regarding valuation of shares in kind, as set out in Ministerial Decision 198/94.

Which entity's shareholders are compensated?

Only the shareholders of the merging company which is intended to be dissolved will be compensated.

How are the shareholders compensated?

The continuing company will be required to increase its paid-up capital, and the shareholders of the merging entity which is intended to be dissolved will be compensated by way of shares in the continuing company.

Merger by consolidation

What does it mean?

Both companies are dissolved. A new company is formed and the assets and liabilities of both companies are transferred to the new company.

Which company is dissolved?

Both companies are dissolved.

How does the valuation work?

Both companies will have to be evaluated in accordance with either:

1. their last audited balance sheets; or 
2. the procedures regarding valuation of shares in kind, as set out in Ministerial Decision 198/94.

Which entity's shareholders are compensated?

The shareholders of both companies will be compensated.

How are the shareholders compensated?

The shareholders of both companies will be compensated by way of shares in the new company.

The adoption of a specific merger methodology is largely driven by the size and form of the companies that intend to merge, their assets, liabilities and the respective valuations placed on the companies. The impact of capital gains tax, especially in the context of goodwill, will have to be carefully examined by tax experts. The adoption of either structure can result in vastly different tax outcomes for companies intending to merge.

Changes introduced by the New CCL

The merger provisions under the Old CCL are largely mirrored in the New CCL, save as set out below.

Capital of a new company created pursuant to a merger by consolidation: As per the Old CCL, a merger through consolidation can still be effected by the dissolution of, for example, two merging companies and the formation of a new company which will be capitalised by the net value of the assets owned by the two dissolved companies.  Article 36 of the New CCL introduces a new provision which sets out that the new company may not have a net asset value which is less than the dissolved companies.  In practice, a new company may have a lower net asset position than the dissolved companies (perhaps if there is a goodwill write-down).  Obviously, this calls for financial advice to be obtained during the merger process in order that the full consequences of the merger can be analysed.

No longer a requirement to advertise merger in local newspaper: Article 13 bis (8) of the Old CCL required a merger to be announced in two daily newspapers for two consecutive issues.  This is no longer required under the New CCL.

Shorter creditor claims period: Under Article 37 of the New CCL, creditors could object to the merger during a three-month waiting period before the merger became effective.  This period has been reduced, after the registration of the merger resolution, to 30 days – this means that mergers can be effected in a quicker time frame as creditors have a shorter period of time to object to a merger.  Under the Old CCL, companies in the process of merging would often request the Capital Market Authority or the Omani Ministry of Commerce to shorten the historic three-month creditor claim period – as such, this shorter statutory period will be welcomed.

Please do not hesitate to get in touch with a member of the team should you have any queries relating to the New CCL or how it might impact you doing business in Oman.