When two Kuwaiti companies decide to merge, the will of the parties and a merger agreement are not enough. The Companies Law, promulgated by Law No. 1 of 2016 and amended since (including by Law No. 15 of 2017), sets a mandatory path: defined merger methods, a valuation of net assets, publication that opens a window for creditors to object, and special approvals where bonds or sukuk exist or partners' burdens increase. A separate competition law adds a clearance step before the deal can close. This article explains the mechanism as the texts state it, from our office in Kuwait, and complements our published buyer's due diligence checklist. Article numbers refer to the Companies Law unless we say otherwise. Related guides are linked at the end of this article.
Who can merge, and with whom
Article 255 says a company, even one in liquidation, may merge into another company of the same legal form or of a different form. The rule is broad. Merger is not a privilege of active companies alone, and the parties do not need to share the same legal form.
The three methods
Article 255 names three methods:
- Merger by amalgamation (merger into an existing company): one or more companies are dissolved and their estate passes to an existing company.
- Merger by consolidation: two or more companies are dissolved and a new company is established to which the estates of the merged companies pass.
- Merger by division and absorption: a company's estate is divided into two or more parts, and each part passes to an existing company.
The executive regulations set the procedures, conditions and details of the merger, subject to the articles that follow.
Amalgamation, step by step
Article 256 lists the steps in a merger by amalgamation:
- Each merged company issues a resolution dissolving itself.
- The net assets of the merged company are valued under the rules on valuing in-kind contributions in Article 11 of the Law.
- The absorbing company issues a resolution increasing its capital by the value of the merged company.
- The capital increase is distributed among the partners of the merged company in proportion to their interests in it.
- If the new interests are shares, and the periods the Law sets for trading a company's shares have already passed since the absorbing company was formed, the shares may be traded as soon as they are issued.
Consolidation, step by step
Article 257 provides that in a merger by consolidation, each merged company issues a dissolution resolution, and the new company is formed under the rules of the Law. If the new company is a shareholding company, the in-kind valuation report prepared under Article 11 is used without the need to put it before a founders' meeting. Each merged company is allotted interests or shares equal to its share in the new company's capital, and these are distributed to the partners of each merged company in proportion to their interests. If the new company's interests are shares, and the trading periods have passed for each of the merged companies, the shares may be traded once they are issued.
Publication and the creditors' window
Article 258 requires the merger to be published. The merger resolution may not be implemented until thirty days have passed from its publication in the Official Gazette. During that period the creditors of the merged company may object to the merger by official notice to the company. The merger stays suspended until the creditor waives the objection, or the objection is rejected by a final judgment, or the company pays the debt if it is due or gives sufficient guarantees to pay it if it is not yet due. If no objection is made within the period, the merger is final.
For the buyer or the absorbing company, this thirty-day window is a calendar item to plan around. For the target's creditors it is the point where creditors have bargaining power, so a well-run process contacts major creditors before publication and arranges payment or security in advance.
Bondholders, sukuk holders and partners
Article 259 sets a special condition for merging a shareholding company that has issued bonds or sukuk. The bondholders' or sukuk holders' assembly must approve the merger resolution by the majority representing two-thirds of the bonds or sukuk. Failing that, the company must reach a debt settlement that the assembly approves by the same majority. The assembly's representative may object to the merger resolution under the creditor-objection rules of the previous article. Article 260 deals with convertible bonds and sukuk: their holders may ask to convert them into shares of the absorbing or new company within the period set in the issue terms, using the exchange ratio in the issue terms read against the ratio in the merger agreement.
Article 261 protects the partners and shareholders. If the merger would increase the financial burdens of the partners or shareholders in any of the participating companies, or would prejudice their rights, all the partners or shareholders in that company must approve the resolution. If a partner or shareholder objects to the merger resolution, the rule of Article 251 applies: the objecting partner may withdraw and recover the value of the interest or shares, by a request to the company within sixty days of the date of registration, and the value is paid according to the actual value stated in the valuation report.
Universal succession: why due diligence is decisive
Under Article 262, in a merger by amalgamation or consolidation, the absorbing or new company takes the place of the merged companies in all their rights and obligations. In a merger by division and absorption, the absorbing companies are jointly liable for the obligations of the divided companies. Every hidden liability therefore passes by operation of law. This makes due diligence before the merger resolution an existential decision for the acquirer, not a formality.
The competition gate
The Companies Law is not the only step. Kuwait's competition law, Law No. 72 of 2020 on the Protection of Competition, defines economic concentration to include the merger of two or more persons by amalgamation or consolidation, or the merger of parts of persons, where it leads to control or increases control (Article 10). Under Article 12, the persons involved must apply to the Competition Protection Authority before completion if their registered assets or annual sales in Kuwait exceed the combined and individual limits that the Authority's board sets. The application comes with a payment receipt for a fee of 0.1 percent of the paid-up capital or of the combined assets of the persons concerned in Kuwait, whichever is lower, capped at KD 100,000. The Authority examines the effects of the concentration on competition and the board decides (Article 13). Under Article 14, the persons concerned may not take any step to complete the concentration before the board's decision, and other bodies that must approve such operations must notify the Authority and approve only after the board's decision. Failure to apply is punishable by a financial penalty of up to 10 percent of the total revenues of the parties in the previous financial year (Article 34), as is an application with misleading or incorrect data. The thresholds are in the board's decisions and the executive regulations, not in the law itself, so we confirm the current figures before advising whether a given merger is notifiable.
What we review before the merger resolution
We review the choice of method, the validity of the dissolution and capital increase resolutions, the net-asset valuation, the publication plan and the handling of the thirty-day creditor window, the bondholder, sukuk holder and partner approvals, and the competition filing. For listed companies we also review the disclosure requirements of the Capital Markets Authority. We deliver this service from our office in Kuwait.
Read also: Enforcing Foreign Arbitral Awards in Kuwait: Step by Step | Kuwait Commercial Contracts: What a Foreign Party Must Check | Kuwait M&A: Legal Due Diligence
Frequently asked questions
Can a company in liquidation merge in Kuwait?
Yes. Article 255 allows a company to merge even if it is in liquidation, with a company of the same or a different legal form.
How long is the creditors' objection window?
Thirty days from publication of the merger in the Official Gazette (Article 258). The merger cannot be implemented before then. An objection suspends the merger until it is waived, rejected by final judgment, or the debt is paid or sufficiently secured.
Is bondholder approval required?
Yes, for a shareholding company that issued bonds or sukuk. The assembly must approve by a majority representing two-thirds, or approve a debt settlement by the same majority (Article 259).
Can a partner who objects leave?
Where Article 261 applies, the partner may withdraw and recover the value of the interest under Article 251, by a request within sixty days from registration.
Does a merger need competition clearance?
It may. If the thresholds are exceeded, a filing to the Competition Protection Authority is required before completion, and the parties may not take steps to complete before the board decides. We confirm the current thresholds for each deal.
Do you help with merger transactions in Kuwait?
Yes. From our office in Kuwait we review merger structure, procedures and approvals.