Alex Saleh, Partner, Al Tamimi & Co, on new reforms to capital markets law: Viewpoint

Viewpoint: Alex Saleh

The past year was productive, as we witnessed the further development of the Kuwait capital markets. The promulgation of Resolution 72 of 2015 relating to the issuance of the Executive Bylaws of Law No. 7 of 2010, and of its amendments establishing the Capital Markets Authority (CMA) and regulating securities activities in Kuwait (Executive Bylaws), has been eagerly awaited, as the Kuwait capital markets regime has been in need of some updating. Since they were officially announced on November 10, 2015, the Executive Bylaws have been heralded as a major accomplishment by the CMA in making notable legislative reforms and developments relating to financial and investment regulations in Kuwait, particularly following the amendment of the Law No. 7 of 2010 by virtue of Law No. 22 of 2015, also known as the Capital Markets Authority Law (CML) Amendment, which was issued in May 2015 but came into effect on the same day the executive regulations were published.

Unlike the former bylaws, the new regulations are organised in one comprehensive handbook that is separated by a series of “modules”, each of which addresses a specific area of law covered under the auspices of the CMA. Previously, the CMA issued circulars and resolutions, which were difficult to arrange as there was no system for easily organising them. The Executive Bylaws revoke all the rules and regulations issued previously by the CMA (an annex of all annulled resolutions is included for the avoidance of any doubt) and incorporates the content directly into the Executive Bylaws. As the CMA stated, “This shall create a unified reference for such provisions, facilitate dealing with them and achieve consistency.”

Module 5 of the executive regulations sets forth the regulated securities activities and the procedures required to obtain a licence to perform securities activities. Foreign and multinational advisory firms engaged by or engaging Kuwaiti financial institutions and companies to arrange cross-border or even local onshore transactions can be assured that international best practices are being observed, which in turn should foster market strength and security.

In the ever-increasing global market, cross-border transactions include the phenomenon of mergers and acquisitions (M&A). The M&A practice in Kuwait is regulated by the CMA and outlined under Module 9. Module 9 addresses the key considerations of regulating M&A, including conflicts of interest, disclosure rules and access to information. Two of the most interesting aspects of this module are oversight of anti-competition that would lead to control of or increase in the exiting control of the relevant market value, and protecting minority rights. One notable provision is Article 3-12 of Module 9 of the Executive Bylaws, which grants minority shareholders the right to object to any prejudice of an M&A before the CMA. This is important, as the regulation of M&A mechanisms supports a strong and competitive market in Kuwait, in line with the vision of the state of Kuwait.

Finally, Module 11 discusses the essence of the capital market, which is dealing and trading in securities. Most notable is the clear and concise rules for pledging securities. Commercial lenders are one of the main players that are likely to increase their exposure in the Kuwaiti market. Specifically, in the arena of project finance, the Executive Bylaws have streamlined the process for enforcing a pledge of shares. Article 9-13 of Module 11 of the Executive Bylaws provides that, where the creditor or mortgagee is a bank or financial institution and the debtor or mortgagor is a professional client, the parties may enter into an agreement at the time of concluding the pledge contract, or at a later date, to give the creditor or mortgagor the right to acquire or sell the pledged asset in the event of the debtor’s breach of its obligations. These articles constitute a highly significant piece of reform in the otherwise onerous and time-consuming task of pledges over shares.