CMA Case Study

1. CMA Case Study 10 May 2011

2. CMA Case Study Background TargetCo • An industrial holding company that is listed on the Kuwait Stock Exchange (“KSE”) • It’s Board of Directors comprises of five members TargetCo Shareholders • A Kuwaiti Bank (“Bank”) – 35%; controls two Board members including Chairman • Savvy Company, a listed Kuwaiti investment company (“SavvyCo”) – 10%; appoints one Board member • Cashless Company, another investment company (“CashlessCo”) – 10%; appoints one Board member • Mr. Big – 5%; appoints one Board member • Remaining 40% of shares are held in free float About SavvyCo • SavvyCo’s shareholders: • Mr. Big – 35%; • A private investor (“Investor”) – 15%; • The remaining 50% of the shares is held in free float • The Board of Directors (“BOD”) of SavvyCo is controlled by nominees of Mr. Big • In 2009, SavvyCo granted a shareholder loan of KD 20 million to TargetCo, which is still outstanding, but not in default

3. CMA Case Study Background (cont’d) Intended Transaction • In September 2010, SavvyCo makes the strategic decision to acquire majority control of TargetCo and then merge it with another Saudi based company, which is also controlled by SavvyCo. • 400 million shares outstanding, at a par value of KD 0.100, share capital is fully paid • Current market price KD 0.90; price has remained stable at this level for the last six months • Trading volumes are very low TargetCo's Equity • Greenfield Financial Advisors LLC of Dubai (“Greenfield”) advise Mr. Big and SavvyCo on the Transaction • Greenfield are paid on a retainer basis and would receive a success fee in the event of closing the Transaction Financial advisors

4. CMA Case Study Approach to the Transaction The implications of the mechanism behind the Transaction as well as the rationale behind the Transaction are presented below: Transaction Rationale • SavvyCo intends to merge TargetCo with a non-listed, cash-rich Saudi based consumer electronics manufacturer (“SaudiCo”), which had recently been purchased by SavvyCo • Subsequent to gaining control, SavvyCo wants to sell its newly acquired majority stake in TargetCo to SaudiCo • After the post-merger integration, SaudiCo would be listed on the Saudi Stock Exchange (“SSE”) Impediments to Transaction • Negotiations between SavvyCo and Bank on a sale of the Bank’s stake in TargetCo have failed, as the parties could not agree on a price • CashlessCo is ready to sell its stake at a price of KD 0.90, as it urgently needs cash to repay its debts • Purchasing further shares in the open market is nigh impossible, as shareholders are holding on to their shares due to its low price

5. 1. Purchase 10% stake held by CashlessCo 2. Enter into debt to equity swap with TargetCo1 CMA Case Study Approach to the Transaction (cont’d) 3. Enter into a share swap with the Family Members2 In order to gain effective control of TargetCo, SavvyCo could proceed via the steps, highlighted below: 4. Make several open market purchases to secure control over TargetCo SavvyCo’s route to gaining effective control over TargetCo Increasing SavvyCo’s shareholding to 20% Increasing SavvyCo’s shareholding to 46.7% on a fully diluted basis Increasing SavvyCo’s shareholding to 50% on a fully diluted basis 1 SavvyCo would exchange KD 20 million of debt for 200 million shares of TargetCo 2 Mr. Big want to enlarge his share in SavvyCo and are ready to exchange their shares in TargetCo for shares in SavvyCo. In order to do achieve this, Mr. Big wants to transfer the shares he holds in TargetCo to SavvyCo in return for the issuance of new shares in SavvyCo

6. Issues prior to CMA regulations 1. Share Purchase • Block trading rules • Any sale of shares of companies listed on KSE, amounting to 5% or more of the company’s share capital must follow the following set procedures for block trading • Sellers must submit share certificate(s) to their brokers, in cases where Kuwait Clearing Company (“KCC”) records do not indicate share ownership • Brokers must then deliver share certificate(s) to the KCC, upon their receipt from the seller and issue a statement of account from KCC • Further, brokers must notify KSE Trading Department of all pertinent details • KSE Trading Department must then announce the deal and pertinent details such as share quantity, as well as the initial bid, within 5 days prior to suggested execution date; • The Trading Department then determines a suitable date and time for the Transaction • Acquirer must present a certified check, amounting to 10% of trade value, in case their account balance at KCC is insufficient to cover the amount • Shares are then put up for auction, and the transaction is executed by end of trading period, to the highest bidder • Upon contract execution, brokers issue a trade contract and forwards copies of the same to the bidding broker, KCC and the Trading Department • KCC deals with settlement related obligations arising from the Transaction and collects any payable commissions Block trading rules

7. Issues prior to CMA regulations Establish an SPV as a wholly owned subsidiary 1. Share Purchase • Block trading risk Transfer the shares to the SPV* • Sellers trading shares in accordance with the Block Trading Decision (BTD) face the risk that purchasers will not want to bid for shares at auction; this risk is not high as most of the block transactions are negotiated deals • Someone other than the intended buyer may quote a higher price and succeed in buying the shares, thus upsetting the intended buyer’s plans Block trading risk Transfer ownership of the SPV to the purchaser • To address this risk, sellers may indirectly transfer the shares to the purchaser, using the three-step process, highlighted below: Block trading risk mitigation • *The transfer of shares from a company to its wholly-owned subsidiary will not fall under BTD provisions Exception

8. Issues prior to CMA regulations 1. Share Purchase • Disclosure requirements • Every shareholder in a listed Joint Stock Company (“JSC”) must notify KSE of any direct or indirect transfer of shares, representing 5% or more of JSC’s share capital (as per Law No.2 of 1999 regarding Disclosure of Interests in the Shares of Joint Stock Companies (“Disclosure Law”) ) Notification to KSE • Disclosure Law also requires disclosure relating to the following types of interest(s): • Names of shareholders who own 5% or more of JSC’s share capital including changes to the ownership percentage • Joint ownership in JSC’s shares • Any commitment to purchase the shares through forward sale or option transactions • Direct or indirect ownership details of 20% or more of the shares of the shareholder who is holding 5% or more of the JSC’s share capital • Details of any decrease in proportion of interest in JSC, mortgaging, or agreeing / terminating to mortgage, and pledging of equity interests in JSC as collateral for a loan • Any offer of the ownership interest as shares in other companies • Legal ownership of 5% or more of the ownership interest in JSC, on behalf of third parties, and • Any increase in ownership of shares of JSC that is expected to reach 5% or more, and any changes in such ownership KSE Disclosure Require-ments

9. Issues prior to CMA regulations 1. Share Purchase • Sanctions for disclosure violation Violation of Disclosure Law results in participants being subject to the following sanctions: • Violating shares’ exclusion from quorum needed to bring together the company’s general assembly • Exclusion from voting on any resolutions for two election periods • Violators are referred to KSE’s arbitration committee, which may result in: • Depriving the violator of his/her nomination on their membership on the BOD for two election periods Sanctions for Disclosure Law Violation 2. Debt for equity swap • Capital increases in kind (cashless transaction) require the appointment of a court appointed valuer. This may have an impact on the swap price and timeline of the transaction • Capital increases in cash in many case (especially when the increase is required to buy shares in another company whose shareholders are to be ultimately allowed shareholding in the company increases capital) require bridge financing Capital increase Implication

10. Issues prior to CMA regulations 3. Share for share swap • Due to Block Trading Rules, no direct share swap is possible for sale of more than 5% shares of a listed company as such shares are required to be posted on the KSE board for auction to allow rival bids for five days • A bridge financing may be required to fund purchase of more than 5% shares on KSE to execute it as a cash transaction. • There is a risk that rival bids can increase the purchase price or shares could be sold to highest bidder • Share swap would require an increase of capital of SavvyCo; the same issues would arise in debt for equity swap arrangement • Further, consent of CBK would be required as this is an increase of share capital of an investment company (SavvyCo.). A feasibility study for the Transaction needs to be submitted along with the purpose and reasons for the capital increase request Share swap implication

11. New issues post CMA regulations Questions to consider Several questions relating to the effect of CMA regulations on share purchase arise Share purchase • Do block trading rules still apply? • What are the additional disclosure requirements? Debt for equity swap • As per Articles 268 and 369 of CMA regulations, capital increases in cash require the issuance of a prospectus • Does the capital increase and subsequent increase of the shareholding of SavvyCo trigger a mandatory public takeover offer? • When does SavvyCo have to inform CMA of its intention to acquire more than 30% of the shares of TargetCo? • As per Article 274 of CMA regulation, if a mandatory takeover offer is required, the offer must be a cash offer • What are the implications of purchasing shares in the market, after considering Article 279 of CMA regulation? Share swap • A share for share swap would require an increase in SavvyCo’s capital; again triggering the requirement for a prospectus, which has to be approved by the CMA • Furthermore, as SavvyCo is an investment company and would therefore also require CBK approval (confirmed in Article 370 of CMA Regulations)

12. New issues post CMA regulations Questions to consider Several further questions arise that in the past did not play a role Disclosure • Article 257 CMA Regulations requires a disclosure of the "potential" offer if an "initial" agreement has been found Conflict of Interest and Effective Control • Article 282 CMA Regulations: No board member of any of the parties of the offer - at a meeting of the board or in any of its subsidiary committees thereof or in the general assembly - shall vote on a resolution in relation to a takeover offer or on any related issue involving a conflict of interest to the board. • A conflict of interest exists if the relevant board member is a member in the board of directors of the bidder and at the same time is a board member or manager in the company which is the subject of the offer, or vice versa. • Article 283 of the Regulations stipulates that a person or entity that has Effective Control of the bidder and the target company is excluded from voting in any board or general assembly resolution in respect of the intended takeover bid. • Provides investment advice in respect of Securities for a commission (Article 124 CMA Regulations) • License required also for foreign companies operating in Kuwait (Article 125 CMA Regulations) • Requires management office in Kuwait (Article 126 CMA Regulations) • Article 130 CMA Regulations requires that certain managers are residing in Kuwait Greenfield

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