Purchasing a Business in Oman: Asset Purchase or Share Purchase?

To acquire a business in Oman through an Asset Purchase the purchaser will need to have a legal presence and commercial registration in Oman, whereas a Share Purchaser does not. A Share Purchaser may also be administratively quicker and cheaper than an Asset Purchase. In addition, there are other concerns that may affect an Asset Purchaser such as assigning lease contracts and the transfer of employees and maintaining Omanisation requirements.

Broadly, there are two methods for purchasing a business in Oman, namely, purchasing all of the shares of the company that owns the business and assets (“Share Purchase”) or purchasing from the company the assets that make up the business (“Asset Purchase”). Each method has its own advantages and disadvantages.

The ultimate goal of the purchaser is to acquire the “business” that (in very simple form) is run by the target company using the assets. That is, a purchaser will want to access the cash flow generated by the assets, rather than either the shares or the assets themselves.

 As with other jurisdictions, there are advantages and disadvantages to both Share Purchases and Asset Purchases in Oman. For example, in a Share Purchase, all of the liabilities (known and unknown) will remain with the company, which will impact the value of the shares. In an Asset Purchase, certain registration and legal presence requirements may result in higher upfront costs and timing.

Below is a summary of some of the issues that a prospective purchaser will need to consider in Oman.

The Requirement for a Legal Presence and Commercial Registration 

If a purchaser wants to acquire a business in Oman through an Asset Purchase, it will need to have a legal presence and commercial registration in Oman. The most common form of company in Oman is an LLC. An Omani national (or a company wholly owned by an Omani national) must hold at least 30% of the shares in the LLC (although shareholders can agree that profits be distributed as they see fit). Further, the capital of the LLC must be at least OMR 20,000 if wholly Omani, US or GCC owned, or OMR 150,000 if one or more of the shareholders are other foreigners. The share capital must be paid in full.

The process for establishing an LLC is reasonably straightforward. Approval and subsequent commercial registration will be handled by the Omani Ministry of Commerce and Industry (“MOCI”) and can take a couple of weeks from when all required documentation has been submitted.

For a purchaser that already has a presence in Oman, commercial registrations are not transferrable. Therefore, for an Asset Purchase, if the target business is not included in the commercial activity described in the purchaser’s commercial registration, the purchaser will need to apply to amend its commercial registration and constitutive contract so that it includes the target business’s commercial activity. Also, depending upon the nature of the business, approvals may also be required from other Omani ministries.

Conversely, whilst the establishment of an LLC is not a requirement for a Share Purchase, MOCI approval will still be required and any Share Purchase will be subject to the 30% Omani ownership requirement. The target company’s commercial registration and constitutive contract also will need to be amended to reflect the purchaser as the incoming shareholder. However, this process is quicker and cheaper than that required for an Asset Purchase.

Issues Concerning the Transfer of Employees 

An Asset Purchase will involve the transfer of employees to the purchaser. This means that the residency and work visas of the employees will need to be transferred to the purchaser.

In an Asset Purchase, the purchaser will need to be aware of its Omanisation obligations. Broadly, there are requirements under Oman law for companies operating in Oman to employ and train a certain percentage of Omani nationals. The percentage of Omanis to be employed depends on the industry in question and the positions to be filled. A purchaser will need to seek approval from the Omani Ministry of Manpower prior to the transfer of employees to ensure that it meets its Omanisation requirements.

In addition to Omanisation requirements, under Oman law, for an Asset Purchase, the vendor (i.e., the seller of assets) will be responsible for paying an “end of service gratuity” to each employee transferred. Accordingly, the vendor will often seek an adjustment to the purchase price to recover these costs from the purchaser.

Assigning Contracts 

In an Asset Purchase, any contracts (including supply agreements, customer agreements, property leases and finance agreements) of which the purchaser wishes to have the benefit will need to be assigned or novated (if possible) to the purchaser. It is usual in Oman for the lease of the premises from which the business is conducted to include a restriction on assignment without the consent of the landlord. In this instance, the landlord’s consent will be required in order to assign the lease. 

Generally, obtaining the consent of a landlord is one of the hardest consents to obtain, particularly as they will often demand covenants and guarantees from the purchaser to ensure that it has sufficient financial standing and credit support. Further complications can arise in Oman as landlords will often seek to take advantage of the assignment request to renegotiate more favourable lease terms (i.e., rent).

Unlike with an Asset Purchase, assignments of contract will not be required in the case of a Share Purchase. However, in Oman, contracts can sometimes require the third party’s consent prior to the change in the ownership or control of the target company. It should be noted that in Oman commercial leases do not usually require the landlord’s consent for a change in control.

 Due Diligence and Contractual Protections 

Generally, for an Asset Purchase, the purchaser can “pick and choose” the assets to be acquired and the liabilities to be assumed. Depending on the nature of the assets being acquired or the liabilities being assumed, the purchaser may require less extensive warranty cover than it would under a Share Purchase, as only the identified assets and liabilities that the purchaser agrees to acquire or assume are transferred.

Under a Share Purchase, all assets, liabilities and other obligations are acquired, even those that the purchaser does not want and those it does not know about. Full and careful due diligence and more extensive warranty cover will generally be required.

An Asset Purchase agreement will normally contain warranties in relation to the assets being acquired. A Share Purchase agreement will also include warranties in relation to the liabilities of the company being acquired. Both types of agreements will also include warranties in relation to the identity and status of the vendor(s) and their ability/power to enter into the transaction.

The scope of the warranties the purchaser may require will depend on how comprehensive and detailed its due diligence investigations have been. Generally, in Oman, publicly available information in respect of Omani LLCs is limited at best. Therefore, the quality of any due diligence investigation is subject to the information provided by the vendor. This can create additional risk in respect of a Share Purchase.

Typically, a Share Purchase agreement will contain more extensive warranties than those provided under an Asset Purchase agreement. In an Asset Purchase, the transaction will not normally involve the purchaser assuming unknown or contingent liabilities.

Summary 

There are usually fewer upfront costs associated with a Share Purchase and the timing will usually be quicker. However, there can be greater risks associated with a Share Purchase, as the purchaser will be acquiring all of the liabilities (known and unknown) attached to the company.

 An Asset Purchase in Oman will often require additional upfront costs, time and planning concerning employees, licensing and contracts to be assigned. However, an Asset Purchase will afford the purchaser greater protection from any undisclosed liability. Whether a transaction is structured as a Share Purchase or Asset Purchase will ultimately need to be determined on a case-by-case basis, as any number of issues can govern the decision for the method of purchase of a business in Oman.