Case Study: Leveraged buyout in Middle East

A leveraged buyout (LBO) in the Middle East is a transaction in which an acquirer uses a combination of equity and borrowed capital to purchase a target company, with the target';s assets and cash flows serving as primary collateral. In the UAE and broader Gulf Cooperation Council (GCC) markets, this structure intersects with local corporate law, Islamic finance constraints, and free zone regulatory frameworks. International buyers who treat a Middle East LBO as a straightforward Western transaction routinely encounter structural failures, regulatory delays, and financing gaps that erode deal value before closing.

This article provides a practical legal analysis of how an LBO is structured in the Middle East, which legal tools apply, where the principal risks arise, and how a buyer can navigate the regulatory and financing landscape effectively. The analysis draws on UAE onshore law, DIFC Courts (Dubai International Financial Centre Courts) jurisdiction, ADGM (Abu Dhabi Global Market) frameworks, and relevant provisions of Saudi Arabian and Qatari corporate law where cross-border elements arise.

An LBO is structurally distinct in the Middle East for three interconnected reasons: the prevalence of Islamic finance, the dual-track corporate law environment (onshore versus free zone), and foreign ownership restrictions that directly affect how acquisition vehicles are established.

In a conventional Western LBO, a special purpose vehicle (SPV) borrows senior and mezzanine debt, acquires the target, and services that debt from the target';s operating cash flows. In the UAE, this basic architecture must be adapted. The UAE Federal Companies Law (Federal Law No. 32 of 2021 on Commercial Companies) governs onshore entities and imposes restrictions on financial assistance - meaning a target company cannot directly pledge its assets to secure acquisition debt without specific board and shareholder approvals, and in some cases regulatory consent.

The Islamic finance dimension is not merely cosmetic. A significant share of regional lenders - including major UAE, Saudi and Qatari banks - operate under Sharia-compliant mandates. Conventional interest-bearing senior debt is unavailable from these institutions. Instead, the deal must be structured using Murabaha (cost-plus financing), Ijara (lease-based financing) or Wakala (agency-based investment) arrangements. Each instrument has different collateral mechanics, prepayment profiles and enforcement rights, which directly affect the LBO';s debt service model and exit optionality.

Foreign ownership is a further structural constraint. Under the UAE Foreign Direct Investment Law (Federal Law No. 19 of 2018), certain onshore sectors remain subject to Emiratisation requirements or foreign ownership caps. A buyer acquiring a mainland UAE target in a restricted sector must either partner with a UAE national sponsor, restructure the target into a free zone entity before acquisition, or obtain a specific ministerial exemption. Each path carries different timelines - typically 30 to 90 days for exemption processing - and different cost implications.

The standard legal architecture for a Middle East LBO involves a layered holding structure, typically with an offshore parent, a regional holdco in the DIFC or ADGM, and an operating entity onshore or in a sector-specific free zone.

The DIFC operates under its own legal framework - the DIFC Companies Law (DIFC Law No. 5 of 2018) - which is based on English common law principles. This makes DIFC entities attractive as acquisition vehicles because English-law security documentation, intercreditor agreements and guarantee structures are directly enforceable without translation or adaptation. ADGM (Abu Dhabi Global Market) operates under a parallel framework - the ADGM Companies Regulations 2015 - also modelled on English law. Both jurisdictions allow 100% foreign ownership, have no restrictions on profit repatriation, and permit the granting of security over shares and assets under familiar legal concepts.

A typical LBO structure in the UAE therefore looks as follows:

• An offshore parent (often a Cayman Islands or BVI entity) holds the equity
• A DIFC or ADGM holdco acts as the acquisition vehicle and borrower
• The target operates onshore or in a free zone
• Security is granted over holdco shares, intercompany receivables and, where permissible, target assets

The intercreditor agreement - the document governing the relationship between senior lenders, mezzanine providers and the equity sponsor - must be carefully drafted to account for both English-law enforcement rights (at the DIFC/ADGM level) and UAE onshore enforcement procedures (at the target level). A common mistake is to draft the intercreditor agreement entirely under English law without addressing the onshore enforcement gap, leaving lenders with theoretical rights they cannot practically exercise against UAE mainland assets.

Financial assistance rules deserve particular attention. Article 222 of Federal Law No. 32 of 2021 restricts a UAE onshore company from providing financial assistance for the acquisition of its own shares. This provision mirrors the old UK Companies Act position and requires deal lawyers to structure upstream guarantees and asset pledges carefully to avoid invalidity. In practice, a whitewash procedure - a shareholder resolution approving the assistance - is available for private companies but requires specific procedural steps and board solvency declarations.

To receive a checklist on LBO structuring steps for the UAE and DIFC, send a request to info@vlolawfirm.com

Financing is the central mechanical challenge of any LBO, and in the Middle East the challenge is amplified by the coexistence of conventional and Islamic capital markets, differing lender appetites, and regulatory constraints on leverage ratios.

Senior debt in a Gulf LBO is typically provided by a club of regional and international banks. Regional banks - particularly those in the UAE, Saudi Arabia and Qatar - often require Sharia-compliant structures. International banks with Gulf operations frequently offer both conventional and Islamic tranches, allowing a hybrid financing package. The hybrid approach is now standard in large-cap Gulf LBOs: a conventional senior facility from international lenders sits alongside a Murabaha or Wakala tranche from regional Islamic banks, with an intercreditor agreement governing priority and enforcement.

Murabaha financing works as follows: the bank purchases the relevant asset (or a commodity as a proxy) and sells it to the borrower at a marked-up price, payable in instalments. The mark-up is economically equivalent to interest but is structured as a trade profit. For LBO purposes, a commodity Murabaha (using London Metal Exchange metals as the underlying commodity) is the most common mechanism because it does not require the bank to hold a real asset. The borrower receives cash proceeds and repays the marked-up amount over the facility term.

Mezzanine financing in the Gulf is less developed than in Western markets. The regional mezzanine market is thin, and most Gulf LBOs rely on a two-layer structure - senior debt and equity - rather than a three-layer senior/mezzanine/equity stack. Where mezzanine is used, it is typically provided by international private equity debt funds or development finance institutions, not regional banks. This affects pricing: mezzanine in Gulf transactions often carries a higher margin than equivalent Western deals because of the limited competitive supply.

Leverage ratios in Gulf LBOs are generally more conservative than in European or US transactions. A typical Gulf LBO operates at three to five times EBITDA leverage, compared to six to eight times in mature Western markets. Regional lenders are more conservative on leverage, partly due to regulatory capital requirements under the UAE Central Bank';s guidelines on large exposures (Circular No. 33/2023 on Credit Risk Management), and partly due to the thinner secondary debt market that limits syndication options.

A non-obvious risk is the treatment of intercompany loans in the LBO structure. Where the DIFC holdco on-lends acquisition debt to the onshore operating entity, UAE onshore courts may recharacterise the intercompany loan as equity if the terms are not at arm';s length or if the documentation is deficient. This recharacterisation risk is particularly acute in insolvency scenarios, where a liquidator may challenge the priority of intercompany claims.

Due diligence in a Middle East LBO must cover four dimensions that are either absent or less prominent in Western transactions: foreign ownership compliance, sector licensing, Sharia compliance of existing contracts, and real property ownership restrictions.

Foreign ownership compliance requires a full mapping of the target';s corporate structure against the UAE Positive List (the list of sectors open to 100% foreign ownership under Cabinet Resolution No. 16 of 2020) and any sector-specific licensing requirements. If the target holds a licence in a restricted sector - such as certain healthcare, education or media activities - the buyer must determine whether the acquisition triggers a change-of-control notification or approval requirement with the relevant regulator. The Department of Economic Development (DED) in each emirate, the Securities and Commodities Authority (SCA) for listed entities, and sector-specific regulators such as the Telecommunications and Digital Government Regulatory Authority (TDRA) each have their own notification timelines and approval criteria.

Sharia compliance of existing contracts matters because a target operating in the Gulf may have financing arrangements, lease agreements or supply contracts structured under Islamic law. If the LBO refinancing replaces Sharia-compliant facilities with conventional debt, the target may breach covenants in its existing Islamic finance documents. A common mistake is to treat existing Islamic finance facilities as straightforward debt to be repaid at closing without reviewing the specific prepayment mechanics and break costs under the Murabaha or Ijara documentation.

Real property ownership is a further due diligence area. Under UAE law, non-GCC nationals can own freehold property only in designated areas (as defined by each emirate';s property laws, including Dubai Law No. 7 of 2006 on Real Property Registration). If the target owns property outside designated areas, the buyer - as a foreign entity - may be unable to hold that property directly after acquisition and may need to restructure the property holding through a UAE national entity or a long-term usufruct arrangement.

Regulatory approval timelines vary significantly. A straightforward acquisition of a DIFC or ADGM entity with no onshore regulated activities can close in 15 to 30 days from signing. An acquisition involving a UAE Central Bank-regulated entity (such as a finance company or insurance broker) requires prior approval and typically takes 60 to 120 days. An acquisition in the healthcare sector requires approval from the relevant health authority (Dubai Health Authority or Department of Health Abu Dhabi) and may take 90 to 150 days.

Practical scenario one: a European private equity fund acquires a UAE-based logistics company with onshore and free zone operations. The fund structures the acquisition through a DIFC holdco, uses a hybrid conventional/Murabaha senior facility, and obtains DED approval for the change of ownership within 45 days. The deal closes on schedule because the due diligence identified the financial assistance issue early and the whitewash procedure was completed pre-signing.

To receive a checklist on regulatory approvals and due diligence for M&A transactions in the UAE, send a request to info@vlolawfirm.com

Security documentation in a Gulf LBO must be enforceable across multiple legal systems simultaneously: English law (for DIFC/ADGM-level security), UAE onshore law (for mainland asset pledges), and potentially Cayman or BVI law (for offshore holdco share pledges).

Share pledges over DIFC entities are governed by the DIFC Security Law (DIFC Law No. 8 of 2005, as amended). This law provides for a registration-based security interest system similar to the English law floating charge concept. A pledge over DIFC company shares must be registered with the DIFC Registrar of Companies to be effective against third parties. Registration is straightforward and typically completed within five to ten business days. Unregistered pledges are void against a liquidator or creditor - a risk that is occasionally overlooked by international counsel unfamiliar with DIFC registration requirements.

For onshore UAE assets, security is governed by Federal Law No. 20 of 2016 on Mortgaging of Movable Assets (the Movable Assets Law). This law introduced a modern security interest registry for movable property, allowing lenders to register security over equipment, receivables, inventory and intellectual property. Registration is done through the Emirates Integrated Registries Company (EIBFS) online platform. The Movable Assets Law significantly improved the enforceability of non-real-estate security in UAE onshore transactions, but enforcement still requires a court order from the UAE courts unless the parties have agreed to DIFC or ADGM jurisdiction.

Enforcement of security in the UAE onshore courts is slower and less predictable than in DIFC or ADGM. Onshore court proceedings for enforcement of a pledge can take 12 to 24 months, including appeals. DIFC Courts enforcement proceedings are faster - typically six to twelve months for a contested matter - and benefit from English common law procedural rules. For this reason, sophisticated LBO lenders insist on structuring as much of the security package as possible at the DIFC or ADGM level, with onshore security treated as a secondary layer.

Exit mechanics in a Gulf LBO are more constrained than in Western markets. The regional IPO market - primarily the Dubai Financial Market (DFM), Abu Dhabi Securities Exchange (ADX) and Saudi Exchange (Tadawul) - has grown significantly, but listing requirements and market depth vary. A trade sale to a regional strategic buyer is the most common exit route. Secondary buyout exits (selling to another private equity fund) are less common due to the thinner regional private equity market. Dividend recapitalisation - extracting value by refinancing and paying a special dividend - is available but requires careful structuring to avoid UAE thin capitalisation issues and to comply with the target';s existing debt covenants.

Practical scenario two: a Gulf sovereign wealth fund co-invests in an LBO of a regional healthcare group. The deal uses a Wakala tranche from a UAE Islamic bank and a conventional term loan from an international bank. At exit, the sponsors pursue a dual-track process - simultaneous preparation for an ADX IPO and a trade sale process. The trade sale closes first, with the buyer being a regional hospital group. The DIFC holdco share pledge is enforced smoothly during a pre-closing restructuring because it was registered at closing.

Practical scenario three: a mid-market LBO of a UAE technology services company fails to register the DIFC share pledge at closing. When the company underperforms and the senior lender seeks to enforce, the unregistered pledge is challenged by a subsequent creditor. The lender is forced into DIFC Court proceedings to establish priority, adding six months and significant legal costs to the enforcement process. The lesson is that registration mechanics must be treated as a closing condition, not a post-closing administrative step.

International buyers entering the Middle East LBO market make a predictable set of mistakes, most of which are avoidable with proper legal preparation.

The most common structural mistake is treating the DIFC or ADGM holdco as a purely administrative layer without ensuring that the security package, intercreditor agreement and enforcement rights are properly connected to the onshore operating entity. A holdco that cannot effectively enforce against the target';s assets provides lenders with theoretical comfort but no practical recovery path.

A second common mistake is underestimating the timeline for regulatory approvals. Buyers who sign an SPA (Share Purchase Agreement) with a 30-day closing condition in a regulated sector routinely miss that deadline, triggering MAC (Material Adverse Change) clause disputes and renegotiation pressure. The correct approach is to conduct a regulatory mapping exercise before signing and to build realistic approval timelines into the SPA conditions precedent.

The financial assistance issue under Article 222 of Federal Law No. 32 of 2021 is frequently overlooked by buyers whose counsel is primarily experienced in English or US law. The whitewash procedure is available but requires specific steps: a board resolution confirming solvency, a shareholder resolution approving the assistance, and in some cases an auditor';s report. Failure to complete the whitewash renders upstream guarantees and asset pledges voidable, which can unwind the entire security package.

Islamic finance documentation requires specialist review. A buyer whose legal team lacks Islamic finance expertise may miss break cost provisions, profit rate adjustment mechanisms or Sharia board approval requirements that affect the economics of refinancing at exit. The cost of non-specialist mistakes in this area can be substantial - break costs on a Murabaha facility can represent one to two percent of the facility amount, which on a large transaction is a material sum.

Many underappreciate the importance of UAE labour law compliance in LBO due diligence. Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations imposes specific obligations on employers in relation to end-of-service gratuity, which is a statutory entitlement for all employees. In an LBO, the acquirer assumes the target';s accumulated gratuity liability. If this liability has not been properly provisioned - which is common in smaller UAE businesses - it can represent a significant undisclosed cost that erodes post-acquisition cash flows.

A non-obvious risk in Gulf LBOs is the treatment of related-party transactions in the target';s pre-acquisition history. UAE onshore courts and the SCA have broad powers to set aside transactions between the target and its pre-acquisition shareholders if those transactions are found to have been at non-arm';s-length terms. A buyer who does not conduct thorough related-party transaction due diligence may inherit claims or liabilities that were not visible in the audited accounts.

The strategic choice between a DIFC-based and an ADGM-based acquisition vehicle is often underanalysed. DIFC is better connected to the Dubai financial ecosystem and has a more developed court system with a larger body of case law. ADGM is preferred for transactions with Abu Dhabi nexus or where the buyer has existing relationships with Abu Dhabi-based lenders. Both offer equivalent legal frameworks, but the choice of jurisdiction affects which courts govern disputes and which enforcement infrastructure is available.

We can help build a strategy for structuring your LBO in the UAE or broader GCC region. Contact info@vlolawfirm.com to discuss your transaction.

What is the main legal risk of using a conventional debt structure in a Gulf LBO?

The principal risk is that regional lenders operating under Sharia-compliant mandates cannot participate in a conventional interest-bearing facility, which narrows the lender pool and may increase financing costs. Beyond lender eligibility, a conventional facility that refinances existing Islamic finance arrangements at the target level may trigger technical defaults under the target';s existing Murabaha or Ijara documentation. Buyers should conduct a full review of the target';s existing financing documents before committing to a conventional-only debt structure. A hybrid structure - combining conventional and Islamic tranches - is typically more practical and broadens the available lender base.

How long does a typical Middle East LBO take from signing to closing, and what drives delays?

A straightforward LBO of a DIFC or ADGM entity with no regulated activities can close in 30 to 45 days from signing. Transactions involving onshore UAE entities in regulated sectors - healthcare, financial services, telecommunications - typically require 90 to 150 days due to regulatory approval processes. The most common sources of delay are change-of-control approvals from sector regulators, completion of the financial assistance whitewash procedure, and registration of security interests. Buyers who build these timelines into the SPA conditions precedent and begin regulatory filings immediately after signing minimise the risk of closing delays. Delays beyond the longstop date expose both parties to termination rights and potential damages claims.

When should a buyer consider a trade sale exit rather than an IPO in the Gulf?

A trade sale is preferable when the target operates in a sector with limited free float liquidity on regional exchanges, when the buyer';s investment horizon is shorter than the 18 to 24 months typically required to prepare for a GCC IPO, or when a strategic buyer can pay a control premium that exceeds the expected IPO valuation. IPO exits on the DFM, ADX or Tadawul are attractive when the target has strong brand recognition in the region, a track record of audited IFRS financials, and a business model that resonates with regional retail investors. The dual-track process - running both options simultaneously - is the most effective way to maximise exit value and maintain negotiating leverage, but it requires significant management bandwidth and legal preparation.

A leveraged buyout in the Middle East is a structurally complex transaction that requires simultaneous command of UAE corporate law, Islamic finance mechanics, free zone regulatory frameworks and cross-border security documentation. The deals that close efficiently and perform well post-acquisition share a common characteristic: the legal and financing architecture was designed from the outset to account for regional constraints, not retrofitted after problems emerged. Buyers who invest in specialist legal and financial advice at the structuring stage consistently achieve better outcomes than those who adapt Western templates without modification.

Our law firm VLO Law Firms has experience supporting clients in the UAE and broader GCC region on M&A and leveraged buyout matters. We can assist with transaction structuring, due diligence, regulatory approval processes, security documentation, and intercreditor negotiations. To receive a consultation, contact: info@vlolawfirm.com

To receive a checklist on LBO exit mechanics and security enforcement in the UAE, send a request to info@vlolawfirm.com