TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

As per the current investment policy of the Government of Pakistan, all sectors of the economy are open to foreign investment. Government approval is not required except for investing in specified industries i.e., arms and ammunition, high explosives, radioactive substances, security printing, currency, and mint. Likewise, licenses are required for investing in and operating businesses in certain regulated industries such as banking, telecom, security services, insurance, oil and gas, mining, and power generation, etc. There is no upper limit of foreign equity (except in airline, banking, agriculture, and media sectors), and foreign investors are allowed to hold up to 100% ownership interest in local companies.

Pakistan’s foreign exchange law requires that no person resident in Pakistan will buy or borrow any foreign exchange from or make any payment to or for the credit of, any person resident outside Pakistan except with the previous general or special permission of the central bank, the State Bank of Pakistan (“SBP”). Furthermore, no person resident in Pakistan can issue or transfer any security or create or transfer any interest in a security in favor of a person resident outside Pakistan without the SBP’s general or special permission.

From time to time, SBP grants general permissions under various provisions of the foreign exchange law. If a matter is not covered by a general permission given by SBP, it will require special permission from SBP.

The Anti-Money Laundering Act, 2010, and various regulations issued by local regulators, including SBP and the Securities and Exchange Commission of Pakistan (“SECP”) pursuant to the standards and recommendations issued by Financial Action Task Force (FATF) also regulate the movement of currency.

Several incentives are available in Pakistan to encourage private sector investment by foreign and domestic investors especially for setting up businesses in designated areas, including export processing zones, special economic zones, and special technology zones. The incentives include complete exemption from payment of or a lower rate of income tax as well as taxes on the import of plant, machinery, equipment, and raw materials in applicable circumstances. Non-fiscal incentives include the provision of improved infrastructure, better connectivity, and efficient utilities to the businesses operating in various zone areas which are strategically located across the country and along the route of the China Pakistan Economic Corridor (CPEC).

In businesses exceeding the specified threshold, the employees are entitled to management representation and their consent is required on certain matters affecting the terms and conditions of their employment. However, such matters do not include corporate transactions. Having said this, the employees may be entitled to consultation in relation to corporate transactions if it is so provided in the collective bargaining agreement between the employer and the collective bargaining agent or the trade union of the employees.

Labor law prohibits termination of employment of workers except through a written order which must explicitly state the reason for such termination. One month advance notice or salary in lieu thereof is required for terminating the employment of a permanent worker for any reason other than misconduct. Furthermore, upon termination of his or her employment, such worker will be paid: (i) a statutory gratuity equal to one-month salary or wages for each completed year of employment; (ii) salary, or wages in lieu of one month advance notice period (where applicable); and (iii) salary or wages for any outstanding leaves.

Labor law does not govern the employment of executive and managerial employees, as well as those performing intellectual work. The employment of these employees may be terminated in accordance with the terms and conditions of their employment contracts.

Labor law prohibits an employer from closing down the business (except in certain exceptional circumstances) or terminating the employment of more than 50% of the workers without prior permission of the labor court or, where applicable, the provincial government.

Labor law also prescribes the order which should be followed by an employer while retrenching the workers belonging to a particular class and provides the retrenched workers a preferential right in case of a re-hiring by the same employer in the same class within a specified period.

However, the above limitations are not applicable in respect of any executive and managerial employees, as well as those performing intellectual work. The employment of any such employee can be terminated in accordance with the terms and conditions of his or her employment contract.

The following taxes will apply in case of sale of shares:

• Capital gain tax will apply in the case of the sale of shares of a company. The rate of tax will depend on the holding period of shares and may go up 15% of the amount of gain; and
• Stamp duty will be payable in respect of the share transfer instrument. The applicable rate of stamp duty will depend on the place of execution of the share transfer instrument.

Likewise, a transaction involving the sale of assets will attract the following tax charges:

• Capital gain tax will be payable in respect of the sale of an asset. The amount of tax will depend on the holding period of the relevant asset and the amount of gain (to be calculated in accordance with the prescribed formula) and may go up to 15% of the amount of such gain;
• Stamp duty will also be payable in respect of an instrument evidencing the sale of an asset. The rate of stamp duty will depend on the place of execution of the sale instrument or, in the case of an immovable asset, the place where the relevant immovable asset is located; and
• Where an asset to be sold comprises an immovable property (or any interest thereof), certain other taxes such as capital value tax, registration fee, and local council fee may become payable depending upon the location of the immovable property.

No tax is payable on the issue of shares. However, an instrument evidencing the title of the holder to the relevant shares such as a share certificate or a share warrant will attract stamp duty at such a rate as is applicable in the relevant province.

A merger (or acquisition) transaction that substantially lessens competition by creating or strengthening a dominant position in the relevant market in Pakistan is prohibited. Every intended merger transaction that meets the following pre-merger notification thresholds require a mandatory clearance from the Competition Commission of Pakistan (“CCOP”):

• The value of gross assets of the undertaking, excluding the value of goodwill, is not less than PKR 300 million (approximately USD 1,950,000) or the combined value of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged, is not less than PKR 1 billion (approximately USD 6,500,000); or
• Annual turnover of the undertaking in the preceding year is not less than PKR 500 million (approximately USD 3,250,000) or the combined turnover of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged is not less than PKR 1 billion (approximately USD 6,500,000); and
• The transaction relates to the acquisition of shares or assets of the value of PKR 100 million (approximately USD 650,000) or more; or
• In case of acquisition of shares by an undertaking if an acquirer acquires voting shares, which taken together with voting shares, if any, held by the acquirer shall entitle the acquirer to more than 10% voting shares of the target entity.

Where the transaction involves asset management companies, the pre-merger notification will not be required except where:

• The collective exposure for itself and in all its collective investment schemes in a single entity is more than 25% of total voting rights; or
• The value of total assets under management of an asset management company is PKR 1 billion (approximately USD 6,500,000) or more; and
• The transaction relates to the acquisition of shares or assets of the value of PKR 100 million (approximately USD 650,000) or more; or
• In case of acquisition of shares by an undertaking, if an acquirer acquires voting shares, which taken together with voting shares, if any, held by the acquirer shall entitle the acquirer to more than 10% voting shares.

It depends on the transaction structure. Typically, the documents presented and/or executed at the signing meetings include the share purchase/acquisition agreement, the share transfer deed(s), the documents evidencing the compliance of the statutory procedure and waiver of the right of first refusal/pre-emption right by the existing shareholders of the target company, and the documents evidencing the approval of the transaction by the parties and the authority of their respective authorized signatories to execute the transaction documents.

Likewise, the documents presented and/or executed at the closing meetings include the board resolution of the target company approving the transfer of shares, the share certificate(s) in the name of new shareholder, the resignation letters of existing directors of the target company, and the required statutory returns to be filed by the target company with the relevant company registration office of SECP.

The law does not prescribe any gap requirement between signing and closing. It will depend on the transaction structure agreed between the parties.

There are no regulatory requirements to engage third-party intermediaries or to deposit monies with them. However, where a transaction involves the sale of shares of a locally incorporated company by a domestic shareholder to a foreign buyer on a repatriable basis, the proof of remittance of the purchase price by the foreign buyer to the seller in Pakistan in foreign exchange through banking channel will be submitted to the central bank, SBP.

In the case of corporate parties, it is standard practice to require certified true copies of (i) the statutory return confirming the names of the directors of the company and (ii) the board resolution approving the transaction and authorizing the named individual (usually a director or another principal officer) to execute the documents on behalf of the company. It is not uncommon to request proof of identity of the individual signing the transaction documents.

The signatures of each party to a document (except where a document is executed in electronic form) pertaining to financial or future obligations must be attested by two adult male witnesses or one adult male and two adult female witnesses. Where a document requiring stamp duty is executed in Pakistan, it should be typed/printed on the stamped papers. Where such document is executed outside Pakistan, it will be affixed with special adhesive stamps upon its arrival in Pakistan. In certain circumstances, a document executed outside Pakistan may require notarization and certification by the relevant embassy of Pakistan.

In addition to the execution formalities noted above, it should be ensured that the individual signing the document on behalf of the company is properly authorized in the manner laid down in the Articles of Association of the company. Where the Articles of Association prescribe any special execution formalities, such formalities should be complied with.

A contract (other than a contract for the sale of immovable property) may be executed by an individual either orally or in writing. Where a contract is executed in writing, it should be signed by such individual and, as stated above, his or her signatures should be attested by two adult male witnesses or one adult male and two adult female witnesses.

No separate execution formalities have been prescribed under Pakistani law for foreign companies. However, it should be ensured that the document is executed on behalf of the foreign company in accordance with applicable foreign law and constitution documents of the foreign company. In certain cases, a document executed abroad may require notarization and certification by the relevant Pakistani embassy or, where applicable, an apostille from the place of execution. Furthermore, where a document is in a language other than English, its certified English translation may also be required.

It is not mandatory to involve notaries. However, as explained above, a document executed abroad may require notarization and certification by the relevant embassy of Pakistan or, as applicable, apostille at the place of execution.

A notary cannot change the terms of the deal or transaction between the parties.

Generally, the fees of notaries in Pakistan are very nominal.

None. However, if the transaction involves a document that requires notarization, certification from any embassy of Pakistan abroad, or apostille at the place of execution, the time to be spent in getting this done should be accounted for in the transaction timeline.

The seller will execute the share transfer deed in the presence of attesting witnesses and will hand it over to the buyer along with the original share certificate. The buyer will countersign the share transfer deed in the presence of attesting witnesses, pay applicable stamp duty, and submit it to the target company along with the original share certificate. The board of directors of the target company will approve the transfer of shares, cancel the existing share certificates, and order the inclusion of the name of the buyer in the shareholders' register of the target company and the issuance of a new share certificate to the buyer. The buyer will become the legal holder of the shares upon inclusion of its name in the shareholders’ register of the target company.

Where the transfer exceeds a specified threshold, the target company will notify SECP of the transfer. Where the transfer is in favor of a foreign entity or individual, the target company will apply for registration of the relevant shares with SBP under the foreign exchange law.

Outgoing officers and directors may resign by submitting a written resignation letter to the target company. Incoming officers and directors must consent to their appointment in writing. Where quorum for the board meeting is present, the board of directors of the target company will resolve to accept resignations of outgoing officers and directors, make new appointments, and fill in any casual vacancies occurring on the board. However, where quorum for the board meeting is not present due to the departure of the outgoing director(s), these appointments will be made in a shareholders’ meeting. The target company will notify the appointments to SECP.

Typically, the following formalities are required to transfer title to shares in a private limited company: (i) waiver of pre-emption rights by the existing shareholders of the target company; (ii) execution of the share transfer deed by the seller and the buyer in the presence of attesting witnesses; (iii) submission of duly stamped original share transfer deed and original share certificate(s) to the target company; (iv) approval of the transfer of shares by the board of directors of the target company; (v) inclusion of the name of the buyer in the shareholders’ register of the target company, and cancellation of the share certificate(s) in the name of the seller and the issuance of new share certificate(s) in the name of the buyer; (vi) reporting the transfer to SECP where it relates to transfer of shares exceeding a specified threshold; and, (vii) in case of a foreign buyer, registration of relevant shares with SBP.

An individual may appoint a third party to execute documents at signing/closing meeting through a power of attorney. Likewise, if its Article of Association allow, a company may also authorize a third party to execute documents at signing/closing meeting in the manner laid down in the Articles of Association of the company.

The signatures of the donor on the written power of attorney should be attested by two adult male witnesses or one adult male and two adult female witnesses. The power of attorney will also attract payment of stamp duty. Notarization of a power of attorney executed within or outside Pakistan raises a presumption about its due execution and authenticated. A power of attorney executed outside Pakistan must be certified by the relevant Pakistani embassy or apostilled at the place of execution, as applicable.

A power of attorney will be strictly construed, and the powers of an attorney will be limited to those expressly mentioned in the relevant instrument.

A faxed or emailed document could be admissible in court as evidence of due execution, provided, the party submitting it proves that the original document is in the possession of the party against which such document is sought to be proved or that the original document has been destroyed or lost or could not be produced due to some other reason beyond the control of such party. Electronic documents are admissible in court.

Yes, electronic signatures can be admitted as evidence of execution in legal proceedings. Furthermore, where an electronic document has been executed using an advanced electronic signature, it is generally presumed that (i) such document is authentic and has integrity; (ii) the advanced electronic signature is the signature of the person to whom it correlates; (iii) the advanced electronic signature was affixed by that person to sign or approve the electronic document; and (iv) the electronic document has not been altered since that point in time.

An instrument may be executed in counterparts. The counterparts will be taken together as evidence of the agreement.

It is not a common practice for lawyers in Pakistan to give “undertakings”. Undertakings given by parties are generally enforceable.

The closing mechanism depends on the transaction structure agreed between the parties. The parties may agree on transaction closing subject to fulfillment of certain conditions precedent or conditions subsequent. In case the parties have agreed on a transaction closing subject to fulfillment of conditions subsequent, the transaction will be void if those conditions are not fulfilled. The parties may also agree on an escrow arrangement. However, this closing mechanism is generally adopted in large cross-border transactions.

Generally, there are no further formalities to be observed after the share sale closing. However, where the transaction relates to the transfer of shares exceeding a specified threshold or where the buyer is a foreign individual or entity, the target company will be required to report the transaction to SECP and/or SBP. Likewise, there may be additional formalities in case of sale of shares of a listed company or a public sector company or where the company is engaged in a licensed economic activity.

Legal opinions are not required under the law. However, for large transactions and where foreign parties are involved, due execution legal opinions are usually requested. There are no specific requirements or rules governing legal opinions.

The transaction timetable depends upon the nature, structure, and complexity of the transaction. A transaction with a simple structure and routine due diligence may be completed within 45 to 60 days. However, in the case of a complex transaction, or where the transaction requires regulatory approval(s), or where enhanced due diligence is required, the transaction timetable may be considerably prolonged depending on the factor(s) causing the delay such as prolonged negotiations between the parties, time spent in rectifying any issues identified during the due diligence process, and time consumed in obtaining regulatory approvals.

A non-compete clause will be enforceable provided it is reasonable. While determining the reasonableness of a non-compete clause, the court will consider many factors including (i) the nature of relevant trade or business; (ii) the duration of the restriction; (iii) the extent of geographical territory in respect of which restriction is imposed; and (iv) public interest.

As a general guide, a restriction for a period of six months to one year may be considered reasonable. However, there is no set rule to determine the reasonable duration of a non-compete clause, and it will vary from case to case depending upon the relevant facts and circumstances.

A contract containing a non-compete clause may require an exemption under Pakistani competition law.