During mergers and acquisition (M&A) the process of finding the appropriate target company is just the tip of the iceberg. Target screening is one of the most important stages of any transaction that many people tend to underestimate. Efficient target screening assists the investors, acquirers and corporate groups evaluate the risks in advance, prevent the expensive post-acquisition disputes, and verify that the transaction is focused on the legal, regulatory and commercial goals.
In the UAE, where the aspect of cross-border features is a common characteristic of transactions, free zones, and regulated industries, legal target screening is a decisive factor in the decision of whether to undertake an acquisition.
What Is Target Screening in M&A?
Short screening Target screening is the initial legal and business evaluation of a prospective target in an acquisition prior to embarking on thorough negotiation or due diligence.
It serves as a red flag system, allowing the buyers to detect a red flag on:
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Legal compliance
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Ownership structure
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Regulatory exposure
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Risks of money and contract
Target screening is strategic and focused as opposed to full due diligence which is case by case and time consuming, which aids decision-makers to swiftly assess the viability of a target.
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The importance of Target Screening in the UAE
Corporate and regulatory environment of the UAE is also a unique hurdle in M&A transactions and includes:
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Different guidelines to the mainland and free zone firms.
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Industry licensing and foreign ownership.
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The changing tax, AML and corporate governance regulations.
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Higher regulation in the risky sectors.
Target screening involves making sure that vendors do not transfer unreported liabilities, acts of non-compliance, and structural defects, which may negatively affect the value of the transaction.
Critical Areas of law that Target screening involves
1. Corporate Structure and ownership
A legal review confirms:
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Shareholding and beneficial ownership.
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Adherence to foreign ownership laws.
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Correctness of incorporation papers and constitutional documents.
Ambiguous or non-conformity ownership arrangements might put regulatory approvals in stake or nullify the deal.
2. Compliance with Regulation and Licensing
Target screening is a determination of whether the company:
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Possesses legitimate trade licences and regulatory approvals.
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Carries out its legal business operations.
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Meets the industry-specific regulations (banking, health, real estate, fintech, etc.)
Failure to comply with the regulations can lead to fines, licence suspension, or failure of a transaction.
3. Dispute Exposure and Litigation
An early review identifies:
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Litigation on going or threatened.
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Arbitration proceedings
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Approaches in regulatory investigations or enforcement.
Being able to identify exposure to disputes is the key to determining reputational risk and financial risks.
4. Contractual and Commercial Risks
Target screening indicates the following:
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Key commercial contracts
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Change-of-control clauses
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Acquisition termination rights.
Ignoring the restrictive contractual terms may result to termination or post-close re-negotiation of the contract.
5. Issues in Employment and Labour Law
The liabilities on labour are frequently transferred with the business. Screening helps identify:
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Employment disputes
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Non-compliant contracts
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Exposure to end-of service benefits.
It is especially significant in acquisitions in the UAE with massive workforces.
6. Compliance Risk of Financial Crime and Compliance
As AML and compliance requirements become more enforced, target screening determines:
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Risks exposure to financial crime.
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Penalties or red flags of compliance.
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Weak internal controls
The inability to detect such risks could subject the buyers to regulatory measures after the acquisition.
Target Screening and Full Legal Due Diligence
| Target Screening | Full Due Diligence |
|---|---|
| Early and intensive | Detailed and extensive |
| Early recognises deal-breakers | Establishes risks on a detailed basis |
| Cost-efficient | Resource-intensive |
| Carried out prior to LOI | Carried out after LOI |
Target screening enables purchasers to determine whether full due diligence practices are worthy and this will save time and transaction costs.
At What Time should target screening be done?
Target screening must preferably be made:
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Prior to the signing of a Letter of Intent (LOI)
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Prior to getting into exclusivity deals.
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Prior to making valuation or financing.
The initial legal contribution enhances bargaining power and minimizes implementation risk.
Evidential Support of Target Screening M&A Transactions
Successful screening of targets involves legal knowledge which is a combination of:
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Corporate law knowledge
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Regulatory insight
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Transactional experience
At HHS Lawyers and Legal Consultants, we provide services of strategic legal evaluation as a subset of larger
Mergers and Acquisitions consulting,
where buyers and investors are advised to make informed decisions before engaging in more complex deals.
Conclusion
The process of target screening is no sham but a very important risk management instrument during a merger and acquisition. The sensitive legal and regulatory background in the UAE presents an opportunity to avert legal, regulatory, and commercial risks early in the process and the acquisition can become successful or an expensive disaster.
Through meticulous target screening, prior to complete due diligence, businesses are able to secure their investments, bargain on a basis of strength and have the M&A transactions legally and commercially viable.
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FAQ’s
What does target screening entail in mergers and acquisitions?
What is the relevance of target screening in UAE M&A transactions?
Jurisdictional Nuances: Whether the target is a Mainland entity (DED regulated) or a Free Zone entity (e.g., DMCC, DIFC), which dictates market access and 100% ownership rights.
Tax Compliance: Reviewing the target’s standing with the Federal Tax Authority (FTA) regarding the 9% Corporate Tax and VAT filings.
Foreign Ownership: Assessing eligibility under the latest Commercial Companies Law amendments.
What are the risks realized in target screening?
Regulatory Friction: Incompatibility with industry-specific regulators like the Central Bank or VARA.
Ownership Gaps: Discrepancies in Ultimate Beneficial Ownership (UBO) filings.
Legacy Liabilities: Historical tax gaps or unresolved litigation that could devalue the target.
AML & Financial Crime: Screening against global and local sanctions lists to ensure the target’s funds are clean.
What is the difference between target screening and complete legal due diligence?
Target Screening: A “low-cost, high-speed” outside-in analysis primarily using public data and market reports to assess strategic fit and directional economics.
Legal Due Diligence: A “high-intensity, granular” inside-out investigation conducted after the LOI. It involves access to a data room to verify every contract, employee record, and internal compliance protocol.
