Saudi Arabia: Introduction To Company Acquisitions In Kingdom Of Saudi Arabia

Overview

The article examines the material legal process involved when undertaking a corporate acquisition transaction in Saudi Arabia (Acquisition Transaction).

The general process an Acquisition Transaction undergoes shares several similarities with similar types of transactions in other jurisdictions. Notwithstanding, the prevalent regulations and overriding legal system unique to KSA must be taken into consideration and applied accordingly to the various agreements and processes involved. Such will serve to mitigate any risks associated with any legal clauses being considered non-compliant with Saudi law and therefore nonenforceable in a Saudi court of law, arbitration panel, and/or local enforcement court.

In addition, the governing rules and regulations in KSA applicable to an Acquisition Transaction include restrictions in certain instances (depending on the business sector involved) on matters such as share transfers, non-competition, and foreign (i.e., non Saudi national) ownership that must be considered for the subject transaction to be allowed to legally close.

Definitions

  • Acquiring Entity: The corporate entity that encompasses another by absorbing it.
  • Acquisition: When two (or more) corporate entities are combining and/or transferring their respective ownerships and/or assets amongst one another.
  • Acquisition Transaction: Process involved when undertaking a corporate acquisition transaction in Saudi.
  • CMA: Capital Market Authority of Saudi.
  • Companies’ Regulations: The regulations in KSA issued in accordance with Saudi Arabia Royal
  • Decree No. M3/1437 on the Approval of the Companies Law*, and Saudi Arabia Cabinet Decision No. 30/1437 Approving the Companies Law in the Enclosed Form.
  • Company Law: Saudi Arabia Royal Decree No. M3/1437 on the Approval of the Companies Law*.
  • Competition Law: Saudi Arabia Royal Decree No. M25/1425 Relating to the Competition Law (as amended) and with its implementing regulations issued by Saudi Arabia Competition Council Decision No. 126/1435 On the Issuance of the Implementing Regulation of the Competition Law.
  • Foreign Investment Law: Saudi Arabia Royal Decree No. M1/1421 on the Approval of the Foreign Investment Law*.
  • JSC: Joint Stock Company organised and incorporated in accordance with the rules and regulations of Saudi.
  • LLC: Limited Liability Company organised and incorporated in accordance with the rules and regulations of Saudi.
  • LOI: Letter of intent.
  • Long Stop Date: The deadline by which time a specified action/task must be completed.
  • Merger: A transaction where two or more corporate entities essentially combine their management and/or operations and may involve incorporating an entirely new corporate entity to represent the interests of the merged companies.
  • Merger and Acquisition Regulations: Saudi Arabia Capital Market Authority Merger and Acquisition Regulations. The regulations in Saudi Arabia issued by the Board of the CMA pursuant to its Saudi Arabia Resolution No. 150/2007, dated 21/09/1428 H corresponding to 03/10/2007 G, based on the Capital Market Law issued by Saudi Arabia Royal Decree No. M30/1424, dated 02/06/1424 H, and amended by Saudi Arabia Resolution of the Board of the CMA No. 345/2018, dated 07/08/1439 H (corresponding to 23/04/2018G), based on the Capital Market Law and the Companies’ Regulations.
  • MOCI: Ministry of Commerce and Investment in Saudi.
  • SAGIA: Saudi Arabian General Investment Authority in Saudi.
  • SPA: Share purchase agreement or an asset purchase agreement, depending on the type of Acquisition Transaction at issue.
  • Target: When an acquisition encompasses one corporate entity by absorbing another.

 

Practical Guidance

Merger vs Acquisition

The term M&A is often used interchangeably both within the legal and business community. When an M&A transaction is referred to, it is inferred that two (or more) corporate entities are combining and/or transferring their respective ownerships and/or assets amongst one another, often with the purpose of, amongst a myriad of other commercial factors, enhancing the prospects for rapid business growth and/or greater exposure within a particular geographical region. Delving a little more into detail however, a "merger" encompasses a separate type of transaction than an "acquisition". An acquisition encompasses one corporate entity (Acquiring Entity) absorbing another (Target), either in a "friendly" or "hostile" manner, by way of purchasing the Target’s assets or stocks and/or offering cash or security in the Acquiring Entity, with the acquiring entity’s management often remaining as is. No new entity is formed to represent the interests of the Target. This Practice Note focuses on acquisitions. However, it is important to note that in today’s corporate world, the processes that go into closing a merger transaction and those involving an acquisition often tend to overlap. This is going to depend on the specific commercial understandings reached between the respective parties (i.e., retaining key senior management personnel of the Target, retaining a Target’s brand for purposes of capitalising on a trademark’s goodwill, etc.).

Acquisition Transaction – overview

Within Saudi Arabia, the Companies’ Regulations stipulate that six different types of corporate entities may be incorporated by law. Acquisition Transactions often involve entities incorporated as holding companies, JSC’s, or LLCs. Acquisition Transactions involving public companies that are officially listed on Tadawul (the Saudi stock exchange) are regulated by the CMA by way of the Merger and Acquisition Regulations and require a separate analysis to denote the requirements to finalise an acquisition process that a publicly listed Acquiring Entity and/or Target.

Legal process outline

From a legal perspective, an Acquisition Transaction involves a series of processes that must be followed to ensure that each of the Acquiring Entity and the Target obtain their rights as ultimately agreed upon between the parties, from conducting a thorough legal due diligence on the Target to the negotiation and eventual execution of several binding agreements. Although the exact type of agreements and sequence of the processes involved in an Acquisition Transaction may differ depending on the nature and understandings reached in connection with a specific transaction, Acquisition Transactions materially involve the following:

1. Nondisclosure/ confidentiality agreement

Prior to engaging in any serious negotiations and in the interest of protecting sensitive and confidential information made available to the counterparty as part of each party’s assessment on whether to move forward, the parties would agree on and execute a nondisclosure or confidentiality agreement. The terms within would require the recipient of any information deemed confidential to maintain it as such for an agreed upon period. Such confidentiality terms may also be included in individual clauses found within a letter of intent / term sheet as discussed below.

2. Letter of intent / term sheet

The parties to an Acquisition Transaction often opt to enter into either an LOI or a term sheet. Both documents outline the basic terms and conditions initially agreed upon by the respective parties (i.e., consideration, conditions precedent, etc.), as well as stipulate that subsequent definitive agreements will be entered into following successful completion of the due diligence process (after which the enforceability of the LOI or term sheet will terminate). Materially, an LOI/term sheet would also include a binding clause indicating that each party commits to negotiate exclusively with the other for a set period of time.

3. Legal due diligence

Subsequent to negotiating and executing the above described documentation, the Acquiring Entity will circulate to the Target a legal due diligence request list. The list will include, amongst others, documentation detailing/related to the following:

  • constitutional documents;
  • entity organisational structure (branches, subsidiaries, etc.);
  • board/shareholders’ resolutions;
  • tangible and intangible assets;
  • powers of attorney;
  • employment;
  • related party contracts/transactions;
  • contracts with customers, suppliers, and/or other third parties;
  • financial transactions; and taxes.

The above exercise results in a legal due diligence report being prepared for use by the Acquiring Entity to identify any legal risks associated with the Acquisition Transaction.

4. Share/asset purchase agreement

Assuming the Acquiring Entity is satisfied with the results of the legal due diligence report (as well as with the separate financial due diligence report) and opts to proceed with the Acquisition Transaction, the parties need to negotiate and execute an SPA share purchase agreement. The SPA is the primary definitive agreement associated with the sale of the targeted shares or assets. Its purpose is to document the terms of the transaction, specify each party’s rights,obligations and/or liabilities and provide contractual protection against undisclosed risks and/or liabilities of any party. Although there is no officially prescribed legal form for an SPA to follow, the majority of SPAs are written in a manner that include terms and conditions associated with the following (without limitation and not meant to be exclusive) clauses:

  • identity of the parties;
  • preamble/background details of the Acquisition Transaction;
  • definitions (including for any agreed upon Long Stop Date);
  • number of shares/assets, and relevant details on each, at issue in the Acquisition
  • Transaction;
  • price and consideration for the shares or assets;
  • manner in which closing of the Acquisition Transaction shall occur;
  • conditions precedent;
  • warranties, indemnities, and specified remedies;
  • any limitations on liability;
  • tax provisions;
  • restrictive covenants;
  • confidentiality; and
  • general legal provisions such as further assignment rights, entire agreement, dispute resolution mechanism, and governing law.

5. Closing an Acquisition Transaction

Upon all conditions precedent outlined in the SPA having been completed to the satisfaction of the relevant party, and following the execution of the required corporate approval documents and associated powers of attorney, the parties proceed to close the Acquisition Transaction. If the Acquisition Transaction involves a share purchase, the details associated with the relevant closing mechanism depends on the legal form of the Target in KSA.

  • For an LLC, the parties would need to execute the amended and restated articles of association of the Target in front of the notary public at MOCI, with the subject articles thereafter notarised. The Target’s commercial registration file at MOCI would also be amended accordingly to reflect the share purchase by the Acquiring Entity.
  • In the case of a JSC, there is no process involving the notary public at MOCI. The parties simply ensure that the Target’s shareholder register is amended to reflect the share purchase following the issuance of the relevant share certificates to the Acquiring Entity.

Other material considerations

As part of an Acquisition Transaction in KSA, it is prudent for an Acquiring Entity to consider several additional issues that could very well factor into the legal risks associated with the transaction and whether it will be allowed to close from a regulatory standpoint. Additionally, the parties should seek independent financial, commercial, and tax advice to bring any related risks associated with the latter to light as well.

The below are not meant to be exhaustive, but should be considered as part of ongoing negotiations between the parties:

As part of an Acquisition Transaction in KSA, it is prudent for an Acquiring Entity to consider several additional issues that could very well factor into the legal risks associated with the transaction and whether it will be allowed to close from a regulatory standpoint. Additionally, the parties should seek independent financial, commercial, and tax advice to bring any related risks associated with the latter to light as well.

The below are not meant to be exhaustive, but should be considered as part of ongoing negotiations between the parties:

1. Foreign ownership restrictions

KSA’s Foreign Investment Law allows for the concept of foreign investment within the country. SAGIA, the government entity that regulates foreign investment in KSA, possesses the authority to set the level or percentage of foreign investment in corporate entities participating in various industries or activities. In the majority of cases, the ownership level allowed for foreign nationals in many activities or industries prove significantly higher (up to 100% in many cases) than for onshore foreign investment in other GCC countries.

Notwithstanding, SAGIA does publish a "negative list" that lists the activities or industries where foreign investment is not allowed and that are reserved for participation only for KSA nationals. SAGIA also sets conditions for certain types of foreign investment licenses where a KSA national partner with a minimum percentage ownership is required. For instance, such as one type of retail license, which requires a minimum Saudi ownership of 25%, and EPC contracting licenses, which also require a minimum Saudi ownership of 25%.

2. Restrictions on share transfers

If an Acquisition Transaction involves an LLC as the Target, the Companies’ Regulations stipulates that non transferring shareholders possess a preemptive right to obtain the sale shares at issue. Once notified by way of written notice containing the requisite transfer details, the non transferring shareholders have 30 days thereafter to exercise their right to acquire the sale shares at issue.

If the Target is a JSC, the Acquiring Entity should be aware that the Target’s founding shareholders are statutorily unable to transfer any of their shares to a non shareholder third party for a period of two years.

3. Unfair competition

The Competition Law, in attempting to combat or control anticompetitive practices in KSA, stipulates that the General Authority for Competition in KSA must be notified (within a minimum of 60 days prior to the Acquisition Transaction’s closing) in instances where an Acquisition Transaction results with an Acquiring Entity ultimately possessing a dominant position (assessed in part as 40% market share in KSA) in the market.

Such transactions are evaluated for "economic concentration" (through a set of various determining factors) by the said General Authority for Competition. "Economic concentration" is attained by transferring ownership (through an Acquisition Transaction, merger, or combination) of a Target’s assets, rights, shares, interests, or obligations to an Acquiring Entity in KSA.

4. Material principles of Sharia law

An understanding of Sharia law as applied in Saudi Arabia and what elements of an agreement are considered enforceable or unenforceable in the country, proves vital when:

a. negotiating terms and conditions within the various agreements that encompass an Acquisition Transaction,

b. highlighting the relevant legal risks encountered as part of the legal due diligence exercise, or

c. assessing legal defences should a dispute occur between the respective parties.

We list below certain points of interest pertaining to Sharia law (i.e., Saudi law) that should be considered:

  • Specifically relating to payment terms in general, an interest payment provision is unenforceable under Saudi law. Substance prevails over form. Nomenclature is disregarded where it is designed to disguise the payment of interest and any failure to make a payment which is considered in effect to be one of interest, as well as not being enforceable, may not be regarded by a Saudi court and arbitration panel as constituting a breach of contract.
  • Provisions limiting liability may be held unenforceable by Saudi courts and arbitration panels on the basis that a party cannot limit or exclude liability for his own failure to honour the terms of the contract.
  • If damages are payable, the quantum of damages is assessed on the basis of actual loss and Saudi law will never award punitive or consequential damages.
  • Saudi law generally recognises liquidated damages. However, if liquidated damages are challenged, a Saudi court and arbitration panel may not enforce a contractual provision for the payment of liquidated damages where the agreed liquidated damages are excessive, notwithstanding that the parties agreed to such a provision. The court or arbitration panel would assess whether the liquidated damages were fair and reasonable and, based on their own independent investigation, would determine whether to enforce such liquidated damages.
  • Indemnities are subject to the same rules as apply to liquidated damages: the amount claimed must be certain and must reflect the actual provable direct loss suffered by the claimant. Further, a party is only liable to give compensation for losses that it has occasioned.
  • While Saudi law does not impose a duty on the parties to legal agreements to act reasonably or in a nonarbitrary manner, there is a general assumption that contracting parties will act reasonably in the implementation and operation of their contractual arrangements.
  • Saudi law does give effect to provisions, which allow a party to act in its sole or absolute discretion, subject to the implied standard of reasonableness that applies to each of the contracting parties in their performance of the agreement.
  • There is no remedy of specific performance. In the event of breach of a representation or warranty, the sole remedy would be monetary compensation for any actual direct provable loss.

The above is a contribution to the Lexis Nexis Gulf Legal Advisor project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions