Saudi Arabia: Structuring Mergers & Acquisition Transactions in the Kingdom of Saudi Arabia

Last Updated: 3 April 2010
Article by Muhammad Arif Saeed

This article explores the key legal and practical factors that should be considered in planning and executing acquisition transactions in the Kingdom of Saudi Arabia (KSA). Although this article touches briefly upon the relevant capital market law regulations relating to mergers and acquisitions, the primary intention is to discuss foreign investors' ventures into the acquisition of private businesses in KSA. In this context, the acquisition of private business means transactions involving a KSA limited liability company (LLC) as the target company.


Unlike some other jurisdictions, KSA does not offer any free economic or trade zones with distinct corporate laws and regulations or tax incentives. The planned Economic Cities in KSA are not free economic zones in the sense as generally understood. As a result, in general all foreign investments in KSA would be governed by the KSA foreign investment legal regime and would be regulated by the KSA corporate laws. These are discussed in more detail later in this article.

An acquirer must research and carefully evaluate the legal requirements and market practices necessary for completion of a successful acquisition transaction before committing serious time and resources for investment in KSA. The aim should be to minimise risks, cost and time involved in a transaction. An acquirer should make a thorough risk analysis and ensure that he is fully aware of any government pre-approval requirements in connection with a proposed structure to avoid delays.

Some of the key considerations in structuring an acquisition are:

  • Due diligence,
  • Foreign direct investment restrictions,
  • Share purchase versus asset purchase,
  • The structure of the corporate vehicle (branch office or LLC) intended to be used for the acquisition,
  • Tax efficiency and
  • Timetable for completion of the transaction.

Due diligence


Legal due diligence is a crucial part of a potential acquirer's fact-finding exercise to determine the financial health, value, operational weaknesses, legal compliance and regulatory issues relating to a target entity. It also helps in pricing and other aspects of an acquisition, particularly during the negotiation phase.

In a jurisdiction like KSA, where public information on corporate entities (especially private businesses) is scarce, due diligence could be a challenging process. An acquirer has to depend largely on meaningful disclosure of material information by the seller. Also, cultural sensitivities need to be taken into account that generally discourages independent inquiries by an acquirer or his advisors.

The availability of target entity's corporate documentation and information for review may depend on a number of factors, such as, its standard of corporate governance, how professionally and effectively the target business has been managed and the seller's cooperation. An acquirer needs to be aware of the risk that information provided may at times not be complete or up-to-date or even factually correct. In practice, perseverance and constant follow-ups have helped in the past in obtaining complete information in order to manage the risks for the acquirer.

Relevant Information

Like other jurisdictions, it is common to have a non-disclosure agreement signed in order to maintain confidentiality on shared information. Due to the lack of disclosure and transparency, it is important that a due diligence request list is prepared which comprehensively covers all aspects of legal diligence which best suit the purpose (merger or acquisition of entities or businesses). For the seller's understanding, a due diligence list should use terminology that is generally understood in KSA in relation to different types of corporate entities.

A due diligence report would normally set out the documents and information reviewed and identify any qualifications and assumptions as to the completeness or accuracy of the information received.

Foreign Direct Investment Restrictions

Foreign direct investment is regulated in KSA under the Foreign Investment Act (issued by the Royal Decree No. M/1 of 2000) and the Executive Rules (the Foreign Investment Law). The Saudi Arabian General Investment Authority (SAGIA) is the regulatory body in this respect. A foreign investment in KSA must be licensed by SAGIA before an investment vehicle (branch or a subsidiary) can be established.

The Foreign Investment Law provides protection to foreign investors and generally speaking allows treatment of any project established pursuant to a foreign investment license to be on an equal footing with that of a KSA project established by KSA nationals. It permits up to 100% foreign ownership of a KSA entity for most non-trading enterprises unless the proposed activity is on what is called the "Negative List". The Negative List restricts foreign ownership in specific business activities. In general, foreign investment is permitted in most manufacturing, technical and trading services.

The WTO Accession Protocol signed by KSA sets out certain market access, capital and ownership thresholds in specified activities that are open to foreign investment. This should be taken into account before embarking upon an investment decision.

A foreign acquirer should seek advice in respect of any possible restriction on investment in the activities of the target entity, market access thresholds, pre-approval or other licensing requirements or conditions that need to be satisfied for obtaining a foreign investment license.

Where a target company in KSA has no foreign shareholder prior to the acquisition in question, then a foreign investment license will need to be obtained from SAGIA to enable such investment. Where there is a foreign investment license already in existence (because of an existing foreign shareholder) then SAGIA approval is required so that such license is amended to reflect the new foreign shareholding.

Share Purchase versus Asset Purchase

The typical forms of business acquisitions in KSA are private acquisitions of shares in a target company or private acquisition of a target entity's underlying business assets. The decision between the two is based on the investment strategy and business plan for an intended acquisition.

Share Purchase

In a share purchase an acquirer not only acquires interest in the target entity but also inherits the target's liabilities. As a result, a share purchase transaction demands a more involved and detailed due diligence phase.

For a valid share purchase transaction it is important that the acquirer and the seller have the requisite authority to enter into such a transaction. These are normally evidenced by properly issued powers of attorney and/or corporate resolutions approving the transaction, all duly authenticated, legalised and notarised for use in KSA and then translated into Arabic by an accredited translator.

For sale and transfer of shares in an LLC to a third party, the statutory pre-emption rights under the KSA Companies Regulations must be waived by all the existing shareholders of the LLC and a shareholders' resolution of the target company approving the sale and stating that the shares were offered to the other shareholders is required. An approval of the shareholders' resolution by the Ministry of Commerce & Industry (MOCI) is required.

A share acquisition in KSA would generally require:

  • Execution of a share purchase agreement,
  • A foreign investment license from SAGIA (where a foreign acquirer is involved) or amendment to an existing foreign investment license (where the target entity has an existing foreign shareholder),
  • Submission of the target entity's shareholders' resolution amending its articles of association for MOCI's approval,
  • Execution of the shareholders' resolution before a notary public and its publication in the Official Gazette, and
  • Issuance of an amended commercial registration by MOCI.

In view of the timeframe involved in completing the procedure for transfer of shares, it is important to ensure that a share purchase agreement contains pre-completion covenants so that an acquirer's interests are protected. These would generally include the sellers' agreement not to take any material business decisions without the acquirer's consent and that all the representations and warranties are valid at completion.

The KSA culture may sometimes be sensitive to escrow arrangements, but it is prudent to take the parties into confidence and explain the overall benefits of such an arrangement for a smooth completion of an acquisition.

In the case of a listed joint stock company (a public listed company), acquisition of shares generally takes place through either a restricted offer of shares or a takeover offer. These transactions are regulated by specific regulations issued by the Capital Markets Authority (CMA) for this purpose.

Asset Purchase

In an asset purchase arrangement, an acquirer may opt for either purchasing the entire assets of a target entity or pick certain assets and therefore exclude liabilities to a certain extent. The procedural aspects of transfer of assets will need consideration, especially with regard to any leased assets, as except for the registration of ownership of property (real estate) and vehicles, transfer of assets is not generally regulated in KSA.

Available structures and the KSA legal regime

A joint venture between two or more corporate entities through a contractual arrangement is the most common form of private acquisition transaction. A new special purpose vehicle may also be established to consolidate the partners' resources in the joint venture.

The following laws generally govern merger and acquisition transactions in KSA:

The Companies Law (issued by the Royal Decree No. M/6 of 1965)

The Companies Law regulates business mergers in KSA and provides the form that companies may take and the incorporation and corporate governance rules and procedures applicable to each case.

With the exception of a cooperative company, a company can merge with a different company. The articles of association or bylaws may prescribe the types of entities or the types of business activities with which an entity could merge. It is therefore important to address this issue at the outset.
The Companies Law provides for mergers where:

  • The companies involved are merged to form a newly incorporated company, their assets and liabilities are transferred to the new entity and the merging companies are liquidated. The shareholders of the liquidated companies receive shares in the new entity in exchange for their shares in the liquidated companies, or
  • One or more companies are absorbed by an existing company. The shareholders of the absorbed company receive new shares in the existing company.

A merger is valid if it is authorised by a properly published resolution adopted by every one of the constituent entities in the manner prescribed for the alteration of its memorandum of association or by-laws. The merger resolution takes effect 90 days after the date of its publication. The creditors of the merged companies may, during that period, object to the merger by registered letters addressed to the company. In that event, the merger is suspended until the creditors have waived their objection or until the Board of Grievances has ruled at the request of the company that the objection is unfounded, or until the company has offered sufficient security for the satisfaction of the debt.

The Capital Markets Law (issued by the Royal Decree No. M/30 of 2003) and Implementing regulations (Capital Market Law)

The Capital Markets Law provides the legal framework for regulation of the capital market. It establishes the CMA and the Stock Exchange (Exchange or Tadawul) and incorporation of a national securities depository centre.

The CMA is the apex regulator of listed joint stock companies, and establishments involved in securities, asset management, investment banking and brokerage activities. It has the authority to issue regulations and guidelines for the implementation of the provisions of the Capital Markets Law, covering, for example, licensing of financial intermediaries or authorised persons, IPO's, private placements and investor protection relating to securities activities and business.

The CMA Mergers & Acquisition Regulations and the Listing Rules

The M&A Regulations issued in 2007 and the Listing Rules issued in 2004 set out the basic regulatory framework for regulation of:

  • A restricted purchase of voting shares in a listed company which results in the buyer owning or controlling 10 per cent or more of such class of shares;
  • A restricted offer of shares made by a public announcement in which the offer is to purchase listed shares and such acquisition would increase the offeror's ownership to 10 per cent or more of the shares
  • A take-over offer whereby the buyer acquires control of a listed company by acquiring more than 30 per cent or more of voting rights in such company or acquiring a right to appoint 30 per cent of the company directors;
  • A reverse takeover whereby a listed company offers to the shareholders of a private company (limited liability company) its new shares in exchange for the shares of such shareholders provided that the number of shares to be issued by the listed company under such an arrangement results in the shareholders of the private company owning more than 50 percent in the listed company.

Anti-competition Laws

The Competition Law (issued by the Royal Decree No. M/25 of 2004) aims to protect and encourage fair competition and provides a means to combat monopolistic practices that affect legitimate competition.

The provisions of the Competition Law apply to all entities active in the KSA market except for public corporations and wholly-owned state companies.

There are specific provisions in the Competition Law that deal with mergers. These provisions prohibit any merger or acquisition which creates a dominant market position or restricts market entry and which may therefore result in anti competitive behaviour such as price fixing and restrictions on the free flow of goods and services.

Under the Competition Law, an application for approval should be filed with the Competition Protection Council by the parties at least 60 days prior to completion in respect of any merger or acquisition which may otherwise violate the Competition Law. The Council is required to notify the entity of an acceptance or rejection within 90 days.

Employment Law Issues

Article 18 of the Labour Law (issued by Royal Decree M/51 of 2005) regulates the treatment of employment contracts in the case of a merger of companies or change of control upon acquisition.

It provides that if the ownership of an entity is transferred to a new owner, or where there is a change in the structure of an entity as a result of a merger, restructuring or otherwise, the terms of employment contracts shall continue to remain in force and the original employer and the new employer shall both be jointly liable for salary accrued prior to the change in control or transfer of ownership and for any other amounts due to an employee.

It is possible for the original employer and the new employer to agree to transfer of all payment obligations in favour of the employee to the new employer. The acquirer therefore is obliged to accept all employees employed by the target entity, and both the acquirer and the seller would continue to be jointly liable to bear the cost and obligations of maintaining the existing terms and conditions of the employment contracts. It is therefore advisable for an acquirer to procure indemnification from the target entity (and where the target entity is being liquidated, from the shareholders of the target entity) for all losses and liabilities incurred with respect to the employees prior to the change of control.

An acquirer must assess whether the target entity meets the requirements of KSA nationals for employment in terms of the Saudisation policy, which currently requiresthat at least 30 per cent of employees must be KSA nationals for a business with 20 or more employees. A business that does not achieve the requisite levels of Saudisation may not be allowed:

  • To sponsor new expatriate employees,
  • Renew the residency visas of the existing employees,
  • Renew the commercial registration of the business itself, or
  • Amend its memorandum of association or bylaws to change its shareholding.

Moreover, businesses that fail to meet the Saudisation levels may not be able to receive benefits from government affiliated funding programmes or to bid on government procurement contracts.

Tax Efficiency

A capital gain arising out of a sale or transfer of assets is likely to be treated as a normal business income and will be taxed at the normal corporate tax rate. There is no transfer fee or stamp duty on the acquisition of shares or transfer of assets. There are no specific rules under the KSA taxation regime that specifically address mergers and acquisitions.

In general, KSA nationals and the nationals of Gulf Co-operation Council (GCC) states are liable to pay zakat (religious wealth tax) at the rate of 2.5% of the portion of their taxable income attributable to their shareholding in a KSA entity.

A non-GCC individual or a GCC entity with non-GCC shareholding is liable to pay tax at the rate of 20% of the taxable income attributable to its shareholding in the KSA entity.

Existence of a double tax treaty between the country of a foreign acquirer and KSA may help in managing tax liabilities for a foreign acquirer. There could be additional tax considerations involved in case of a foreign acquirer and specialised tax advice should be obtained in those circumstances.

The market practice is that the chartered accountancy firms registered to practice in KSA give advice on complex taxation matters. A foreign acquirer should at the very outset seek advice on the potential tax implications of contemplated structures for mergers or acquisitions and the transfer of assets.

Timetable for Completion

It is important that the parties to a proposed merger or acquisition transaction agree to a realistic timetable for its completion keeping in mind that an acquisition of a private business (an LLC) in KSA may take longer to complete as compared to other jurisdictions due to the compulsory governmental approvals and other regulatory requirements, in particular where a transaction involves a foreign acquirer.

Other Considerations

Shari'ah is the fundamental law of KSA and it primarily governs contractual arrangements and interaction between parties generally. The Shari'ah is a collection of principles derived from different sources, but principally the Holy Qur'an and the Sunnah (the witnessed sayings and actions of the Prophet Muhammad). The broad and general nature of the Shari'ah means that KSA courts can be expected to apply a combination of discretionary powers and established legal principles in the review and interpretation of business documents. This flexibility, combined with the absence of an established precedent system and the liberal exercise of discretionary powers by authorities during the regulatory process, can make it difficult to predict with certainty the correct interpretation and ultimate enforceability of transaction documents.

Matters relating to employment, general social security for employees and Saudisation policy should be watched closely both in terms of legal due diligence as well as the post merger phase so as to avoid any violation of the laws or other regulatory implications.


During the recent global economic downturn, KSA has emerged relatively less affected and continues to enjoy a period of sustained growth. One of the messages that came out of the recent Competitiveness Forum held in Riyadh by SAGIA is that the KSA regulatory regime has improved substantially following a number of important measures taken by SAGIA and other KSA authorities to ease doing of business in KSA. There is a strong commitment on the part of the KSA government to encourage private businesses and foreign direct investment, particularly in the areas of industry and technical services. With the opportunities that the KSA market holds for potential investors, this offers an encouraging business environment. However, it is vital that any intended penetration in the KSA market takes into account the complications that may arise because of local business laws and practices and should therefore be based on proper legal and financial advice.

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.

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