Mergers & Acquisitions

Private M&A transactions: Most private M&A transactions in Saudi Arabia are structured as share purchase deals. Through a share purchase agreement, the share capital of the target is acquired by the buyer from the seller for an agreed consideration.

A joint venture between two or more corporate entities through a contractual arrangement is also a common structure of private acquisition transactions.

Private M&A transactions may be also structured as asset purchase deals. Through an asset purchase agreement, all or certain assets and liabilities of the target are acquired by the buyer from the seller. For example, a buyer may acquire a specific factory owned by the seller.

Public M&A transactions: Public M&A transactions are regulated by the Capital Market Authority (CMA). The M&A Regulations issued by the CMA govern the transactions. Most public M&A transactions are structured as share purchase deals. The M&A Regulations apply to any public or private purchase or sale of voting shares in a listed company resulting in ownership or control of 10% or more of the voting shares of that company.

Share purchase deals are more common for their simplicity and continuity of the company’s business without the need to obtain or amend permits or licences related to its business activities. They also do not require the transfer of employees’ sponsorship or the amendment of employment contracts.

The main advantage of an asset purchase deal is that it enables the buyer to choose which assets and liabilities to acquire. In a share purchase deal, the acquirer not only acquires an interest in the target, but also inherits its liabilities. A share purchase deal thus demands more involved and detailed due diligence.

The choice of the M&A transaction can be influenced by many factors, including:

• tax considerations;
• foreign investment restrictions considerations;
• employment considerations;
• IP considerations;
• merger control considerations;
• other regulatory considerations; and
• the nature of the company and the nature of its business.

The parties will usually sign a term sheet or a letter of intent. The term sheet or letter of intent will be legally non-binding, except for some provisions such as confidentiality or non-disclosure provisions and exclusivity provisions. Some parties may choose to enter into an independent non-disclosure agreement before signing the term sheet or letter of intent.

The M&A Regulations permit payment of a break fee if an acquisition offer fails because of specific events that prevent it from proceeding, such as where the board of the target recommends a higher competing offer.

The break fee must not exceed 1% of the offer value and must be disclosed in the offer document and the announcement, as required under the M&A Regulations. The board of the target must provide the Capital Market Authority (CMA) with written confirmation that the fee is in the best interests of the target shareholders.

M&A transactions in Saudi Arabia may be financed through a mix of equity and debt, subject to the satisfaction of minimum capital and reserve requirements.

The preparatory stages will usually involve legal advisers, financial advisers and tax advisers to cover the due diligence of the target. Other advisers may also be involved, depending on the nature of the target’s business.

In public M&A transactions, the bidder and the target must appoint:

• an independent financial adviser, authorised by the CMA; and
• an independent legal adviser, authorised to practise law in Saudi Arabia.

Yes, the target in a private M&A transaction may pay adviser costs.

(a) Commercial/corporate

The due diligence request should include:

• constitutional documents;
• registrations;
• licences;
• the articles of association; and
• the bylaws.

A search of the Ministry of Commerce website by the target’s commercial registration number and its expiry date will verify the company’s corporate status.

The bidder should also take steps to understand the target’s material contracts, based on a commercial assessment of its business.

(b) Financial

Limited liability companies and joint stock companies must prepare, audit and file with the authorities the audited financial statements. Reviewing these financial statements can provide the prospective buyer with high-level preliminary information about the target’s historical financial performance.

(c) Litigation

Legal due diligence covers any pending or actual litigation concerning the target.

(d) Tax

Tax due diligence is normally carried out as part of the financial due diligence on the target.

Companies in Saudi Arabia, other than listed companies, and with some other exceptions, are subject to two different tax regimes based on the nationality of their shareholders. Companies that are 100% owned by Saudi or Gulf Cooperation Council (GCC) shareholders are subject to the Zakat regime. Companies that are 100% owned by foreign (non-Saudi and non-GCC) shareholders are subject to the income tax regime.

Companies that are owned by Saudi or GCC shareholders and foreign shareholders are subject to the Zakat regime in proportion to the Saudi or GCC shareholding and the income tax regime in proportion to the foreign shareholding.

(e) Employment

Legal due diligence covers the review of employment policies and contracts. The review will examine matters relating to:

• the transfer of employees and employee sponsorship;
• liabilities relating to end-of-service benefits;
• social security registration and compliance; and
• ‘Saudisation’ requirements.

The Labour Law regulates the treatment of employment contracts in the case of an M&A transaction. In the post-M&A transaction phase, the transfer of employees should be handled efficiently to avoid any regulatory implications.

(f) Intellectual property and IT

The due diligence usually covers:

• IP registrations;
• IP litigation; and
• IT policies.

(g) Data protection

The bidder should take steps to conduct due diligence on the target’s compliance with applicable data protection laws. Saudi Arabia issued its first data protection law – the Personal Data Protection Law – in 2021, to regulate the collection and processing of personal data. The law applies to any personal data processing carried out by a ‘controller’, which is any entity that determines the purpose of processing personal data and how it is processed, regardless of whether the data processing is initiated by it or through any processer that processes data on its behalf.

(h) Cybersecurity

The due diligence may include technical reviews of cybersecurity.

(i) Real estate

Real estate due diligence should ascertain the extent of owned and leased real estate assets that the target relies upon to carry out its business. The review usually covers:

• title deeds of the real estate owned by the target;
• lease agreements between the target and third parties;
• identification of any liens, mortgages, encumbrances or third-party interests; and
• any real estate litigation.

The following public searches are carried out as part of the due diligence process:

• commercial registration verification searches through the Ministry of Commerce website;
• constitutional corporate documents verification searches through the Ministry of commerce e-magazine (Aamaly) website;
• real estate title verification searches through the Ministry of Justice (Notary Public) website; and
• in respect of public M&As, public announcements and information about the target on the Capital Market Authority website.

No. Pre-sale vendor legal due diligence is not common in Saudi Arabia.

Merger control: The General Authority for Competition (GAC) must be notified 90 days before closing of the M&A transaction if it will result in an economic concentration. GAC has 90 days to provide a decision after it accepts the completed notification filing. The offer will lapse if GAC objects to the transaction. If no decision is reached after the 90 days, the transaction may proceed.

Foreign investment: Foreign ownership of private company shares in Saudi Arabia is subject to the Foreign Investment Law and regulated by the Ministry of Investment.

Sector-specific approvals: M&A transactions involving companies regulated by specific authorities will sometimes require approval from these authorities. For example, the Communication and Information Technology Commission issues specific regulations that regulate M&A transactions in the communication and IT sector.

Ministry of Commerce: M&A transactions are regulated by the Ministry of Commerce. The closing of M&A transactions will be through the Ministry of Commerce, ending with the issue of the amended commercial registration of the company.

Ministry of Investment: Foreign ownership of private company shares in Saudi Arabia is subject to the Foreign Investment Law and regulated by the Ministry of Investment. Before proceeding with M&A transactions involving foreign shareholdings in a private company, an investment licence must be issued or amended by the Ministry of Investment.

Capital Market Authority (CMA): Public M&A transactions are regulated by the CMA.

General Authority for Competition (GAC): The GAC may reject an M&A transaction if it results in an economic concentration.

There are currently no transfer taxes on either share purchase deals or asset purchase deals.

Customary representations and warranties include:

• capacity and authority;
• title to the shares;
• audited and management accounts;
• records;
• business since the last accounts date;
• assets;
• debtors;
• intellectual property;
• confidential information;
• contracts;
• joint ventures, partnerships and corporate structure;
• data protection and privacy;
• litigation and disputes;
• compliance and regulatory matters;
• competition;
• insurance;
• employees and sponsorship;
• pensions;
• real estate; and
• tax.

Breach of a representation or warranty constitutes a breach of contract, which will generally entitle the other party to claim damages.

Limitations to liabilities may include:

• matters fairly disclosed to the buyer or within its actual knowledge;
• caps on liability amounts;
• materiality thresholds;
• a de minimis threshold per claim;
• an aggregate threshold for all claims; and
• time limits for bringing claims.

Such trends are not very common.

This differs from deal to deal, depending on the risks identified during the due diligence stage. A guarantee from a parent company, shareholders or third parties may be used.

Post-closing restrictive covenants might be included in some sale and purchase agreements. They must be reasonable in terms of time, extent and geographical scope.

Conditions to closing may include:

• regulatory procedures and approvals;
• anti-competition approval;
• creditors’ approvals; and
• buyer and seller shareholders’ approvals.

The bidder must submit the proposed offer timetable to the Capital Market Authority (CMA) within three days of the mandatory announcement for the CMA’s approval. The timetable includes the following milestones.

Generally, there are no restrictions on open market purchases. However, such purchases will be subject to disclosure requirements and insider trading issues that arise if the buyer (including persons acting in concert), has confidential price-sensitive information concerning the offer from the time when there is reason to suppose that an approach or an offer is contemplated and announcement of the approach or offer, or termination of the discussions.

No, there are no provisions for the squeeze-out of any remaining minority shareholders (and allowing minority shareholders to ‘sell out’).

The offer document must describe how the offer will be financed and identify the financing sources. If the bidder decides that the payment of the fee or the provision of security for any obligation (conditional or otherwise) will depend to a large extent on the business of the target, the planned arrangements should be described; alternatively, a statement that there is no such arrangement should be provided.

If the offer, or any part thereof, is to be paid in cash, the offer document must contain a bank guarantee issued by a local bank to ensure that the bidder can fulfil the full value of the offer.

A company may not be delisted without the prior approval of the CMA. To obtain the CMA’s approval, the company must submit a delisting request to the CMA with a concurrent notification to the exchange which includes the specific reasons for the delisting request. If the delisting is the result of an acquisition or other corporate action by the company, a copy of the relevant documentation and a copy of each related communication to shareholders must be submitted. The CMA may, at its discretion, accept or reject the delisting request. The consent of the company’s extraordinary general assembly to delist the company must be obtained only after the CMA has approved that delisting.

No, bumpitrage is not a common feature in public takeovers in Saudi Arabia.

The offer price must match the highest price paid by the bidder (or its concert) for shares in the target in the three months prior to the announcement of the firm intention to provide an offer (or earlier if required by the CMA).

The value of an offer must be increased to the highest price paid by the bidder (or its concert) for shares (or any other interest in shares giving it control) in the target during the period from the initial announcement to the end of the offer period.

Generally, the bidder is committed to proceed once the offer has been formally announced. The scope to withdraw by invoking conditions to the offer is limited. Exceptions, however, include failure to obtain approval from the General Authority for Competition (GAC). Any deal that falls within the scope of the Competition Law must be approved by the GAC. The offer must state that if it is rejected by the GAC, it will be withdrawn.

Yes. The irrevocable undertakings must be stated in the offer announcement and the offer document. Documents including such irrevocable undertakings must be available for inspection.

The M&A Regulations do not prevent hostile bids, but they are uncommon in Saudi Arabia.

Yes. As for any other takeover, the general disclosure requirements and the timeline of a regular takeover must be observed.

The M&A Regulations state that if the board of the target has reason to believe that a bona fide offer might be imminent, the board may not, without the approval of the shareholders’ general assembly, take any action relating to the affairs of the company that may cause the rejection of the offer or prevent the shareholders from deciding on it.

The Saudi market saw M&A deals jump in 2021, led by the IT, healthcare and petrochemical sectors. Last year also saw the merger of National Commercial Bank and Samba Financial Group under the name of Saudi National Bank (SNB). SNB is now Saudi Arabia’s largest bank, accounting for a market share of 25%, with SAR 837 billion in assets.

In October 2021, Saudi Arabia announced the National Investment Strategy to help achieve the kingdom’s key Vision 2030 goals. The vision seeks to increase:

• the private sector’s contribution to 65% of gross domestic product;
• the foreign direct investment (FDI) share to 5.7%; and
• non-oil exports from 16% to 50%.

The National Investment Strategy aims to increase annual investment injections to more than $550 billion in 2030, comprising local investment of $450 billion and FDI flows of $100 billion.

The Foreign Investment Law regulates the process for foreign investors wishing to establish a legal entity or acquire an interest in a Saudi entity. The Foreign Investment Law protects foreign investors and treats a business established according to a foreign investment licence on equal footing to a Saudi business established by Saudi nationals. Under the law, foreign investors are not permitted to operate or acquire businesses without first obtaining an investment licence from the Ministry of Investment.

Foreign investors may own up to 100% of a Saudi entity unless the entity’s activities are included on the ‘Negative List’, which restricts foreign ownership of very limited business activities. Certain capital investment, market access and ownership thresholds apply to some activities that are open to foreign investment.

Top tips would include the following:

• Ensure that a comprehensive term sheet, covering legal and commercial matters, is agreed between the parties at the outset of the deal.
• Hire great advisers to ensure that they do proper due diligence on the target.
• Ensure that the diligence advisers understand the target and its business and can work closely together.
• Analyse the foreign investment requirements and restrictions, and all related issues.
• Analyse other regulatory requirements and restrictions, and all related issues.
• Consider the M&A requirements under the Companies Law.
• Consider the M&A Regulations if the transaction is a public M&A transaction.