1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
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.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
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.
1.3 What factors commonly influence the choice of sale process/transaction structure?
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.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
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.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
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.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
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.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
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.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
Yes, the target in a private M&A transaction may pay adviser costs.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
The due diligence request should include:
- constitutional documents;
- 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.
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.
Legal due diligence covers any pending or actual litigation concerning the target.
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.
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.
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.
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
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.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
No. Pre-sale vendor legal due diligence is not common in Saudi Arabia.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
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.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
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.
4.3 What transfer taxes apply and who typically bears them?
There are currently no transfer taxes on either share purchase deals or asset purchase deals.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
Customary representations and warranties include:
- capacity and authority;
- title to the shares;
- audited and management accounts;
- business since the last accounts date;
- intellectual property;
- confidential information;
- joint ventures, partnerships and corporate structure;
- data protection and privacy;
- litigation and disputes;
- compliance and regulatory matters;
- employees and sponsorship;
- real estate; and
Breach of a representation or warranty constitutes a breach of contract, which will generally entitle the other party to claim damages.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
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.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
Such trends are not very common.
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
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.
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
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.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
Conditions to closing may include:
- regulatory procedures and approvals;
- anti-competition approval;
- creditors' approvals; and
- buyer and seller shareholders' approvals.
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
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.
|Beginning of offer period||Delivery of the final offer document to the CMA for approval.|
|Within 30 days of receiving all information and documentation required by the M&A Regulations||The CMA grants approval.|
|D Day||Publication of the offer document approved by the CMA and provision of the same to the board and shareholders of the target within three days of obtaining the CMA's approval of the offer document.|
|D+14||Last date for publication of the target's board's circular (if not published with the offer document).|
Last date to obtain the bidder's shareholders' approval; the period between announcing and convening the general assembly meeting must not be less than 21 days.
Last date to obtain the target's shareholders' approval; the period between announcing and convening the general assembly meeting must not be less than 21 days.
Earliest date the offer can be closed.
|D+42||Last date for shareholders to withdraw acceptances of offer if the offer is not unconditional as to acceptances.|
Last date on which the target may announce profit or dividend forecasts, asset valuations or proposals for dividend payments.
Last date on which the bidder can revise the offer or announce new information.
Last date for the offer to become unconditional as to acceptances.
Last date on which the offer must remain open for acceptance if the offer is declared unconditional as to acceptances on D+60.
All other conditions must be fulfilled by this date.
|D+91||Last date for settlement of consideration if the offer is offer wholly unconditional on D+81.|
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
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.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
No, there are no provisions for the squeeze-out of any remaining minority shareholders (and allowing minority shareholders to ‘sell out').
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
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.
6.5 What threshold/level of acceptances is required to delist a company?
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.
6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?
No, bumpitrage is not a common feature in public takeovers in Saudi Arabia.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
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.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
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.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
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.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
The M&A Regulations do not prevent hostile bids, but they are uncommon in Saudi Arabia.
7.2 Must hostile bids be publicised?
Yes. As for any other takeover, the general disclosure requirements and the timeline of a regular takeover must be observed.
7.3 What defences are available to a target board against a hostile bid?
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.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
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.
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
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.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
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.
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.