merger and acquisition

Considerations not to be missed: Mergers and Acquisitions in Saudi Arabia

The Kingdom of Saudi Arabia has transformed into an alluring business market for global organizations looking for new mergers and acquisitions (M&A). and 2021 is set to observe an expansion in the pattern following several successful deals in 2020. Saudi Arabia Merger and Acquisition market is esteemed at more than USD 1 billion.

During the fiscal year 2020, Saudi Arabia was positioned among the top investment banking fee earner in the Middle East. North Africa (MENA) is expected to keep up its position in 2021 as more organizations take advantage of the investment climate in the region, specifically in Saudi Arabia.

The local M&A market is projected to further grow this year, with activity expected to center mainly on the e-commerce, energy, education, and healthcare sectors.

  • Mainly which corporate entities are commonly involved in private acquisitions?

The corporate companies that are usually associated with acquisitions in Saudi Arabia are Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs). Whereas Capital Market Authority regulated funds are concerned, both types of companies are used by fund managers to effect an acquisition. Holding organizations are sometimes also engaged in acquisitions.

  • Are there any limitations under corporate law on the transfer of shares in a privately owned business.? Are there any limitations on acquisitions by foreign buyers.?

Limitations on share transfer

Article 161 of the Companies Law gives a preemptive right to non-selling investors of a limited liability company to attain the shares of the transferor. The transferor should inform existing investors of the transfer conditions by notice through the directors of the company. Investors can execute their preemptive rights by requesting to buy the offered shares at fair value. In 30 days from the day they get the notice, except if the period is modified in the articles of association.

The Minister of Commerce and Investment issued a decision on 18 April 2018. Stating that the admission of any new investor to a limited liability company through the issuance of new shares will require the approval of the existing shareholders.

Article 107 of the Companies Law limits the transfer of a founder’s shares in a JSC prior to the publication of financial statements covering not less than 24 months since formation.

Moreover, the Competition Law and its Implementing Regulations limit the transfer of shares that results in economic concentration.

Foreign ownership restrictions

Foreign ownership of private company shares in Saudi Arabia is regulated by Foreign Investment Law (given by Royal Decree No. M/1 dated 05/01/1421 H. (comparing to 10/04/2000 G)) and Saudi Arabian General Investment Authority (SAGIA). There is a defined list of activities that are subject to foreign investment restrictions. Which are confined uniquely to non-foreign ownership. However, most business sectors are open to foreign investment. Provided that the foreign investor obtains a foreign investment license. SAGIA has the authority to issue these instant licenses and investors can apply online for them if they meet the set criteria.

  • Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

Sales of companies by auction are not common in Saudi Arabia. However, under Article 207 of the Companies Law, a company liquidated for insolvency can appoint a liquidator, or the court can appoint one. The liquidator\’s objective is to transfer or sell the company\’s assets for cash to pay creditors and is therefore authorized to sell a company\’s assets at a public auction.

  • What type of preliminary agreements are commonly made between the acquirer and the seller before the contract?

Letters of intent

Letters of intent or term sheets are used as instruments that document the efforts and intentions of the parties entering into acquisition transactions. They also lay the basic parameters and timing of these transactions. Normally, the letter of intent is not legally binding, except in relation to confidentiality or no-shop arrangements. Term sheets are more comprehensive than letters of intent and mainly include the key commercial terms the parties intend to include in the definitive agreements.

Exclusivity agreements

Exclusivity agreements limit the parties to exclusive dealings for a predefined time frame. Exclusive negotiation arrangements are generally included in the acquisition letter of intent or term sheets in Saudi Arabia. However, such arrangements are not legally binding in Saudi Arabia. Because courts are mainly reluctant to order against these specific breaches of a contract. The assessment of damages is also difficult to determine. Therefore, these types of breaches are normally resolved outside court as a result of arbitration and dispute resolution mechanism.

Non-disclosure agreements

Both parties involved in the acquisition, commonly enter into non-disclosure agreements as a primary step added into a letter of intent or term sheets. Non-disclosure obligations mainly cover the disclosure of confidential information within the scope of acquisition. These agreements and provisions are enforceable by the courts of Saudi Arabia under Saudi law.

  • What are the main documents that are prepared in an acquisition deal?

The main documents in an acquisition are:

  • A share purchase agreement when acquiring shares.
  • An asset transfer agreement when acquiring assets.
  • A merger agreement for mergers.
  • Any corporate approvals documents such as board resolutions or shareholders\’ resolutions.
  • For limited liability companies, the amended and restated articles of association.
  • What forms of consideration are mainly considered in a share sale?

Cash is the most prevalent form of consideration in Saudi Arabia in a share sale. Shares are rarely used as a form of consideration. Because they need to be further investigated for their fair value unless the shares are publicly traded.

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