Corporate M&A 2018 Comparisons

Last Updated February 15, 2019

Law and Practice

Authors



Hatem Abbas Ghazzawi & Co is an independent Saudi Arabian law firm. The firm has played an impressive role in high-profile transactions and developed a reputation for providing high-quality advice on some of the largest and most complex project-transactions in Saudi Arabia. It remains the first choice Saudi counsel for many foreign companies and international law firms seeking advice on Saudi Arabian law.

There have not been any public takeovers in recent years. In 2013, Saudi International Petrochemical Co (SIPCHEM) signed a Memorandum of Understanding (MOU) with Sahara Petrochemicals Company (Sahara) outlining the terms of a proposed merger between the two companies, but this deal was never completed. According to an announcement in mid-2014, the merger would be difficult to implement under the current regulatory framework using a structure acceptable to both companies where both companies will continue to exist while achieving operational integration.

In recent news, Kingdom Holding Company announced that it will acquire a 16.2% stake in Banque Saudi Fransi (BSF), a deal with total consideration of approximately SAR5.8 billion (USD1.5 billion).

There is not enough market practice to establish any trends in the last 12 months. However, it is expected that Saudi Arabia’s Vision 2030 will increase M&A activity in the industrial, healthcare and education sectors.

There were no public takeovers in the past two years. However, the financial institution sector is expected to witness some M&A activity in the near future as well as the industrial, healthcare and education sectors.

There was only one public takeover since the publication of the Merger and Acquisition Regulation where Almarai acquired the entire share capital of Hail Agriculture Development Company through a share purchase. Share purchases comprise the majority of private acquisitions. 

The Capital Markets Authority ("CMA”) is the main body responsible for regulating public mergers and acquisitions and the Saudi capital market.

The Ministry of Commerce and Investment (“MOCI”) is the main regulator of corporate entities.

The Competition Protection Council, which operates under the umbrella of the Ministry of Commerce and Investment, is responsible for regulating competition matters. 

Furthermore, and depending on the activity of the bidder and the target, it may be necessary to obtain approvals and comply with the additional requirements of other regulatory bodies, such as the Saudi Arabian Monetary Agency (“SAMA”) for banks and insurance companies and the Communications and Information Technology Commission (“CITC”) for telecommunication companies.

Foreign investors must obtain approval from the Saudi Arabian General Investment Authority (“SAGIA”) before incorporating in Saudi Arabia. SAGIA approval is obtained after meeting certain conditions depending on the investment activity and providing required documentation. Furthermore, there are various limitations on foreign ownership of joint stock companies and these can vary depending on the nature of activity carried out by such companies. There are legislative limitations on foreign shareholding imposed by regulators of specific industries and limitations that could be set out in the relevant company's by-laws. For instance, there are foreign ownership limits that apply to banks, insurance companies and telecommunication companies. In addition, there are a number of activities (the “Negative List”) which foreign investors are prohibited from undertaking, such as real estate development in the cities of Makkah and Al Madinah Al Munawarrah.

The Competition Regulation issued pursuant to Royal Decree No M/25, dated 04/05/1425, Hejra (corresponding to 22 June 2004, Gregorian) and its implementing rules issued pursuant to the resolution of the Competition Council No 126 of 4/4/1435H (corresponding to 1 July 2014G).

Acquirers should be especially aware of the following labour law issues:

  • Under Article 18 of the Labour Regulation, when a business is sold to a new owner or a merger has taken place, the employment contracts of existing employees remain valid and the service period is deemed continuous. Furthermore, both the buyer and the seller are jointly liable for the accrued end-of-service benefits of the employees, unless otherwise agreed.
  • Compliance with regulations and circulars in connection with the employment of non-Saudi employees. For example, once the acquisition/merger is complete, the information relating to the sponsorship of the employees must be amended to reflect the acquisition/merger as the resulting entity will become the sponsor of the employees.

We are not aware of any national security reviews of acquisitions. However, this would most likely depend on the sector.

We are not aware of any Saudi Arabian court decisions in the last three years specifically in relation to mergers and acquisitions.

There have not been any significant legal developments related to mergers and acquisitions in the past three years, but the CMA has introduced a number of new implementing rules and updated existing ones which regulate relevant issues such as: the Rules for Qualified Foreign Financial Institutions Investment in Listed Securities, issued Pursuant to Resolution of the Board of the CMA No 1-42-2015, dated 15/7/1436H, (corresponding to 4 May 2015G), as amended; and the recent amendment to the Corporate Governance Regulation, pursuant to Resolution No 8-16-2017 of the Board of the CMA, dated 16/5/1438H, (corresponding to 13 February 2017G).

We are not aware of any recent significant changes to Takeover Law.

In terms of stake-building strategies, the Saudi market is not developed enough and therefore there is no sufficient data available to determine customary practice.

There are several disclosure and filing obligations contained in the Merger and Acquisition Regulation and the Listing Rules. These include the following:

  • Where a person becomes the owner of, or interested in, shares amounting to 5% (or more) of a listed company, that person must notify the listed company and the CMA at the end of the trading day of the occurrence of such an event. If such a person’s ownership or interest increases or decreases by 1%, said person must notify the listed company and the CMA of the same at the end of the trading day. For the purposes of calculating the total number of shares, a person will be deemed to be interested in shares owned or controlled by a company controlled by that person or any other persons with whom that person has agreed to act in concert with that person.
  • A public announcement is required when a company is considering a potential takeover and an approach to a potential offeree company has been made and the parties have reached an understanding (including the relevant conditions) that an offer will be made.
  • A public announcement is required when a firm intention to make an offer (the making of which is not, or has ceased to be, subject to any pre-condition) is notified to the board of the offeree company from a serious source, irrespective of the attitude of the board to the offer.
  • A public announcement is required immediately upon an acquisition of shares by a person which gives rise to a mandatory Article 12 of the Merger and Acquisition Regulation or a permissible offer under Article 13 of the Merger and Acquisition Regulation. The announcement should not be delayed while full information is being obtained; additional information can be the subject of a later supplementary announcement.
  • A public announcement is required when, following a bid approach, a company’s shares are the subject of rumour and speculation or where there is a price movement of 20% or more of the lowest share price since the time of the approach or a price movement of 10% or more in a single day.
  • A public announcement is required when, before a bid approach has been made, the offeree company is the subject of rumour and speculation or where there is a price movement of 10% or more in a single day.
  • A public announcement is required when negotiations or discussions are about to be extended to include more than a very restricted number of people.
  • A public announcement is required when a purchaser is being sought for a holding, or aggregate holdings, of shares listed on the exchange carrying 30% or more of the voting rights of a company or when the board of a listed company is seeking one or more potential offerors under certain circumstances.

MOCI has issued standard forms of articles of association and by-laws and it would be difficult to deviate from such standard forms.

The Merger and Acquisition Regulation only makes reference to dealing in derivatives by financial advisers. It provides that, during the offer period, financial advisers to a target company (or any affiliate or subsidiary of such adviser) are prohibited from purchasing shares or dealing in derivatives of the target company.

Where a person is subject to one or more of the following events, the person must notify the issuer and the Authority at the end of the trading day of the occurrence of the relevant event:

  • becoming the owner of, or interested in, 5% or more of any class of voting shares or convertible debt instrument of the issuer;
  • the ownership or interest of the person referred to in sub-paragraph (‎1) of paragraph (a) of this Article increasing or decreasing by 1% or more of the shares, or convertible debt instruments of the issuer. Except where the increase or decrease was a result of a capitalisation issue, capital increase for acquiring a company or purchasing an asset, issuer's capital reduction, or the issuance of rights issues where the person or any of the persons referred to in paragraph (b) of this Article did not trade or exercise their right to subscribe;
  • a director or senior executive of the issuer becoming the owner of, or interested in, any rights in the shares or convertible debt instruments of that issuer; and
  • the ownership or interest of any of the directors or senior executives of the issuer increasing or decreasing by 50% or more in the shares or convertible debt instruments that he or she owns in that issuer, or by 1% or more of the shares or convertible debt instruments of that issuer, whichever is less. Except where the increase or decrease was a result of capitalisation issue, capital increase for acquiring a company or purchasing an asset, issuer's capital reduction, or the issuance of rights issues where the person or any of the persons referred to in paragraph (b) of this Article did not trade or exercise their right to subscribe.

Furthermore, the board report which must be issued to the shareholders within a period not exceeding 75 calendar days after the end of the annual financial period must include a description of any interest, contractually based securities, and subscription rights of the issuer’s directors, senior executives and their relatives in the shares or debt instruments of the issuer or any of its subsidiaries, together with any change to such interest or rights during the last financial year.

The Mergers and Acquisition Regulation does not specifically provide that shareholders must make known the purpose of their acquisition and their intention regarding control of a company. However, when an announcement is made pursuant to certain conditions provided in the Merger and Acquisition Regulation, the offeree company may request that the CMA set a time limit for the offeror to clarify its intentions in respect of the offeree company. If such a time limit is imposed, at some time on or before the expiry of that limit the offeror must publicly announce either a firm intention to make an offer, or that it does not intend to make an offer.

Before a firm intention to make an offer has been notified to the Capital Markets Authority, a brief announcement by the offeree company that talks are taking place or that a potential offeror is considering making an offer (without disclosing the name of the potential offeror) must be made. See also section 4.2 Material Shareholding Disclosure Thresholds,above.

There is insufficient market practice to determine how often disclosure does not occur in compliance with legal requirements. However, the rules on disclosure must be complied with to avoid penalties.

There is insufficient market practice to determine a standard or usual scope of due diligence. It would be expected that a bidder would conduct financial, technical, commercial, and legal due diligence based on publicly available documents and information. Audited accounts and general corporate information relating to listed companies can be easily obtained without having to approach the target. The bidder may be able to obtain information from the target company; however, the board of the target company is subject to confidentiality obligations and will be careful not to disclose any confidential information.

The Almarai transaction was subject to confirmatory financial, technical, commercial, and legal due diligence. The attempted SIPCHEM Sahara merger was also subject to financial, technical, commercial, market and legal due diligence.

The Saudi market is not developed enough and therefore there is not sufficient data available to determine whether standstills or exclusivity are usually demanded.

Both the Almarai acquisition and the attempted SIPCHEM Sahara merger contained terms and conditions which were documented in an agreement. Furthermore, an agreement was signed between Kingdom Holding Company and BSF in relation to the acquisition of shares in BSF.

There is not enough market practice to establish the average time required to acquire/sell a business. The Merger and Acquisition Regulation provides that the offeror must approach the CMA to establish a takeover timetable. Once the timetable is adopted by the authority, it must be complied with by all parties involved.

The Almarai transaction was completed within a year from the date of the first announcement.

The recent announcement by Kingdom Holding Company (11 September 2017) of its intention to acquire shares in BSF provides that the deal is expected to close in the second half of 2017.

Where a person or a group of persons acting in concert increase ownership of shares in a given company through a restricted purchase of shares, or a restricted offer for shares so that such a person, or those with whom that person is acting in concert, becomes the owner of 50% or more of a given class of voting shares in a listed company, the board shall have the right to exercise its power in accordance with Article 54 of the Capital Market Law to order that person to offer to purchase the shares of the same class it does not own on the terms set out in Article 12 of the Merger and Acquisition Regulation.

In the Almarai transaction, Almarai paid for the shares of the target with both cash and shares.

The acquisition of shares in BSF by Kingdom Holding Company provides that the deal shall be financed through cash at hand and outstanding bank facilities.

As a general rules, offer conditions cannot be unreasonable. The Merger and Acquisition Regulation provides that an offer must not be subject to conditions which depend solely on subjective judgements by the directors of the offeror or of the offeree company or the fulfilment of which is in their hands.

Furthermore, when a firm intention to make an offer is announced, the announcement must contain all conditions (including any conditions relating to acceptances, listing and increase of capital and any consent required by law) to which the offer or the publication of the offer document is subject. Such conditions may include the bidder acquiring the entire issued share capital of the target or obtaining all regulatory approvals from relevant authorities.

The acceptance condition will depend on the nature of the offer and voting thresholds in the constitutional documents of the target and offeror. See also 4.2 Material Shareholding Disclosure Threshold and 6.2Mandatory Offer Threshold above for mandatory and permissive offers.

Control is defined as the ability to influence the actions or decisions of another person, whether directly or indirectly, alone or with a relative or affiliate, through (i) holding 30% or more of the voting rights in a company, or (ii) having the right to appoint 30% or more of the members of the governing body. 

In Saudi Arabia, a business combination can be conditional on the bidder obtaining financing.

The Merger and Acquisition Regulation allows for break-up fees and defines such a fee as an arrangement which may be entered into between an offeror or a potential offeror and the offeree company, pursuant to which a cash sum will be payable by the offeree company if certain specified events occur which have the effect of preventing the offer from proceeding or causing it to fail.  Any break-up fee arrangement must be fully disclosed in the announcement and in the offer document.

If a bidder does not seek 100% ownership of a target, it can only seek the governance rights provided in the by-laws of the target company and the Companies Regulation.

Under Saudi Arabian legislation, shareholders can vote by proxy.

There are no mechanisms under the Merger and Acquisition Regulation whereby the bidder has the right to acquire minority shareholdings. However, as noted above (see 6.2 Mandatory Offer Threshold) the Board of the Capital Market Authority has the power to order a bidder who has acquired at least 50% of a class of shares to offer to purchase the remaining shares of the same class.

There is not enough market practice to determine whether such irrevocable commitments are common. Furthermore, the Merger and Acquisition Regulation provides that an offeror or persons acting in concert with it may not make any arrangements with shareholders and may not deal or enter into arrangements to deal in shares of the offeree company, or enter into arrangements which involve acceptance of an offer, either during an offer period or when one is reasonably in contemplation, if there are favourable conditions attached which are not being extended to all shareholders.

A bid should be made public when a company is considering a potential takeover and an approach to a potential offeree has been made so that the parties understand that an offer will be made or when a firm intention to make an offer is notified to the board of the offeree company.

When an offer or possible offer is announced, the announcement must be published in a typed format and sent to the CMA (as specified by the CMA).

See also 4.2 Material Shareholding Disclosure Threshold, above.

Disclosure on the Saudi Stock Exchange (Tadawul) is required.

The offeror must make copies of its audited consolidated accounts for the last two financial years available for inspection, from the date the offer document is published until the end of the offer period.

If the offeror’s shares are not listed on the Stock Exchange and the payment will include securities, the offeror must produce:

  • turnover, net profit or loss for the last three financial years;
  • a statement of assets and liabilities from the last published audited accounts; 
  • a cash-flow statement, if provided in the last published audited accounts.

The transaction documents do not need to be disclosed in full. The offer documents must contain particulars of all documents required for the acceptance of the offer.

If the offeror needs to increase its share capital to complete an offer, its board only needs to present a transaction overview, including the structure, to its shareholders.

The transaction documents do not need to be disclosed in full. The offer documents must contain particulars of all documents required for the acceptance of the offer.

If the offeror needs to increase its share capital to complete an offer, its board only needs to present a transaction overview, including the structure, to its shareholders.

The Saudi market is not developed enough and there is not enough experience to establish common practice. However, the Corporate Governance Regulation provides that a board may establish committees as may be needed depending on the company’s circumstances in order to enable it to effectively perform its duties.

As mentioned above, the market is not developed enough and such a situation has not yet occurred.

The Merger and Acquisition Regulation provides that the board of the offeree company must obtain competent independent advice from a financial adviser and inform its shareholders of the substances of such advice. The board of the offeror company must also obtain competent independent advice from a financial adviser and inform its shareholders of the substance of such advice. Furthermore, in the event a valuation of assets is given in connection with an offer, it should be supported by the opinion of a named independent valuer. The basis of valuation must be clearly stated. While it is not mandatory, it is common for boards to seek external legal advice on such matters.

Generally, previous decisions of the courts and judicial committees of the Kingdom of Saudi Arabia are not considered to establish a binding precedent for the decision of later cases. The decisions of the various courts and judicial committees of the Kingdom of Saudi Arabia and Royal Decrees, ministerial decisions and resolutions, departmental circulars and other pronouncements of official bodies of the Kingdom of Saudi Arabia which have the force of law are not generally or consistently indexed and collected in a central place or made publicly available other than (i) certain judgments of the Board of Grievances posted on its website; and (ii) summaries of certain decisions of the Committee for the Resolution of Securities Disputes and the Appeal Committee for the Resolution of Securities Disputes posted on their respective websites. Consequently, we are not aware of any Saudi Arabian court decisions in recent years specifically in relation to M&A and therefore cannot determine whether conflicts of interest have been the subject of judicial scrutiny.

The Merger and Acquisition Regulation does not prohibit hostile tender offers. However, it provides that an offer must be put forward in the first instance to the board of the offeree company or to its advisers.

The Merger and Acquisition Regulation provides restrictions on a number of defence measures. For example, it prohibits the board from:

  • issuing any authorised but unissued shares;
  • issuing or granting options in respect of any unissued shares;
  • creating or issuing, or permitting the creation or issue of, any securities carrying rights of conversion into or subscription for shares;
  • selling, disposing of or acquiring, or agreeing to sell, dispose of or acquire, assets of a material amount; or
  • entering into contracts otherwise than in the ordinary course of business.

The Merger and Acquisition Regulation goes further to prohibit the board of an offeree company from taking any action that may frustrate a bona fide offer without the approval of the shareholders in general assembly in the event the board has reason to believe that a bona fide offer might be imminent.

There is no publicly available experience with regard to defence measures. 

The Merger and Acquisition Regulation does not specifically provide what duties directors owe when enacting defence measures but, as a general rule, the board of an offeree company must act in the best interest of the shareholders.

As a general principle, at no time after the board of the offeree company has reason to believe that a bona fide offer might be imminent may any action be taken by the board of the offeree company in relation to the affairs of the company, without the approval of the shareholders in general assembly, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits. Furthermore, shareholders must be given sufficient information and advice from their board of directors to enable them to reach a properly informed decision regarding a merger or acquisition and must have sufficient time to do so. No relevant information should be withheld from them. 

The Merger and Acquisition Regulation provides that the board of the offeree company must circulate its views on the offer, including any alternative offers, and must, at the same time, make known to its shareholders the substance of the advice given to it by the independent advisers.

The Merger and Acquisition Regulation also provides that an offer must not be subject to conditions which depend solely on subjective judgements by the directors of the offeror or of the offeree company or the fulfilment of which is in their hands.

In Saudi Arabia, litigation is not common in connection with M&A deals.

The Saudi market is not developed enough and there are not enough transactions to establish patterns in terms of shareholder activism. Furthermore, there is no precedent for shareholder activism as yet. 

Hatem Abbas Ghazzawi & Co.

113, Saudi Business Centre
Al Baghdadiya
Madina Road
Jeddah 21442
Kingdom of Saudi Arabia

+966 12 650 4475

+966 12 657 2007

secretariat@saudilegal.com www.saudilegal.com
Author Business Card

Law and Practice

Authors



Hatem Abbas Ghazzawi & Co is an independent Saudi Arabian law firm. The firm has played an impressive role in high-profile transactions and developed a reputation for providing high-quality advice on some of the largest and most complex project-transactions in Saudi Arabia. It remains the first choice Saudi counsel for many foreign companies and international law firms seeking advice on Saudi Arabian law.

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.