Contributed By Hatem Abbas Ghazzawi & Co.
There were a small number of M&A transactions during 2018. The Saudi British Bank (SABB) and Alawwal Bank announced that they signed a binding merger agreement. Saudi Arabia’s National Agricultural Development Co (NADEC) also declared that it would acquire all the shares of Al Safi Danone in a deal that will be funded through a SR536 million (USD143 million) capital increase. It is expected that further mergers will take place in the near future.
There is insufficient market practice to establish any trends in the Kingdom of Saudi Arabia. However, the binding merger between SABB and Alawwal Bank may create Saudi Arabia’s third-biggest lender, in a deal valued at USD5 billion. HSBC Holdings owns 40% of SABB and Alawwal is 40% owned by RBS Holdings NV, a consortium that includes Royal Bank of Scotland. The National Commercial Bank, Saudi Arabia’s biggest lender by assets, and Riyad Bank have also begun preliminary discussions to merge. It is expected that more mergers in the banking sector will follow, due to slower economic growth resulting from the drop in oil prices.
Furthermore, Al-Ahlia for the Cooperative Insurance Company has signed a memorandum of understanding with Gulf Union Cooperative Insurance Co to jointly consider the economic and technical feasibility of their merger. There have also been speculations about an acquisition by Saudi Aramco of the majority of shares in Saudi Arabian Basic Industries Corporation (SABIC).
It is expected that more mergers in the banking sector will follow the SABB and Alawwal merger in the next few years. The insurance market is another sector that may experience merger activity.
Techniques for acquiring a company include cash acquisition, cash from capital increase, share swaps, using debt or convertible debt to pay for the acquisition. However, not all of these have been used in practice.
There has been only one public takeover since the publication of the Merger and Acquisition Regulations, dated 21/9/1428H, corresponding to 3/10/2007G. This was Almarai’s acquisition of the entire share capital of Hail Agriculture Development Company through a share purchase. Share purchases comprise the majority of private acquisitions. NADEC’s deal to buy rival Al Safi Danone, as an example, is detailed in 1.1 M&A Market above.
The Capital Markets Authority (CMA) is the main regulatory 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 General Authority for Competition is responsible for regulating competition matters.
Furthermore and depending on the activity of the bidder and the target company, it may be necessary to obtain approvals and comply with the additional requirements of other regulatory bodies, eg, the Saudi Arabian Monetary Agency (SAMA) for banks and insurance companies and the Communications and Information Technology Commission (CITC) for telecommunications companies.
There are restrictions on foreign investment in Saudi Arabia. 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 the company’s activity.
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 bylaws. For instance, there are foreign ownership limits that apply to banks, insurance companies and telecommunications companies. In addition, there are a number of activities (the ‘negative list’) that foreign investors are prohibited from undertaking, eg, property development in the cities of Makkah and Al Madinah Al Munawarrah.
As a rule, foreign investors, in all categories, whether residents or non-residents, including strategic foreign investors, cannot own more than 49% of the issued shares or convertible debt instrument of a listed company. This is in addition to other applicable restrictions under the Qualified Foreign Investor Rules.
The Competition Regulations issued pursuant to Royal Decree No M/25 dated 04/05/1425 Hejra (corresponding to 22 June 2004) and its implementing rules, issued pursuant to the resolution of the Competition Council No 126 of 4/4/1435 Hejra (corresponding to 1 July 2014) apply to business combinations in Saudi Arabia.
Under the Labour Regulations, Article 18, 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. Further, both the buyer and the seller are jointly liable for the accrued end of service benefits of the employees, unless otherwise agreed.
Acquirers should pay attention to compliance with regulations and circulars in connection with the employment of non-Saudi employees. Eg, once the acquisition/merger is complete, the information relating to the sponsorship of the employees must be amended to reflect the acquisition/merger, since the resulting entity will become the sponsor of the employees.
A national security review of acquisitions would most likely depend on the sector, although there are none known of to date.
We are not aware of any Saudi Arabian court decisions in the last three years specifically in relation to mergers and acquisitions.
The Merger and Acquisitions Regulations have been amended by resolution of the board of the CMA No 3-45-2018, dated 23/4/2018. See 3.2 Significant Changes to Takeover Law, below. Furthermore, the CMA has introduced a number of new implementing rules and updated existing ones that regulate relevant issues, eg, the issue of the Rules for Special Purpose Entities pursuant to Resolution No 4/123/2017 of the board of the CMA, dated 9/4/1439H (corresponding to 27/12/2017G), the recent amendment to the Corporate Governance Regulation pursuant to Resolution No 3/45/2018 of the board of the CMA, dated 7/8/1439H (corresponding to 23/4/2018G), the recent amendment to the Market Conduct Regulation pursuant to Resolution No 1/7/2018 of the board of the CMA, dated 1/5/1439H (corresponding to 18/1/2018G), and the recent amendment to the Instructions for Company Announcements pursuant to Resolution No 2/73/2018 of the board of the CMA, dated 27/10/1439H (corresponding to 11/7/2018G).
As mentioned previously, the Merger and Acquisitions Regulations have been amended. There have been several changes to the Regulations, including the introduction of a section dedicated to mergers. Prior to amendment, the Regulations focused primarily on acquisitions and did not differentiate between the two types of transactions. The new section on mergers explains the different types and provides the rules for merger transactions.
Further, the amendment introduces a section dedicated to private transactions, which are defined as:
“transactions involving the purchase and/or sale of shares carrying voting rights in any company listed on the exchange, negotiated between the offeror and selling shareholder(s) of the offeree company without making an offer or involving the other shareholders or directors of the offeree company.”
This new section regulates certain aspects of private transactions, including negotiations between the selling shareholder and the offeror, announcements and mandatory offer triggers.
The Saudi market is not well developed and therefore there is insufficient data available to determine customary practice. However, an acquisition of 10% or more of voting shares of a listed company brings the Merger and Acquisitions Regulations into play and therefore requires the offeror to comply with it.
There are several disclosure and filing obligations contained in the Merger and Acquisition Regulations and the Rules on the Offer of Securities and Continuing Obligations. These include the following:
The MoCI has issued standard forms of articles of association and bylaws and it would be difficult to deviate from these. Companies cannot vary the reporting thresholds included in implementing rules of the Capital Market Law.
Dealing in derivatives is allowed by duly licensed persons authorised by the CMA and among banks. The Merger and Acquisition Regulations only make 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.
The following reporting obligations relate to securities generally and are not focused specifically on derivatives:
Further, the Competition Regulation provides that enterprises that take part in a merger, or those wishing to acquire assets or ownership right (equity) or rights of use or shares that would place them in a dominant position, must notify the General Authority for Competition in writing at least 60 days prior to its completion.
The Mergers and Acquisition Regulations provide that any person obtaining shares (or having control over them) by a deal or number of deals (in owned or controlled shares, or is controlled by persons acting in concert) that represent 40% or more of shares that carry voting rights of a listed company must disclose this information to the public by the end of the third working day following the day on which its ownership reached the pertinent percentage. The disclosure must include (among other matters) the purpose of the purchase and the future plans (with persons acting in concert) toward the offeree company's activity, shareholders and employees resulting from the purchase.
Also, when an announcement is made pursuant to certain conditions provided in the Merger and Acquisition Regulations, the offeree company may request that the CMA sets a time limit for the offeror to clarify his or her intentions in respect of the offeree company. If a time limit is imposed, at some time on or before its expiry, the offeror must publicly announce either a firm intention to make an offer, or that he or she does not intend to make an offer.
Before a firm intention to make an offer has been notified to the CMA, 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 4.2 Material Shareholding Disclosure Threshold, above.
The rules on disclosure must be complied with to avoid penalties and sanctions.
It would be expected that a bidder conducts financial, technical, commercial and legal due diligence based on publicly available documents and information. Audited accounts, board reports and general corporate information relating to listed companies can be easily obtained without having to approach the target entity.
The bidder may be able to obtain information from the target company, although the target company’s board is subject to certain obligations and will be careful not to disclose any confidential information. However, when an offeree is formally approached in respect of a potential private transaction, the offeree may share confidential/price sensitive information with a bona fide offeror to assist him or her in conducting due diligence to evaluate the merits of the potential private transaction, provided this is made in strict confidence.
The Saudi market is not well developed and therefore there is insufficient data available to determine whether standstills or exclusivity are commonly demanded.
It is permissible and common for tender offer terms and conditions to be documented.
There is not enough market practice to establish the average time required to acquire/sell a business. The Merger and Acquisition Regulations provide that the offeror must approach the CMA to establish a takeover timetable. Once the authority adopts the timetable, all parties involved must comply.
The Almarai transaction was completed within a year from the date of the first announcement.
The SABB and Alawwal merger was announced in May 2018 and is expected to close in the first half of 2019. The acquisition by NADEC of Al Safi Danon is expected to complete in the second quarter of 2019.
Saudi Arabia has a mandatory offer threshold. Where a person or a group of persons acting in concert increase the ownership of shares through a restricted purchase of shares or a restricted offer for shares – so that this person or those with whom the person is acting in concert become the owner of 50% or more of a given class of voting shares in a listed company – the board has the right to exercise its power in accordance with Article 54 of the Capital Market Law to order the person to purchase the shares of the same class that it does not own on the terms set out in Article 23 of the Merger and Acquisition Regulations.
In the Almarai transaction, Almarai paid for the shares of the target company with both cash and shares. The acquisition of shares in Banque Saudi Fransi by Kingdom Holding Company was financed by way of cash and outstanding bank facilities. The acquisition by NADEC of Al Safi Danone will be funded through a SR536 million (USD143 million) capital increase.
As a rule, offer conditions cannot be unreasonable. The Merger and Acquisition Regulations provide that an offer must not be subject to conditions that depend solely on subjective judgements of the offeror’s directors or of the offeree company, or the fulfilment of which is in their hands.
In addition, when a firm intention to make an offer is declared, the announcement must contain all conditions (including any relating to acceptances, listing or 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 target company’s entire issued share capital 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 company and of the offeror. See 4.2 Material Shareholding Disclosure Threshold and 6.2 Mandatory Offer Threshold, above, for mandatory 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 an affiliate, through:
In Saudi Arabia business combination may be conditional on the bidder obtaining financing.
The Merger and Acquisition Regulations allow for break-up fees and defines such a fee as an arrangement which may – with the consent of the CMA – 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.
Furthermore, any break-up fee that is proposed must be of a minimal size (no more than 1% of the offer value) and the offeree company board of directors and its independent financial adviser must confirm to the CMA in writing that the fee is in the best interests of the offeree company’s shareholders.
If a bidder does not seek 100% ownership of a target and assuming the target is a joint stock company, it can only seek the governance rights provided in the bylaws of the target company, the Corporate Governance Regulations and the Companies Regulations. This is in addition to any Saudi Arabian regulation that governs the industry regulating the target.
In Saudi Arabia shareholders can vote by proxy.
Under the Merger and Acquisition Regulations (see 6.2 Mandatory Offer Threshold, above) the board of the CMA 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.
The Merger and Acquisition Regulations provide 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 that involve acceptance of an offer, either during an offer period or when one is reasonably in contemplation, if there are favourable conditions attached that are not being extended to all shareholders. In addition, the offeror’s financial adviser must inform the CMA before any offeree shareholder or offeror shareholder is contacted with a view to seeking an irrevocable commitment to accept/approve or refrain from accepting/approving an offer when offeror shareholder consent is required.
Also, the timing and duration of negotiations depend on whether it is a recommended deal (ie, if the target board approves the offer) and the type of offer consideration. The Merger and Acquisition Regulations require that an offer be put forward to the board of the offeree or to its financial adviser before it is made to the shareholders of the offeree company, so it is likely that discussions and negotiations will take place between the parties before any formal announcement is made.
An announcement to the public 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, other than the General Authority for Competition’s approval) is notified to the offeree company’s board. This is irrespective of the attitude of the board of directors of the offeree company to the offer, or where definitive agreements (including the share sale and purchase agreement and excluding entering into preliminary agreements such as a memorandum of understanding) relating to a private transaction, are entered into by and between the offeror and the selling shareholder.
The offeror must submit the offer document to the CMA for its approval to publish it. An offer document may not be published without the prior approval of the CMA.
The CMA will grant its approval to the offer document within 30 days of receiving all information and documentation required under these regulations.
See also 4.2 Material Shareholding Disclosure Threshold, above, for other disclosure obligations.
Disclosure on 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.
In the event of the offer of a securities exchange in which the offeror is a non-listed company, or where the offer for the purpose of control results in a merger with a non-listed company, the offer document must include the information required under the Merger and Acquisition Regulations, including:
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.
The Merger and Acquisition Regulations provide that the boards of an offeror and the offeree company must act in the best interests of their respective shareholders. It also provides that the shareholders’ interests taken as whole, together with those of the employees and creditors, should be considered when directors are giving advice to shareholders in connection with a merger or acquisition.
The Saudi market is not well developed and there are not enough examples to say that there is a common practice. However, the Corporate Governance Regulations provide that a board may establish committees as needed, depending on the company’s circumstances, to enable it to effectively perform its duties.
With Saudi Arabia’s limited market and experience in this area, there has not as yet been a situation where the courts have had to defer to a board of directors in a takeover situation.
The Merger and Acquisition Regulations provide that the board of the offeror (if it is a listed company) and that of the offeree company must obtain competent independent advice from a financial adviser and inform its shareholders of the substance of the advice. They must also appoint an independent lawyer who is authorised to practice law in Saudi Arabia. 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 the valuation must be clearly stated.
Generally, previous decisions of the courts and judicial committees of the Saudi Arabia are not considered to establish a binding precedent. The decisions of the various courts and judicial committees, royal decrees, ministerial decisions and resolutions, departmental circulars and other pronouncements of official bodies of Saudi Arabia that have the force of law are not generally or consistently indexed and collected in a central place or made publicly available. The exceptions are:
There do not appear to be any recent Saudi court decisions relating specifically to M&As and thus it cannot be said whether conflicts of interest have been the subject of judicial scrutiny.
The Merger and Acquisition Regulations state that an offer must be put forward first to the board of the offeree company or to its advisers before it is made to shareholders of the offeree company.
The Merger and Acquisitions Regulations provide that during the course of an offer, or even before the date of the offer, if the board of the offeree company has reason to believe that a bona fide offer might be imminent, the board must not, except in pursuance of a binding contract entered into earlier, and without the approval of the shareholders convened in a general assembly:
There are no publicly available examples of defence measures.
As a rule, the board of an offeree company must act in the best interests of the shareholders and must obtain approval of the shareholders convened in a general assembly before enacting any defensive measures that are referred to in the Merger and Acquisition Regulations as ‘frustrative actions’.
Furthermore, the directors’ duties must be viewed within actions that are not frustrative actions, eg:
As a 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 that board in relation to the affairs of the company without the approval of the shareholders in general assembly. This could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits. Further, 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 Regulations state 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 Regulations also provide that an offer must not be subject to conditions that 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.
Litigation is not common in connection with M&A deals in Saudi Arabia.
As litigation is not widespread in connection with M&A deals in Saudi Arabia, it cannot be said that there is any stage at which it is common to bring an action.
The Saudi market is not well developed and there are not enough transactions to establish a pattern. There is no precedent for shareholder activism as yet.
See 11.1 Shareholder Activism, above; there is no precedent for shareholder activism as yet.
See 11.1 Shareholder Activism, above.