Contributed By Nader Al Awadhi In Association with GLA & Company
Cabinet Resolution No 372 of 1440H Promulgating the KSA Competition Law (Royal Decree No (M75) of 1440H) (the “KSA Competition Law”).
The KSA Competition Law is supplemented by the implementing regulations pursuant to Resolution No 337 of 25/1/1441H concerning the Executive Regulations of the KSA Competition Law (“Executive Regulations”).
Merger Review Guidelines issued by GAC (defined in 1.3 Enforcement Authorities) in July 2021 (“Guidelines”).
The KSA General Authority For Competition (GAC) enforces the relevant legislation.
Notification is compulsory with respect to any entity that is encompassed within the scope of the KSA Competition Law. Exceptions:
The KSA Competition Law provides for the following penalties upon breach:
When the Settlement Committee imposes any of the aforementioned penalties, the following shall be taken into consideration:
With respect to penalties implemented, GAC publishes the statistics surrounding the same annually. The latest report provided on GAC’s website is for the year 2020. The report detailed that GAC received 64 complaints in regard to violations of the KSA Competition Law. Forty-one of those cases were dismissed based on case-specific grounds (such as lack of jurisdiction, lack of reliance on actual evidence, or lack of evidence on violations of the KSA Competition Law). Ultimately GAC proceeded with 22 cases in total and decided to initiate investigation, research and evidence-gathering. In 2020, 10 final judgments were issued for GAC and endorsed by the Riyadh Administrative Court of Appeal, compared to 12 in 2019. Pursuant to Article 19 of the KSA Competition Law, the final judgments implemented against the violators shall be published at the expense of the violators. As such, GAC published in its 2020 annual report the 10 final judgments issued in its favour, along with the name of the violator, the fine amount, the status of collection, the violation type and the sector the violator is doing business in. The top three violation types involved “Public Security bid-rigging” and the fine amount for each was SAR5,000,000. The total cumulative fines imposed (collected and outstanding) for the year 2020 were SAR45,630,000.
The KSA Competition Law uses a principle of economic concentration to identify merger control issues. Economic concentration is defined as any action that results in a total or partial transfer of ownership of assets, rights, equity, stocks, shares, or liabilities of a firm to another by way of merger, acquisition, takeover, or the joining of two or more managements in a joint management, or any other form that leads to the control of an entity, including influencing its decision, the organisation of its administrative structure, or its voting system. This definition captures asset and share purchases, joint ventures, mergers and takeovers.
While prior to the issuance of the Guidelines it remained unclear how GAC would analyse the elements of control, the Guidelines now clarify this by defining “control” as “the ability to exercise decisive influence” over the “strategic or operational decisions” of the target entity, including the appointment of senior management and approval of budgets, business plans and major investments.
It is now clear that transactions that do not result in a change of control (eg, acquisition of minority interests with no veto rights over strategic decisions or internal restructuring within the same corporate group) are within the scope of the KSA Competition Law and notice to GAC is not required.
Article 7 of the KSA Competition Law provides that the entities involved in the economic concentration must notify the concentration to GAC if the total annual sales value of the entities seeking to participate in the economic concentration exceeds the amount determined by the Regulations.
Article 12(1) of the Executive Regulations specifies that the concentration must be notified to GAC if the total annual sales value of all entities intending to participate in the economic concentration exceeds SAR100,000,000.
Article 12(2) of the Executive Regulations also provides that where it is impossible to estimate the annual sales value of the entities, or where the entities’ business activities do not extend for a full fiscal year, then the annual sales value for the whole year shall be estimated based on the firms’ activity, as the case may be.
Threshold and Calculation
The KSA Competition Law bases the notification threshold on “the total annual sales value of the entities seeking to participate in the economic concentration”.
Total Annual Sales Value
If the entity’s financial statements are presented in a foreign (other than KSA) currency, then the annual gross revenues should be converted to values in Saudi Arabian Riyals according to the average over the relevant financial year of the foreign exchange rate quoted by the Saudi Central Bank.
Please see 2.8 Foreign-to Foreign Transactions.
The KSA Competition Law specifies that “all the entities participating in the concentration” and does not distinguish between acquiring and selling entity or between mergers and acquisitions. The KSA Competition Law therefore requires that the notification threshold consider the total sales of all entities participating in the concentration without distinction or exclusion.
GAC considers that the entities “participating” in the concentration are all those that form part of the newly concentrated entity after the economic concentration transaction has been completed. This means that:
Group of Companies
The KSA Competition Law applies to all undertakings inside KSA. It also applies to undertakings outside KSA where those undertakings’ activities, including an Economic Concentration, may have an effect on a market in KSA. Article 3 of the Executive Regulations further provides that GAC may assess the effect, actual or potential, of such conduct outside KSA on a market inside the Kingdom.
GAC will consider market shares and market concentration in the context of the other relevant factors that it may consider in order to conclude if a market concentration will take place. GAC typically measures market concentration using market shares, market concentration ratios and the Herfindahl-Hirschman Index (HHI). The HHI is calculated by adding the sum of the squares of the post-merger market share of the merged firm and each rival firm in the relevant market, thereby giving greater weight to the market shares of the larger firms. The HHI therefore requires the market shares, or estimates of them, for all the participants in the relevant market.
GAC will generally use the following HHI thresholds to undertake a preliminary assessment of the potential competition effects of an economic concentration:
The KSA Competition Law uses the principle of economic concentration to assess merger control issues. A joint venture will constitute an “Economic Concentration” when “the joint venture forms an autonomous economic undertaking, or performs the economic functions of an autonomous economic undertaking, on a lasting basis”. This would be considered a “full-function” joint venture. GAC will decide whether a joint venture would be considered a “full-function” joint venture on a case-by-case basis. Attributes of a “full-function” joint venture include:
A joint venture may begin its life as a non-full function joint venture and subsequently becomes a full-function joint venture, it will at that time be considered as a new Economic Concentration requiring notification. Such a change in the nature of the joint venture can include:
Changes in the nature of the joint venture are considered to have taken place upon the shareholder or the joint venture’s management taking the relevant decision that lead to the joint venture becomes a full-function joint venture, or the relevant activity commences.
GAC has no authority to investigate a transaction that does not meet the jurisdictional thresholds expressed under the KSA Competition Law and Executive Regulations.
The Competition Law provides that the undertakings participating in the economic concentration (or transaction) may not complete the transaction unless notified by GAC of GAC’s approval in writing, or if 90 days have elapsed since the review period by GAC has commenced and GAC has not provided an approval or rejection.
The 90-day regulatory review period will begin on the date on which GAC notifies the applicant that the applicant’s notification submission is complete. If the last day of this regulatory review period corresponds to an official holiday, the next working day thereafter shall be considered the last day of this regulatory review period.
The regulatory review period may be suspended under certain circumstances:
Where the regulatory review period is suspended, the days during which it is suspended are not counted as part of the 90-day regulatory review period.
Where an economic concentration must be notified to GAC, it is a violation of the KSA Competition Law for the transaction to be completed unless the participating parties have received GAC’s approval in writing. Please refer to 2.12 Requirement for Clearance Before Implementation.
Please also refer to 2.2 Failure to Notify with respect to the penalties implemented and their publication. GAC’s 2020 annual report (most recent report here) does not indicate that any of the penalties imposed were with respect to parties who have implemented the transaction prior to GAC’s clearance.
There are no circumstances where the authorities will permit closing before clearance or an exemption. It may be possible to carve out the businesses or assets in KSA and implement global closing to the extent the closing does not have a sufficient effect (see 2.8 Foreign-to-Foreign Transactions) on the KSA market. GAC approval may be required.
With respect to the required notification in the event the KSA Competition Law and Executive Regulations are applicable to a specific economic concentration, the relevant participants must notify GAC 90 days before completion of the economic concentration.
Please refer to 2.2 Failure to Notify with respect to penalties and their imposition.
As part of the initial application for notification to GAC, the applicant must also provide a finalised, duly executed agreement to carry out the economic concentration, stating the nature of the transaction and a description of the share, equity, assets, rights or obligations to be purchased or transferred, or managements to be joined, between the relevant entities. GAC requires these documents for valid notification. If notification is made without all the requisite documents being provided, GAC reserves the right to close the notification file.
The fee to be paid for examining the Economic Concentration (the “Notification Fee”) is 0.0002 times (0.02% of) the total annual sales value of undertakings intending to participate in the Economic Concentration, with an upper limit of SAR400,000. The parties must pay the Notification Fee before submission of the notification and must submit proof of payment of the Notification Fee along with the other notification documents and information. GAC will require this proof of payment before the notification will be considered to be complete.
The parties intending to participate in the Economic Concentration transaction must notify GAC of the transaction. Notice of the transaction may be provided by the parties’ legal representative on behalf of the parties. A failure by the concentration parties to submit a notification does not preclude GAC from initiating a review and assessment of economic concentration either prior to or after the completion of the transaction.
The notification should in general be completed in the Arabic language. Notifying parties may choose to complete the forms in the English language but this must be accompanied by a translation into Arabic.
When submitting the notification, the applicant should submit the following information and documents:
For the acquiring entity/merging entity/first partner in the JV:
For the target entity/merged entity/second partner in the JV:
For the seller:
If notification is made without all the requisite documents being provided, GAC reserves the right to close the notification file. Pursuant to GAC’s 2020, 2019, and 2019 Annual Reports, zero applications were rejected for an incomplete notification application.
Pursuant to Article 49 of the Executive Regulations, if the notifying party is found to have withheld information, provided misleading information, or concealed or destroyed documents that are useful in GAC’s investigation, they would be punished by a fine not exceeding (5%) of the total annual sales turnover or not exceeding SAR5 million when it is impossible to estimate the annual sales.
The Economic Concentration must be notified to GAC at least 90 days prior to the completion of the Economic Concentration. The applicant’s notification submission will be considered to be complete when the applicant has satisfied the required conditions for notification including providing the required information and documents required for complete notification. The 90-day regulatory review period will begin on the date on which GAC notifies the applicant that the applicant’s notification submission is complete.
The regulatory review period may be suspended when:
A case team will be appointed to conduct its review and investigation into the economic concentration, within the 90 days. Once the case team has completed its review, it will submit a detailed note outlining its opinion for GAC board of directors. The board will evaluate the case team’s opinion, taking into account all relevant factors and its objectives under the KSA Competition Law and Executive Regulations. The board will issue a decision in one of the following three ways:
GAC is generally available for discussions with parties or their representatives prior to the formal notification of an economic concentration transaction.
Pre-notification discussions are entirely voluntary and at the parties’ discretion. GAC will not conduct pre-notification discussions on a hypothetical basis or without knowing the identities of the parties and markets at issue. To request a pre-notification discussion, the parties or their representatives should provide the following information to GAC: (i) the names and contact information of the economic concentration parties and their representatives (if any); (ii) the type of transaction; (iii) the markets or goods and services affected by the proposed transaction; and (iv) the possible impact of the transaction on competition in general terms.
It is generally recommended that this information be provided in the form of a brief confidential memorandum to GAC as this will assist the efficiency of the pre-notification process.
Pre-notification discussions are encouraged by GAC and treated as strictly confidential.
The information requested during the review process includes:
Meetings and Interviews
GAC may also gather information by holding meetings and direct interviews with the concentration parties or third parties. GAC may communicate by phone with any of the representatives or affiliates of the concentration parties for discussion and request any information required for the review of economic concentrations at any stage of the review process, when necessary.
Information that may be sought by way of phone communications or meetings may include the following:
The 90-day regulatory review period may be suspended under certain circumstances:
There is no indication that there is an option for an accelerated procedure under the applicable law or GAC regulations.
The substantive test employed by GAC pursuant to the KSA Competition Law and Executive regulations is whether there is an economic concentration (as defined under the KSA Competition Law) that cause a sufficient impact on the KSA market and lessens competition. Further, GAC considers change of control to be directly correlated with an economic concentration taking place.
In assessing whether an economic concentration substantially lessens competition, GAC will examine the competitive impact of the transaction in the context of the markets relevant to the economic concentration.
In defining markets in their product and geographic dimensions, GAC focuses on two key dimensions of substitution:
When defining markets, GAC will in most cases follow a general approach:
Further to the above, there are specific factors enumerated in the Executive Regulations that GAC may pass within its overall objectives of protecting and promoting competition within a market. These are as follows:
Dominance in a relevant market can be demonstrated if one or both of the following criteria are achieved:
There is no indication of GAC relying on case law with respect to issues such as market definitions from other jurisdictions.
GAC will broadly consider the following three categories of economic concentration:
GAC assesses the effect of economic concentrations on competition, competitive constraints and the efficiency of markets, rather than on the efficiency of individual entities.
The consideration of efficiencies is relevant to the competition assessment if, and only if, the efficiencies are likely to result in lower (or not significantly higher) prices, increased output and/or higher quality goods or services – in which case the conclusion may be that the economic concentration may not substantially lessen competition.
For GAC to take account of efficiency claims in its assessment of an economic concentration and to be in a position to reach the conclusion that, as a consequence of efficiencies, the economic concentration is unlikely to substantially lessen competition, the efficiencies have to benefit consumers; be specific to the economic concentration; and be verifiable. All of these conditions must be satisfied for GAC to consider efficiencies in the context of its competitive assessment of economic concentrations.
There is no express limitation or permission on what GAC can take into account to achieve the KSA Competition Law and Executive Regulation objectives.
KSA has a standalone law with respect to foreign investments that seems to be separate from the KSA Competition Law.
See 2.10 Joint Ventures.
To the extent the transaction creates an economic concentration that sufficiently impacts the KSA market, the GAC board has the authority to reject the notification filing and block the transaction from taking place or require conditions for the transaction to proceed. GAC has this authority pursuant to the KSA Competition Law and Executive Regulations.
The parties may propose structural or behavioural remedies.
In most cases, remedies are proposed by the economic concentration parties, at their discretion, as a means of permitting a transaction to be approved subject to conditions rather than the transaction being blocked altogether. In principle, the structure and content of the remedies offered to GAC will therefore be a matter for the party offering the remedies. However, GAC will only accept remedies as conditions if it is satisfied that they address GAC’s competition concerns to a degree sufficient to allow GAC to approve the transaction subject to those conditions. GAC will generally provide detailed feedback on the form and content of remedies proposed by the parties, including regarding whether GAC would be satisfied that they would alleviate the competition concerns sufficiently, and if not, what amendments to the proposed remedies would be required for GAC to accept them.
Economic concentration parties therefore have strong incentives to propose effective and enforceable remedies to GAC alleviate the identified competition concerns.
There is no specifically expressed legal standard for remedies. An acceptable remedy must adequately address and alleviate the potential competition harm created by the specific economic concentration.
The most common form of structural remedy likely to be accepted by GAC is divestiture.
We are not aware of GAC requiring remedies to address non-competition issues.
Economic concentration parties are free to propose remedies to GAC at any time throughout the transaction review process, including at the outset of the review, the prenotification phase, the moment of first notification, and after the economic concentration parties have been advised of potential competition concerns during a review. In general, economic concentration parties are encouraged to begin discussions with GAC as early in the process as possible.
When an economic concentration raises competition issues at the outset or during a review, the economic concentration parties may decide to offer remedies to GAC. If GAC accepts that the remedies are sufficient to address the competition concerns in that case, GAC may decide to approve the economic concentration subject to the conditions that the remedies be implemented, rather than blocking the economic concentration.
A divestiture remedy will normally specify the following key elements:
Parties may not complete a transaction before remedies are complied with.
GAC maintains a role in relation to remedies and conditions accepted in relation to economic concentration, including:
Non-compliance or breach of an agreed remedy is a violation of the KSA Competition Law.
A formal decision permitting or prohibiting a transaction maybe issued to the party by GAC. In the event the investigation period of 90 days' lapses without the issuance of a decision by GAC, then it would be considered an approval pursuant to the KSA Competition Law. The application decisions are made public (as a statistic in GAC annual report); however, the party names are not mentioned unless they are penalised.
We are not aware of GAC having required remedies or prohibited foreign-to-foreign transactions.
Clearance decisions will only cover competition issues.
Relevant third parties could be involved in the review process by the applicant including them in the application submission, or by GAC requiring their input. The third parties have a right to request an interview or make a claim as part of a specific investigation for economic concentration. GAC may elicit information from third parties by conducting a survey.
The case team may discuss its interim assessment with third parties in order to identify and to seek to resolve any unresolved issues of any kind. The case team may present its interim assessment or part thereof to third parties for their opinions, while taking account of the need to obtain objective, impartial and substantiated opinions.
The third parties’ interests in confidentiality will be preserved throughout the assessment and investigation process. No documents of the third parties will be shared with others, except pursuant to the procedures outlined in the guidelines. Where a GAC document to be released during interim consultations contains information that is confidential to a third party, GAC will prepare a public version of that document which redacts any such confidential information. The parties whose confidential information is to be redacted will be given an opportunity to comment on this redaction.
Please see 7.1 Third-Party Rights.
The KSA Competition Law provides that the members of the board of directors and the employees of GAC must maintain the confidentiality of information, records, data, files and documents (together, “information”) obtained from the economic concentration parties or other entities in the course of collecting evidence or investigations. Such information may not be passed to other parties except with the approval of the board, where the board’s approval has been recorded in the meeting minutes, or with the approval of the Governor in the following cases:
Where an economic concentration is also being reviewed by competition authorities in other countries, including in cases where the possibility of remedies has also been raised in those other countries, GAC will seek where possible and reasonable to consult and coordinate with those foreign competition authorities. This consultation and coordination is for the purpose of seeking consistency where this is feasible and appropriate, including in relation to remedies.
Where appropriate, GAC will seek confidentiality waivers from economic concentration parties that allow GAC to exchange confidential information relating to the economic concentration with the relevant overseas competition authorities. GAC expects economic concentration parties to give GAC the same notice of economic concentrations and any potential remedies offered as the parties give to the overseas competition authorities, and normally requires simultaneous lodgement of submissions with GAC and overseas competition authorities.
The parties have 30 days from the date of notification or from the date specified for delivering the decision to the parties to the case, even if they failed to appear, to appeal GAC’s decision to the Riyadh Administrative Court of Appeal, otherwise it will become final.
If one of the parties appeals GAC’s decision before the Riyadh Administrative Court of Appeal, that party must notify GAC within three working days from the date of appeal, by means of a letter containing GAC's decision number and date and the number and date of the appeal filed with the Riyadh Administrative Court of Appeal and a copy thereof.
There are no release statistics with respect to successful or unsuccessful appeals against GAC.
We are not aware of any third-party appeals of GAC decisions as of yet.
There are no recent changes, as the KSA Competition Law and Executive Regulations are fairly new.
See 2.2 Failure to Notify.
The latest GAC annual report is from 2020 and they have yet to publish the 2021 report as of now. As such, there is no current information from GAC in this regard.