In 2019, Saudi Arabia published a new Competition Law replacing the Competition Law which had been in place since 22 June 2004.
Grahame NelsonPartner, Head of Office - Al Khobar
Christopher WebbPartner,Corporate Commercial
In 2019, Saudi Arabia published a new Competition Law replacing the Competition Law which had been in place since 22 June 2004. The new Law came into effect on 23 September 2019 ("Competition Law").
As with the previous Law, the new Law requires certain types of corporate transactions to be notified and approved by the Competition Law regulator, the General Authority for Competition ("GAC"). Transactions requiring notification may not be completed until an approval from GAC has been obtained. This needs to be considered on all M&A transactions having a nexus with Saudi Arabia.
The notification obligation arises in respect of “economic concentrations,” defined as "any activity that results in a total or partial transfer of ownership of an entity's assets, rights, equity, stocks, shares, or liabilities towards another, whether directly or indirectly, through a merger, acquisition, takeover, or the joining of two or more managements in a joint management, or by any other means."
A broad range of corporate transactions fall within the definition of an “economic concentration”. They include mergers, acquisitions, and joint ventures.
One problem with the notification test under the previous Law was it was a market share test (i.e. after transaction occurred). As there may be little publicly available information about Saudi markets (and often that information may not exist), it would have been difficult for many parties to determine whether there was a notification obligation.
The parties to a proposed economic concentration have an obligation to notify GAC if they have a combined annual global revenue of 100 million Saudi Riyals (US$26.6 million) or more.
However, the notification obligation is limited to circumstances where there will be a change of control. Merger Control Guidelines issued by GAC in 2021 ("GAC Guidelines") set out GAC’s views as to what constitutes “control”. This is "the ability to exercise decisive influence" over the target entity's "strategic or operational decisions," such as the nomination of senior management and the authorization of budgets, corporate plans, and major expenditures.
Public institutions and companies are only exempt from the Competition Law if they are authorised solely by the government to provide products or services in a specific field, thereby narrowing the scope of the exemption.
Failure to notify a reportable transaction may result in a fine of up to 10% of annual sales or alternatively a fine of up to triple the gains from the violation. There is also the potential for other sanctions to be imposed (e.g. the unwinding of the transaction).
In cases where there may be doubt as to whether there is a notification obligation, the GAC has a pre-clearance procedure. GAC will typically respond within 15 to 20 days to pre-clearance applications.
The GAC Guidelines specify the substantive criteria that the GAC will follow when evaluating the competitive consequences of a transaction. GAC will examine if the deal will "have the impact or be likely to have the effect of significantly reducing competition in a relevant market." The GAC Guidelines emphasise that the evaluation is prospective, comparing expected competitive dynamics with and without the proposed acquisition.
There is a 90 days review period though in practice, the approval process in most cases is less than that. It is important to note that the review period commences on the date that the GAC acknowledges receipt of the filing fee and not on the date of the filing itself.
According to the GAC Guidelines, a transaction involving a joint venture is regarded an economic concentration (and hence potentially notifiable) only if it results in a change of control or creates joint control over a “full-function joint venture”. A full-function joint venture is defined by the Guidelines as “a long-term autonomous economic undertaking capable of bringing about a persistent structural change of the undertakings concerned and in the relevant market.”
The GAC is pro-active in seeking to identify economic concentrations (including foreign-to-foreign concentrations) which require notification.
Where a joint venture begins its life as a non-full function joint venture, but subsequently becomes a full function joint venture, it will at that time be potentially notifiable.
The Competition Law applies to economic concentrations occurring outside Saudi Arabia if the economic concentration has an adverse effect on fair competition within the Kingdom.
The GAC Guidelines explain how the GAC determines whether there is a nexus between a transaction and competition in the Kingdom. There must be a “sufficient nexus” between the economic concentration and a market in the Kingdom. The GAC Guidelines say relevantly:“sufficient nexus between the economic concentration and a market inside the Kingdom [and] this nexus is established where the foreign conduct […] may have an effect on a market inside the Kingdom [which is] direct, substantial and reasonably foreseeable.”
There is not a sufficient nexus if the effect or potential effect in Saudi Arabia is trivial:“In the interests of international comity, the GAC will in general not consider that there is sufficient effect on a market where the foreign conduct (including economic concentrations) does not meet these criteria [and] The GAC considers that this test will generally mean that jurisdiction is established where the actual or potential effect of the conduct on a market inside the Kingdom is more than trivial”.
In the case of a foreign transaction, its effects must be “sufficiently closely connected” to a market or markets in the Kingdom and that is to be assessed by its “impact on prices, quality, or other dimensions of competition, to be determined in a sufficiently proximate way”.
GAC’s Guidelines accord with the recommendations of the International Competition Network (ICN) (of which GAC is a member) that a competition authority should assert jurisdiction over a merger only if it has a “material nexus” to the reviewing jurisdiction. The ICN recommendations say that a transaction will have a “material nexus” only if it has a “significant and direct economic connection” to the jurisdiction, through significant local sales or local assets and where at least two parties have significant local activities.
However, it has been our experience that GAC may take the view that there is an obligation to notify based on evidence of sales in Saudi Arabia or a legal presence in the country (which might include a Saudi Arabian affiliate).
The GAC is pro-active in seeking to identify economic concentrations (including foreign-to-foreign concentrations) which require notification. The GAC is a member of the recently formed Arab Competition Network, and consequently receives information regularly regarding filings elsewhere in the Arab world.
For further information, please contact Grahame Nelson or Christopher Webb.
Published in November 2022
