Saudi General Authority For Competition Announces Significant Merger Guideline Updates

On July 1, 2024, the Saudi General Authority for Competition (GAC) announced key amendments to its merger guidelines. These updates introduce several significant changes, including adjustments to notification thresholds, the validity period for clearance decisions, exemptions for certain joint ventures, and clarifications regarding the criteria for a change of control.

Notification Thresholds

A major critique of Saudi Arabia's merger control system was that the notification thresholds could be met solely by the acquirer's turnover, without considering the target's local impact. The new amendments address this issue in part. Under the existing regime, notification of a transaction is required if:

1. The combined annual worldwide turnover of the parties to the transaction exceeds SAR 200 million (approximately USD 53 million).
2. The combined annual Saudi turnover of the parties reaches SAR 40 million (about USD 10.7 million).
3. The target's annual worldwide turnover is at least SAR 40 million.

Currently, for joint ventures and mergers, the target's Saudi turnover was not a consideration. Foreign-to-foreign transactions were also subject to different rules, requiring notification only if they potentially affected competition in Saudi Arabia, regardless of local turnover.

The proposed amendments revise this framework as follows:

• Acquisitions: Notifications are required if the target generates some turnover in Saudi Arabia. However, the specific amount of turnover needed to trigger the filing obligation is not explicitly defined in the new guidelines. What is clear is that the target does not need to independently meet the SAR 40 million Saudi turnover threshold. Under the amended guidelines, notification is required if:some text
  1. The combined annual worldwide turnover of the parties is at least SAR 200 million.
  2. The combined annual Saudi turnover of the parties is SAR 40 million, provided that the target has some Saudi turnover.
  3. The target's annual worldwide turnover is at least SAR 40 million.
• Mergers and Joint Ventures: The notification requirements for these transactions will also be updated. Notifications will still be required if:some text
  1. The combined annual worldwide turnover of the parties is at least SAR 200 million.
  2. The combined annual Saudi turnover of the parties is SAR 40 million, regardless of whether the target or joint venture has Saudi turnover.
  3. At least two parties involved (not necessarily including the target or joint venture) each have an annual worldwide turnover of SAR 40 million.

Change of Control

The current guidelines have been criticized for providing a simplistic definition of control. The proposed amendments offer more detailed guidance, defining control as the ability to block (negative control) or impose (positive control) decisions related to strategic and commercial matters of an undertaking. A change of control occurs under the following conditions:

1. A person (natural or legal) gains either negative or positive control over an undertaking where they previously had none.
2. A person who had negative control acquires positive control.

The definition also clarifies that joint control constitutes a change of control. The amendments specify that veto rights concerning fundamental matters such as changes to the articles of association, liquidation, or share capital are generally not considered as control. However, veto rights affecting business strategy, budgets, and senior management are likely to be considered control rights. Veto rights over investment decisions will be assessed based on their scope; limited veto rights are typically not deemed as control rights.

Additionally, the amendments provide specific conditions under which investment funds' acquisitions may not be considered as leading to a change of control, including:

• The acquisition is intended purely for financial investment without direct or indirect influence on the management or market behavior of the target.
• Minority shareholder rights are used solely to preserve investment value.
• The investment's objectives and non-intervention intentions are clearly documented.
• The investment fund does not hold controlling interests in competing entities.

Exemptions

The amendments introduce a new exemption for joint ventures that contribute to the Saudi manufacturing sector. Specifically, joint ventures in Saudi Arabia with foreign participation are exempt from merger control if:

1. They are involved in manufacturing products that are either not currently produced in Saudi Arabia or are produced but only distributed in limited areas due to technical constraints.
2. There is no overlap between the activities of the joint venture and those of its parent companies.

Validity of Clearance Decisions

Previously, the guidelines did not specify how long a clearance decision remains valid. The proposed amendments now stipulate that clearance decisions will be valid for one year. If the parties do not finalize the transaction within this one-year period, a new application must be submitted to the GAC.

Way Forward

The proposed amendments mark a significant advancement in the GAC's efforts to refine Saudi Arabia's merger control framework. Particularly, the new focus on acquisitions involving targets with Saudi turnover is a positive step. However, the lack of clarity on the exact turnover required for filing obligations means further guidance would be beneficial. Additionally, while the amendments address some concerns regarding the local nexus in mergers and joint ventures, they do not introduce substantial new criteria, suggesting that the GAC may need to revisit these aspects.

The clarified definition of control is a welcome improvement, offering clearer guidelines on what constitutes control and how it affects merger notifications. The recognition that certain investors, such as those from PR firms, may have different considerations is a positive development. Nevertheless, the exemption criteria for joint ventures could be more precise to ensure practical effectiveness.

Overall, these changes demonstrate the GAC's commitment to evolving and enhancing Saudi Arabia's merger control regime, aiming to balance regulatory oversight with the promotion of investment and competition. The effectiveness of these new guidelines will depend on how well they address the nuances of control, turnover thresholds, and the practical application of exemptions.

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