On 1 July 2024, the Saudi antitrust regulator—the General Authority for Competition (GAC)—proposed amendments to the Merger Control Guidelines. These proposals introduced significant changes including amendments to notification thresholds, the validity period for clearance decisions, exemptions for certain foreign and Saudi joint ventures, and details on the concept of a change of control. The final version of the proposed amendments was originally expected to enter into force in August 2024. The amendments were now issued with the 5th edition of GAC Merger Guidelines. These largely reflects the substance of the earlier proposals with only minor amendments.
Notification threshold
The Guideline addresses long-standing concerns that notification requirements were overly broad. Prior to the new Guidelines a filing obligation could be triggered by the acquirer's Saudi activity, even where the target had no connection to Saudi Arabia. The new Guidelines now introduce a requirement of target activity in Saudi Arabia for acquisitions. For mergers and joint ventures requirements differ.
An acquisition requires notification, where:
- the parties collectively have an annual worldwide turnover exceeding SAR 200 million (approx. USD 53 million);
- the parties collectively have an annual Saudi turnover exceeding SAR 40 million (approx. USD 10.6 million), provided the target has some Saudi turnover; and
- the target's annual worldwide turnover exceeds SAR 40 million (approx. USD 10.6 million).
Hence, the acquisition of a target with no turnover in Saudi Arabia does not require notified since the implementation of the new Guidelines. However, the Guidelines do not specify if there is a minimum Saudi turnover threshold the target must meet and, if so, how substantial this threshold would be. The GAC's reasoning for introducing the requirement of target Saudi turnover was to establish a local nexus corrective. Hence, there are reasonable arguments for de minimis sales or minor one-off sales of the target to Saudi Arabia not triggering a filing obligation. However, since this is not explicitly addressed in the Guidelines, parties must consider the GAC's practice in applying the new threshold to assess if any target sales to Saudi Arabia could trigger a filing obligation or whether target Saudi sales must be of some substance to do so. What is clear is that the target does not have to meet the SAR 40 million (approx. USD 10.6 million) Saudi turnover threshold alone to trigger a filing.
Furthermore, there does not have to be an overlap to trigger a filing obligation. While no filing is required, where the target has no Saudi turnover, the acquirer does not have to have Saudi turnover for a filing to be mandatory. Hence, while the acquirer can no longer meet the Saudi turnover threshold alone under the new Guidelines, the target can. Moreover, the GAC will add all turnover of the parties—regardless of whether these are achieved in the market relevant to the transaction or not—when assessing whether the thresholds are met. Hence, the thresholds—including the Saudi turnover threshold—can be met with sales in unrelated markets.
In case of mergers and joint ventures, the minimum target worldwide turnover threshold of SAR 40 million (approx. USD 10.6 million) does not apply. Also, the target—or joint venture—does not have to produce Saudi turnover. Instead, mergers or joint ventures require notification under the Saudi merger control regime, where:
- the parties collectively have an annual worldwide turnover exceeding SAR 200 million (approx. USD 53 million);
- at the parties collectively have an annual Saudi turnover exceeding SAR 40 million (approx. USD 10.6 million), whereby the target or joint venture does not have to have any Saudi turnover; and
- at least two parties to the transaction (not necessarily including the target or joint venture) have a worldwide annual turnover exceeding SAR 40 million (approx. USD 10.6 million) each.
Hence, mergers and joint ventures may still require notification, if the target or joint venture do not have Saudi turnover, provided the other parties to the transaction meet the SAR 40 million (approx. USD 10.6 million) Saudi turnover threshold. Furthermore, the target of a merger or a joint venture do not necessarily have to have any turnover to trigger a filing. If at least two other parties to the transaction each have worldwide turnover exceeding SAR 40 million (approx. USD 10.6 million), no target or joint venture turnover is required. Hence, it appears that under the new Guidelines the Saudi merger control regime continues to catch greenfield joint ventures.
Change of Control
The previous version of the Guidelines have been criticized for providing a simplistic definition of control. The new Guidelines 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 (natural or legal) person gains either negative or positive control over an undertaking where they previously had none, or (2) a (natural or legal) person who had negative control over an undertaking acquires positive control.
The definition further clarifies that acquisition of joint control or change from joint to sole control constitutes a change of control.
The new Guidelines specify that veto rights concerning fundamental matters such as changes to the articles of association, liquidation, or share capital are generally not considered as granting a minority shareholder control over an undertaking. However, rights concerning business strategy, budgets, business plans, and appointment and removal of board members and senior management are typically considered to establish control within the meaning of the Saudi merger control regime. Veto rights over investment decisions will be assessed based on their scope; veto rights over limited investments are typically not deemed as control rights.
Furthermore, the new Guidelines clarify that control can be established through other means such as (1) agreements between stakeholders to act in concert, (2) long-term or exclusive agreements that grant a person operational oversight, such as management, licensing, or franchise agreements, and (3) de facto influence through economic dependence, financial entanglement, or other structural ties—such as familiar relationships—that give one undertaking the de facto ability to materially influence strategic decisions of an undertaking.
Finally, the new Guidelines provide specific conditions under which investment funds acquiring minority stakes in an undertaking may not be considered as leading to a change of control, despite the funds being granted significant veto rights. This is the case, if the following criteria are met:
- the acquisition is intended purely for financial investment without intention to directly or indirectly influence on the management or market behavior of the target;
- veto rights are used solely to preserve investment value;
- the investment's objectives and non-intervention intentions are clearly documented; and
- the investment fund does not hold controlling interests in competing entities.
Exemptions
The new Guidelines introduce a new exemption for joint ventures that contribute to the Saudi manufacturing sector. Specifically, joint ventures in Saudi Arabia with foreign and Saudi participation are exempt from merger control review if:
- they manufacture products in Saudi Arabia that are either not currently produced in Saudi Arabia or are produced in the Kingdom but only distributed in certain regions of Saudi Arabia due to technical constraints; and
- there is no overlap between the activities of the joint venture and those of its parent companies.
Validity of clearance decisions
As of the new Guidelines entering into force, clearance decisions are 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 and a new clearance decision must be obtained. This second application has suspensory effect.
Way forward
The new Guidelines mark an 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 how de minimis or small one-off sales by targets to Saudi Arabia would be treated pose some concern. Further guidance on this issue would be beneficial. Additionally, while the new Guidelines address some concerns regarding the local nexus in merger and joint venture transaction, they do not introduce substantial new criteria. Mergers and joint venture transactions may still require filing where the targets or joint ventures have no Saudi activity and greenfield joint ventures remain caught.
The clarifications on the change of control element are a welcome improvement, offering clearer guidelines on what constitutes control and how it affects merger notifications. Overall, the clarifications provided in the new Guidelines codify pre-existing practice of the GAC. The GAC has in practice continuously applied a material influence rather than a strict control test. Also, the recognition that certain investors, such PE firms, may have different considerations is also positive development. Still, the exemption provided remains narrow.
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. Yet, some amendments may not go far enough to implement an effective local nexus test. Furthermore, the new Guidelines do not introduce an expedited review procedure that was expected by some. Such a formalized expedited review could have increased regulatory compliance in no issue transactions, giving parties comfort that formal filings can be reviewed speedily.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
