Saudi Competition Authority Introduces Amendments to Merger Guidelines

On 1 July 2024 the Saudi General Authority for Competition (GAC) announced proposed changes to their merger guidelines, which will enter into effect on 1 August. These amendments introduce changes to the notification thresholds, limitations for the validity of clearance decisions, exemption for joint ventures that benefit the development of the Saudi manufacturing sector, and clarification on the change of control criterion.

Notification thresholds

A point of criticism of the Saudi merger control regime has been that the notification threshold can be met by the acquirer alone. The GAC now at least partly addressed this issue in their proposed amendments to the merger guidelines. Currently notification of an acquisition is required, where all of the following thresholds are met:

• the combined annual worldwide turnover of the parties to the transaction is at least SAR 200 million (approx. USD 53 million);
• the combined annual Saudi turnover of the parties to the transaction is at least SAR 40 million (approx. USD 10.7 million); and
• the target’s annual worldwide turnover is at least SAR 40 million (approx. USD 10.7 million).

For joint ventures and mergers the minimum target turnover requirement does not apply. Also, for foreign to foreign transactions the Saudi turnover requirement does not apply as a threshold. Instead foreign to foreign transactions require notification, if the transaction (potentially) has an impact on competition in Saudi Arabia. However, any transaction, the parties to which meet the local turnover requirement, is deemed to have a local effect. Hence, foreign to foreign transaction may require notification, even if the the parties have less than SAR 40 million turnover in Saudi Arabia, provide the transaction has a local effect in Saudi Arabia for other reasons. Where the parties combined Saudi turnover is at least SAR 40 million, a filing is always required. No additional local effects analysis will be conducted.

The proposed amendments to the guidelines now provide that in case of an acquisition a notification is only required, if the target has some turnover in Saudi Arabia. However, the amendments do not clarify how much turnover the target will have to generate in Saudi Arabia to for a filing obligation to be triggered. What is clear is that the target will not have to meet the SAR 40 million Saudi turnover threshold alone. Hence, pursuant to the amended thresholds an acquisition will require notification, if:

• the combined annual worldwide turnover of the parties to the transaction is at least SAR 200 million (approx. USD 53 million);
• the combined annual Saudi turnover of the parties to the transaction is at least SAR 40 million (approx. USD 10.7 million), provided that the target has at least some Saudi turnover; and
• the target’s annual worldwide turnover is at least SAR 40 million (approx. USD 10.7 million).

The notification threshold for mergers and joint venture transactions will also be amended. Still, these transaction may still be notifiable, if the target or the joint venture has no turnover in Saudi Arabia. Under the new thresholds mergers and joint ventures require notification, if:

• the combined annual worldwide turnover of the parties to the transaction is at least SAR 200 million (approx. USD 53 million);
• the combined annual Saudi turnover of the parties to the transaction is at least SAR 40 million (approx. USD 10.7 million), regardless of whether the target or joint venture has turnover in Saudi Arabia; and
• at least two parties to the transaction (not necessarily including the target or joint venture) have an annual worldwide turnover of at least SAR 40 million (approx. USD 10.7 million) each.

Change of control

The current version of the guidelines included a rather rudimentary definition of control. With the proposed amendments some clarification is provided. The amended guidelines define control as the ability to block (negative control) or impose (positive control) decisions related to strategic and commercial matters of an undertaking. Change of control occurs:

• where a (natural or legal) person that had no control over an undertaking acquirers negative or positive control; or
• where a (natural or legal) person that had negative control over an undertaking acquires positive control.

Acquisition of joint control still suffices as change of control under the Saudi merger control regime.

The amended guidelines explain that veto rights of minority shareholders concerning decisions related to changes to an undertaking’s articles of association, its liquidation, or changes to an undertaking’s share capital will typically not be considered as control. Veto rights concerning business strategy, business plan, budget, and appointment of senior management will typically be considered as control. Whether veto rights over investments decisions will be considered control, will depend on how far these veto rights reach. If these are limited to minor investment decisions, they will typically not be deemed control rights.

Furthermore, the proposed amendments clarify that  where positive or negative control rights are used by investment funds solely to maintain the value of their investment, these may not be deemed to lead to a change of control. Accordingly, acquisitions made by Investment funds are not notifiable if the following conditions are met:

• the sole purpose of the acquisition is to make a financial investment in the target without intention to directly or indirectly intervene in the management of the undertaking and the acquirer will in no way influence the undertaking’s behaviour in the market;
• minority shareholder rights are only used to preserve the value of the investment;
• the goal of the investment must be explicitly determined prior to the acquisition, and the intention not to influence the undertaking’s management must be clearly demonstrated; and
• the investment fund does not hold controlling interests in any undertaking competing with the target.

Exemptions

The proposed amendments introduce a new exemption for joint ventures that benefit the Saudi manufacturing sector. Joint ventures established in Saudi Arabia with foreign participation are exempted form the merger control regime, if:

• they will manufacture products in Saudi Arabia that (1) are currently not manufactured in Saudi Arabia, or (2) are currently manufactured in Saudi Arabia but only distributed in limited areas of the Kingdom due to technical reasons related to the nature of the product; and
• there is no overlap between the activities of the joint venture and those of its parents.

Validity of clearance decisions

In their current version the guidelines do not include any limitation for how long clearance decisions will remain valid. With the proposed amendments clearance decisions will only be valid for one year. If the parties do not close the transaction within one year as of the date of the clearance decision, a new application has to be submitted to the GAC.

Way forward

The proposed amendments do demonstrate the GAC’s effort to develop the Kingdom’s merger control regime. Limiting the application of the regime to acquisitions that target undertakings with turnover in Saudi Arabia, in particular, is welcome. However, guidance on how significant the target’s Saudi turnover must be to trigger a filing obligation should be provide. Furthermore, the amendments of the notification threshold for joint ventures and mergers failed to introduce any meaningful local nexus criterion. The GAC may consider revisiting this.

The clarification on change of control will also help with the application of the regime. Also the recognition that certain investors—such as PR firms—may have to be treated differently is positive. Still, the exemption criteria remain somewhat vague and thus less effective in practice.

Finally, it remains to be seen how effective the exemptions of joint ventures that manufacture products previously unavailable in Saudi Arabia will be. In particular, it is unclear whether this will apply to any product or whether products will have to fulfil certain value or quality criteria to benefit from the exemption.