Saudi Arabia is connected with the global financial market because of its oil production. It is a young nation developing its economic framework. The government has initiated new laws and regulations, especially in the merger and acquisition [M&A] area.
M&A is an umbrella term that refers to the merger of resources or companies through different kinds of financial transactions like tender offers, mergers, acquisitions, executive acquisitions, and solidification.
- In a merger, the executive boards of both companies approve the unification and look for endorsement from investors. After the merger, the acquired business will stop. It will be recognized as a part of acquiring an organization.
- In an acquisition, the purchasing business gets dominant shares in the acquired company. However, the legal [authorities] structure or the name of the acquired company does not change.
In KSA [Kingdom of Saudi Arabia], the company’s regulations legally need six different kinds of corporate entities. It includes LLC, JSC, or public companies. The common acquisitions are JSCs or LLCs. Under corporate law, there are restrictions on share transfers in a private company as well as achievements by foreign buyers. Other variables to consider between both parties are Sharia law and competition law.
Overview of the acquisition transaction
The legal process involves several procedures that the buyer [acquiring] and the seller [target] need to diligently follow. The process can differ on the ultimate agreement reached, but it commonly involves the following.
- Confidentiality or nondisclosure agreement – It is crucial to protect confidential information shared for assessment between both parties to determine whether they need to move forward or not.
- Letter of intent – LOI is also called a term sheet, where basic T&Cs get agreed initially by both parties with a condition that the definitive agreement will get followed and completed in due diligence. The LOI also needs to include a binding clause that sets a schedule for each party to negotiate committedly.
- Legal due diligence – The buyer gives a due diligence request list to the target company. It includes documentation related to –
- Power of attorney
- Tangible & intangible assets
- Constitutional documents
- Financial transactions & taxes
- Shareholder/board’s resolution
- Agreements with 3rd parties, suppliers, and customers
- Entity organizational structure
It helps the buyer to recognize if there is a legal risk associated with an acquisition.
- Share/asset purchase agreement [SPA] – If the buyer entity is satisfied with the assessment of due diligence documents, they proceed with the buying transaction. The share purchase agreement is negotiated. There is no standard SPA form to follow. It commonly includes T&Cs connected with the following clauses –
- Identity of parties
- Share/asset details
- The preamble of acquisition transaction in detail
- Warranties, solutions, and indemnities
- Tax provisions
- Limitations on liabilities
- Closing of acquisition transaction details
- Legal provisions for further assignment rights, dispute resolution, governing law, and entire agreement
- Closing of acquisition – After all the stipulations get outlined in the SPA and implemented, both parties move towards closing the acquisition transaction. It will be according to the corporate laws in KSA.
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