Legal Perspective on Company Mergers in Saudi Arabia

Mergers in Saudi Arabia are not just business decisions; they are strategic steps toward growth, resource optimization, and long-term success. With a robust legal framework under Saudi Company Law, mergers provide businesses with clear procedures and protections, fostering confidence for investors and stakeholders. 

In this guide, we explain everything you need to know about mergers in Saudi Arabia, offering insights for business owners, investors, and legal professionals alike.

What is a Merger in Saudi Law?

A merger involves combining one or more companies with another established company or forming a new company by merging two or more companies. It is legally valid only after:

• Each company’s assets are evaluated.
• The compensation (e.g., equity stakes or shares) is determined for the merged entity.

The merger proposal must be approved by the company's governing documents and should detail:

• The value of compensation (e.g., shares or equity stakes).
• Each company’s ability to settle its debts.

Even a company in liquidation can merge with another company, provided it complies with Saudi laws.

Understanding the Difference Between Mergers and Acquisitions in Saudi Arabia

Merger

• It is the process of merging two or more companies to form one new company, where the merged companies expire and the new company becomes their legal successor.
• The new company maintains its legal personality and becomes the owner of all the assets and liabilities of the merged companies.
• The shares of any of the merged companies are not purchased; rather the shares of the new company are distributed to the shareholders of the merged companies in pre-determined proportions.
• The general assemblies of the merged companies must approve the merger by a majority of at least two-thirds of shares.
• The merger is declared in the Official Gazette after a Resolution is issued by the Minister of Commerce.

Acquisition

• It is the process of purchasing an existing company (the acquiree) by another company (the acquirer) for a sum of money or shares of the purchasing company or a combination of the two.
• The acquiree does not expire, but rather becomes wholly owned by the acquirer.
• The acquiree company maintains its legal personality, but its name may be changed after the acquisition.
• The shares of the acquiree are purchased from its shareholders either directly or through a public tender offer.
• The approval of the General Assembly of the acquiree is not required for the acquisition; however, the approval of the regulatory authorities, such as the General Competition Authority, is required.
• The acquisition is declared in the Official Gazette after a Resolution is issued by the Minister of Commerce.

Merger of a Company into Its Owner or a Commonly Owned Entity

Article 87 of the Executive Regulations of the Saudi Company Law provides a streamlined process for mergers involving companies with shared ownership structures. Below are the key provisions:

1. Merger into a Wholly Owned Entity

When one or more companies are merged into a parent company that fully owns them, the following applies:

• The merger decision is issued solely by the parent (merging) company.
• Approval from the merged company or companies is not required.
• Managers or board members of each entity involved must prepare a solvency statement to confirm the merging company’s capacity to settle all debts and obligations for both itself and the merged companies upon the merger’s completion.

2. Simplification of Merger Requirements

For mergers where the parent company fully owns the subsidiaries:

• There is no need to prepare a detailed merger proposal.
• Asset evaluation of the merging and merged companies is not required.

3. Merger of Entities Owned by the Same Partners or Shareholders

When two or more companies owned by the same partners or shareholders merge:

• A merger decision must be issued by each company involved.
• All other provisions of the Saudi Company Law governing mergers apply, except for the requirement to conduct an asset valuation for the entities involved.

Can Partners, Shareholders, or Creditors Object to a Merger?

Yes, Saudi Company Law allows objections to merger decisions under specific conditions. Below are the key points to understand:

1. Merger Announcement
   Companies involved in the merger must announce the transaction at least 30 days before the scheduled date for voting and decision-making. This provides sufficient time for stakeholders, including creditors, to review the proposal.
2. Creditor Rights to Object
   • Creditors of the acquiree company may object to the merger within 15 days of the announcement.
   • Objections must be sent via registered mail or other official notification methods.
   • The company is required to:
     • Settle the creditor’s debt if it is immediately due, or
     • Provide adequate security for future debts.
3. Escalating the Objection to Court
   If a creditor’s concerns are not addressed, they may file an objection with the competent judicial body. This must be done no later than 10 days before the merger decision is finalized.
   • The court can order:
     • Immediate payment of due debts.
     • Adequate security for future obligations.
   • If the court determines that the merger would cause serious harm to the creditor and neither the acquiree nor the acquirer can meet their obligations, it may suspend or postpone the merger. However, this decision must be made before the merger becomes effective.
4. Post-Merger Creditor Protection
   If the court does not issue a ruling before the merger is finalized but later finds the objection valid, it may grant the creditor compensation for any damages caused by the merger.

Enforceability of the Merger Decision

The merger decision becomes legally enforceable as follows:

• For an existing acquirer: The decision takes effect upon the entry of the acquiree's details in the acquirer’s commercial register with the Commercial Registration Office.
• For a newly formed company: The decision takes effect upon the registration of the new company with the Commercial Registration Office.

This step ensures the legal completion of the merger process and provides a clear timeline for enforceability.

For example: If Company A merges into Company B, the merger becomes effective upon registering Company A’s details in Company B’s commercial register. Alternatively, if Companies A and B merge to form Company C, the merger is enforceable upon registering Company C with the Commercial Registration Office.

Rights and Obligations of the Merged Company

Upon the merger decision becoming effective:

• All rights, obligations, assets, and contracts of the acquiree(s) are transferred to the acquirer or the newly formed company.
• The acquirer or the new entity becomes the legal successor to the acquiree(s), assuming all associated responsibilities and benefits.

This seamless transfer of rights and obligations ensures operational continuity and legal clarity for all parties involved.

For example: If a creditor of Company X, set to merge with Company Y, has unpaid dues, they can object to the merger within 15 days of the announcement. If unresolved, they may escalate the matter to court for debt settlement or security guarantees.

Buying and Selling Shares in a Joint-Stock Company Merger: Article 88 Explained

Article 88 of the Saudi Company Law provides detailed controls for share transactions in a merger involving joint-stock companies. Key provisions include:

1. Disclosure of Shareholding:
   • When one or more persons acquire 90% or more of voting shares (directly or indirectly) in a joint-stock company, they must disclose their holdings to the company’s shareholders through the board of directors.
2. Shareholder Rights:
   • The board of directors must notify shareholders immediately upon receiving such disclosure.
   • Shareholders have 90 days from the disclosure date to request a purchase offer for their shares from the person holding the majority stake or contracting to buy those shares.
3. Mandatory Purchase Offer:
   • Upon request, the majority shareholder must submit a cash purchase offer within 60 days of the shareholder's request.
   • The offer price must not be less than the highest price paid for the company's shares in the preceding 12 months.
4. Approval from the Ministry:
   • When the 90% threshold is reached, the majority shareholder must apply to the Ministry for approval to submit a mandatory offer compelling other shareholders to sell their shares.
   • The application must include the purchase price and relevant details, ensuring fairness to minority shareholders.
5. Completion of the Purchase Process:
   • If the 60-day period for a voluntary offer expires, the person must apply to the board of directors to finalize the purchase process.
   • The board deposits the purchase consideration into a designated account for shareholders, and ownership data is updated in the Shareholder Register.

Conclusion: Expert Legal Support for Mergers in Saudi Arabia

Mergers in Saudi Arabia are powerful tools for business growth and restructuring. However, the legal intricacies demand precise compliance and strategic planning. From understanding merger enforceability to navigating objections and shareholder rights, each step requires careful attention to detail.

At Sadany and Khalifa Law Firm, our experienced legal team specializes in corporate law, providing expert guidance on mergers and acquisitions. Whether you are a business owner, shareholder, or investor, we are here to ensure your transactions align with Saudi law and protect your interests. 

Contact us today to get started.

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