Foreign direct investment in developing economies—both in the form of green field investments and mergers and acquisitions (M&A)—surged in the 1990s.
Foreign direct investment in developing economies—both in the form of green field investments and mergers and acquisitions (M&A)—surged in the 1990s. Acquisitions were particularly driven by privatizations of state owned enterprises in the developing world. For example in Egypt where privatization was very active from 1991 until 1997 when it was halted (in part) due to the 1997 financial crisis in Asia. Privatizations in Egypt picked up again between 2004 and 2010. Now activity is expected to pick up again. The Egyptian Government announced plans to sell stakes in 32 state run companies in a variety of sectors; including energy, oil and gas, banking and hospitality in an afford to increase foreign direct investment.
Similar moves to attract foreign investment through privatization where also taken by other Middle Eastern government. Following a decline in oil price Saudi Arabia in 2018 launched a program to identify government assets and services that could be privatized. Dubai announced in November 2021 that it plans to sell stakes in ten state owned entities. Furthermore, Kuwait entertains privatization plans and has announced that it seeks to sell stakes in state owned enterprises across eight sectors by 2025.
Aside form more general M&A concerns and sector specific regulatory matters, the recent immergence of more active merger control regimes in the Middle East must be considered by investors contemplating opportunities posed by the privatization programs in the region. In particular, the competition authorities of Saudi Arabia, Kuwait and Egypt are playing an increasing role in merger control in the region. Each of these jurisdictions have their own substantive tests they employ to assess the (potential) impact of transactions on competition. They also takes different approaches towards remedies to mitigate anti-competitive effects of transactions.
Traditionally, Middle Eastern merger control regime were based on market-share notification thresholds. However, starting with Saudi Arabia, which shifted to a turnover threshold in 2019, we have seen a wave of competition law reforms in the region. In 2021 Kuwait implemented amendments to its competition law that introduced a combination of turnover and asset value thresholds. Effective 30 December 2022 Egypt enacted amendments to its competition law that introduced a pre-closing notification regime based on turnover and asset value thresholds. As of the date of this client brief the new Egyptian pre-closing notification regime was not in force yet. It will enter into force once amended Executive Regulations to the Competition Law are issued.
As of a recent amendment that became effective end of March 2023, the notification threshold in Saudi Arabia is SAR 200 million (approx. USD 52 million) combined annual worldwide turnover all parties relevant to the transaction. In Kuwait notification is required where either: (1) one party’s annual Kuwaiti turnover is at least KWD 500,000 (approx. USD 1.6 million), (2) at least two parties have a combined annual turnover in Kuwait of at least KWD 750,000 (approx. USD 2.4 million), or (3) the value of the Kuwaiti assets of all parties involved in the transaction is at least KWD 2.5 million (approx. USD 8.1 million). Once the new Egyptian pre-closing regime becomes effective, economic concentrations will be notifiable where during the last year (1) the combined Egyptian turnover or value of Egyptian assets of all parties exceeded EGP 900 million (approx. USD 29 million) and at least two parties had an Egyptian turnover exceeding EGP 200 million (approx. USD 6.5 million) each, or (2) the combined worldwide turnover of or value of assets held worldwide by all parties involved exceeded EGP 7.5 billion (approx. USD 243 million) and the Egyptian turnover of at least one party exceeds EGP 200 million (approx. USD 6.5 million).
All three regime catch foreign-to-foreign transactions. Thus, parties may be required to file notifications in multiple jurisdictions through out the Middle East. This poses challenges for investors. Different competition authorities may issue conflicting decisions on a transaction or take a different position on remedies. One of the most famous cases illustrating the consequences of conflicting decisions in a merger review is the thwarted 2005 merger between General Electric and Honeywell. This merger between US companies was derailed when the European Commission opposed the transaction despite the US Department of Justice having cleared it.
Since then, The European Commission and the US authorities increased their efforts to enhance cooperation to mitigate negative effects of conflicting decisions. In particular, they took steps to improve coordination on timing, communication throughout the review and cooperation on collection of evidence and design of remedies. Still, this cooperation may soon again be tested in the proposed acquisition of Activision by Microsoft. This transaction was cleared by the European Commission on 15 May 2023 after the deal was opposed by the British Competition an Markets Authority (CMA). It now remains to be seen which position the US authorities will take.
Middle Eastern competition authorities also have taken steps to introduce communication channels to foster cooperation and coordination among them. In 2021 the Kuwaiti Competition Protection Authority (CPA) and the Saudi General Authority for Competition (GAC) concluded an MoU that provides for regular exchange between the two authorities. The Egyptian Competition Authority (ECA) and GAC cooperated when reviewing the acquisition of Careem by its competitor Uber which led to the two authorities aligning on their conditional clearance of the transaction. Moreover, in 2022 enforcers in the Middle East and some African countries formed the Arab Competition Network as a forum for exchange and cooperation.
Still, cooperation between Middle Eastern authorities remains rudimentary and limited to few, individual transactions. Thus, parties cannot rely on local authorities taking initiatives to coordinate their assessment of transactions with regional implications on their own accord. To avoid conflicting decision or uncoordinated remedies, parties may seek to take the initiative and foster exchange among the authorities. Convincing them to do so will, however, require active engagement coordinated across borders. Also parties should consider implications of steps necessary to allow more effective communication between the reviewing agencies such as waivers of confidentiality. Providing such waivers may make all authorities involved privy to all information submitted to different authorities.
Aside from challenges posed by lack of coordination among reviewing agencies, multijurisdictional filings also increase costs. The obligation to pay filing fees in multiple jurisdictions in particular will be a cost issue in the Middle East. With a cap of KWD 100,000 (approx. USD 326,000) the filing fee in Kuwait can be excessive. Moreover, despite a proposal by GAC to reduce the fee for filings in Saudi Arabia, the fee remains comparatively high with a cap of SAR 400,000 (approx. USD 107,000). While parties can take steps to mitigate negative effects of lacking cooperation among agencies, there are no means to reduce financial burdens posed by filing fees. None of the relevant Middle Eastern competition regimes provides for reductions of filing fees.
With the growing impact of Middle Eastern merger control regimes and Middle Eastern enforcers more aggressively pursuing transactions, investors must take regulatory compliance in the region more serious. Lack of institutional experience of local regulators will affect reviews. Comparatively high discrepancies in decisions and extended review times can be a result. Submitting comprehensive filing documentation and providing precedent from other authorities have proven to mitigate some of these issues. In transactions that require filings in multiple Middle Eastern jurisdictions lack of cooperation and coordination among domestic authorities introduce another level of complexity and challenges. In particular, since it does not appear that cross-border coordination is not likely to increase soon. The Arab Competition Network has raised cautious expectations that it could provide a forum for regional exchange. However, first activities of the Arab Competition Network suggest that such hopes will not be fulfilled—at least not in the short term.
Bremer maintains offices throughout the Near and Middle East and Africa, positioning clients for success in the region.
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