The legal community has broadly welcomed the Saudi General Authority for Competition’s (GAC) updated 5th edition of the GAC Merger Control Guidelines (Guidelines). For a general overview see our client brief on the guidelines. Still, the remaining ambiguities warrant a more in-depth discussion of specific criteria. This client brief will consider the newly amended thresholds in specifically and address possible minimum Saudi turnover of the target as well as the GAC’s authority to call in transactions that fall below the thresholds.
Target’s Saudi turnover requirement and local effect
A key change introduced with the 5th edition of the Guidelines is the recalibration of the notification thresholds. The new framework introduces a more nuanced approach, with different criteria for acquisitions, mergers, and joint ventures. A key point of uncertainty regarding the new thresholds relates to the target entity’s contribution to the Saudi turnover threshold applicable to acquisitions. Under the newly amended threshold and acquisition requires notification, if all the following criteria are met:
- the parties’ combined global turnover exceeds SAR 200 million (~USD 53.3 million);
- the target’s global turnover exceeds SAR 40 million (~USD 10.6 million); and
- The parties’ combined Saudi turnover exceeds SAR 40 million (~USD 10.6 million), provided the target contributes to the parties meeting this threshold.
While the requirement of Saudi turnover of the target is welcome, the criterion remains ambiguous in the Guidelines. The Guidelines require that the target ‘contributes’ to the parties meeting the Saudi turnover threshold. Hence, what is clear is that the target does not have to meet the Saudi turnover threshold alone. What the Guidelines do not clarify is whether there is a minimum threshold the target’s Saudi turnover must exceed or whether a filing is required if the target has any Saudi turnover; possibly as little as SAR 1. In consultations the GAC confirmed that a minimum threshold for target turnover in Saudi Arabia was intentionally omitted. However, they emphasized that purely symbolic target turnover—such as SAR 1—would generally not be regarded as a meaningful indicator of local economic presence of the target and thus typically not suffice to trigger a filing obligation. Still, even negligible target turnover in Saudi Arabia could trigger a filing obligation, if other factors cause the transaction to possibly impact competition in the Kingdom.
Hence, in principle, the GAC will consider a transaction notifiable only where the target engages in some level of meaningful economic activity in the Kingdom. This may be established by target turnover in Saudi Arabia that while falling below SAR 40 million must have some substance. Transactions targeting undertakings with negligible or incidental turnover—for example, one-off or non-recurring sales—will typically not require notification. Still, the GAC retains discretion to require notification of such transactions where other factors suggest a potential effect on competition in Saudi Arabia, This brings into focus the local effects criterion discussed extensively in the Guidelines.
The primary criterion for establishing a local nexus remains the Saudi turnover threshold. A sufficient Saudi nexus is established when the parties’ Saudi turnover—to which the target contributes a meaningful share—exceeds SAR 40 million. While the legal framework permits an effects-based analysis, the authority has indicated that it is unlikely to assert jurisdiction over transactions that do not meet this turnover threshold, as such deals are less likely to have an impact on competition in Saudi market. Still, additional factors such as global effects of the transaction that may extend to Saudi Arabia, significant activates of the parties in a geographical market outside of Saudi Arabia that is reasonably connected to Saudi Arabia, or the target being active in a market that is currently overall small in Saudi may make a filing mandatory even where the target has minimal Saudi turnover.
Hence, the GAC retains authority to review acquisition that do not meet the Saudi turnover requirement, or where the target has no or negligible Saudi turnover. If other factors establish a potential impact of the acquisition on competition in Saudi Arabia, a filing is nonetheless required. How these other factors may be weight remains unclear.
Local effect in mergers and joint venture transactions
In contrast to acquisitions, mergers and joint venture transaction do not generally fall outside of the scope of the Saudi merger control regime, if the target or joint venture lacks Saudi turnover. The notification thresholds for these transactions remain broader. They focusing on the combined turnover of the parties involved, rather than the target or joint venture itself. Specifically, a filing is required where:
- the parties’ combined global turnover exceeds SAR 200 million (~USD 53 million);
- the parties’ combined Saudi turnover exceeds SAR 40 million (~USD 10.6 million), regardless of whether the target or joint venture contributes to this Saudi turnover; and
- at least two parties—not necessarily including the target or joint venutre—each have global turnover exceeding SAR 40 million (~USD 10.6 million).
Crucially, the thresholds can be met without any turnover—either globally or in Saudi Arabia—of the target or the joint venture entity itself. Hence, the Saudi merger control regime still catches greenfield joint ventures as well as mergers and joint venture transactions that involve targets without connection to Saudi Arabia, provided the other parties to the transaction meet the notification thresholds.
This expansive approach bags the question of how the GAC applies the local effects test included in the Guidelines to mergers and joint venture transactions. The Guidelines state that for a transaction to require notification it must potentially have an impact on competition in Saudi Arabia. In case of an acquisition this local nexus is established by (1) the parties meeting the Saudi turnover criterion, and (2) the target contributing to it. This criterion does not apply to mergers and joint venture transactions. The Guidelines could be interpreted in a manner that, therefore, a filing obligation for mergers and joint venture transactions only arises, where the local nexus is established by other factors. The GAC in consultations clarified that such other factors are only relevant, where the thresholds are not met. Where the parties to the transaction meet the notification threshold—regardless of whether the target or joint venture has turnover globally or in Saudi Arabia—the transaction is deemed to have a local effect and requires notification. If the parties do not meet the threshold, a filing may still be mandatory, if other factors establish a local effect. Such factors could be for example global effects of the transaction that may extend to Saudi Arabia, or significant activates of the parties in a geographical market outside of Saudi Arabia that is reasonably connected to Saudi Arabia.
Way forward
The most recent amendment of the Guidelines do provide some relief for acquisitions. Parties now can rule out a filing in Saudi Arabia, if the target is not active in the Kingdom, unless there are other factors that would establish a local Nexus. For mergers and joint venture transactions this does not apply. This poses some challenges due to what the GAC considers to be joint ventures or mergers.
Acquisitions may for several reasons be structured to include a merger. The acquirer could establish an entity the sole purpose of which is to merge with and into the target to affect the acquisition of the target by the acquirer. Transactions structured in this manner—often used in the U.S.—may be considered not an acquisition but a merger by the GAC. The GAC tends to take a formalistic rather than purpose based view when interpreting the Kingdom’s Competition Law. Hence, they may disregard that the transaction is in effect an acquisition and not a merger. This would lead to the transaction requiring notification even if the target has no Saudi turnover and no other factors establish a local effect. Simply the acquirer meeting the Saudi turnover criterion of the notification threshold would suffice. To date this question has not been tested and the GAC has not provided guidance on whether an acquisition that is structured to involve a merger would be considered an acquisition or a merger.
Furthermore, the GAC has in the past taken the view that only transactions whereby several—natural or legal—persons formed a new joint undertaking are joint ventures within the meaning of the Saudi Competition Law. Transactions that created a joint venture by a—natural or legal—person acquiring a stake in an existing entity were deemed acquisitions, not joint ventures by the GAC. If they were to continue this practice, transactions that form a joint venture through a—natural or legal—person acquiring a stake in an existing entity would—unlike other joint venture transactions—only require notification, if the target has Saudi turnover; or other factors establish a local nexus. It remains to be seen how the GAC will position itself on this question now that the new thresholds are applied.
AUTHOR
Ms. Asmaa ElDesoky
