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Powering Up: M&A in Saudi Arabia’s Energy Sector

Posted on May 2, 2023 - 9:57 am by

Mergers and acquisitions (M&A) within the energy sector in Saudi Arabia has become increasingly common in recent years. With the country being the largest oil exporter in the world, the energy sector is a critical component of the Saudi Arabian economy. As such, M&A activity within this sector has significant implications for both the country and the global energy industry.

M&A activity within the energy sector in Saudi Arabia is primarily driven by a desire to increase operational efficiencies, gain access to new technologies, and expand market share. Additionally, the recent economic and political reforms in the country have encouraged foreign investment, which has further fuelled M&A activity within the energy sector.

One notable example of an M&A within the energy sector in Saudi Arabia is the acquisition of a 70% stake in Saudi Basic Industries Corporation (SABIC) by Saudi Aramco, the state-owned oil company. The acquisition was completed in 2020 and was one of the largest M&A deals in the world, valued at $69.1 billion. The acquisition allowed Saudi Aramco to diversify its business and expand its downstream capabilities, while also giving it access to SABIC’s technology and expertise.

Another notable example of an M&A within the energy sector in Saudi Arabia is the acquisition of a 51% stake in ACWA Power, a leading developer and operator of power generation and desalinated water plants, by the Public Investment Fund (PIF), the sovereign wealth fund of Saudi Arabia. The acquisition was completed in 2018 and was valued at $1.2 billion. The acquisition allowed PIF to expand its investments in the renewable energy sector and support the country’s efforts to diversify its energy mix.

Here are some continued themes impacting the energy sector in Saudi Arabia:

Diversification of the energy mix: Saudi Arabia has set ambitious goals to diversify its energy mix and increase its share of renewable energy. The country plans to develop 58.7 gigawatts (GW) of renewable energy capacity by 2030, which would account for 30% of the country’s energy mix. This shift towards renewables is expected to reduce the country’s reliance on oil for power generation and support its efforts to reduce greenhouse gas emissions.

Continued investment in the energy sector: Saudi Arabia has signaled its commitment to investing in the energy sector to support its economic growth and diversification goals. The country’s Public Investment Fund (PIF) has announced plans to invest $40 billion annually in the domestic economy, with a significant portion of this investment expected to be directed toward the energy sector.

Expansion of Renewable Energy: The country has set ambitious targets for renewable energy, with a goal of generating 50% of its electricity from renewable sources by 2030. This target is expected to drive significant investment in the renewable energy sector, particularly in solar and wind power.

Increased Foreign Investment: Saudi Arabia has been actively seeking foreign investment in the energy sector, particularly in the form of joint ventures and partnerships. The recent reforms in the country, coupled with its large reserves of oil and gas, are likely to attract continued foreign investment in the sector.

Growth in the downstream sector: The country has significant downstream capabilities, with its state-owned oil company, Saudi Aramco, being one of the largest downstream players in the world. The country is expected to continue to invest in its downstream sector to capture more value from its oil and gas resources and support the growth of its petrochemicals industry.

Adoption of new technologies: Saudi Arabia has been exploring the use of new technologies in the energy sector, such as carbon capture and storage (CCS) and hydrogen production. These technologies could help the country reduce its carbon footprint and increase its energy efficiency. Saudi Arabia is expected to adopt new technologies to increase operational efficiencies and reduce costs in the energy sector. This includes the adoption of digital technologies such as artificial intelligence, the internet of things, and blockchain to improve efficiency, reduce costs, and enhance safety.

Impact of Global Energy Transition: The global transition to cleaner energy sources is likely to have a significant impact on the energy sector in Saudi Arabia. While the country is taking steps to diversify its energy mix, it remains heavily dependent on oil exports. As the demand for oil declines in the global market, Saudi Arabia may need to adjust its energy strategy to remain competitive.

M&A activity within the energy sector in Saudi Arabia is subject to a range of legal and regulatory requirements. The Saudi Arabian General Investment Authority (SAGIA) and the Capital Market Authority (CMA) regulate M&A activity in the country and must approve all transactions. Several laws impact energy companies in Saudi Arabia who are considering an M&A. Some of the key laws are as follows:

Companies Law: The Companies Law in Saudi Arabia governs the formation, operation, and dissolution of companies in the country. The law provides guidelines on the various types of companies that can be formed, their legal structure, and the rights and obligations of shareholders. Any M&A transaction involving a company in Saudi Arabia must comply with the requirements of the Companies Law.

Antitrust Law: The Saudi Arabian General Authority for Competition (GAC) is responsible for enforcing the country’s antitrust laws. These laws prohibit anti-competitive practices, such as price fixing and market allocation, and require that M&A transactions be reviewed for potential anti-competitive effects.

Foreign Investment Law: The Saudi Arabian General Investment Authority (SAGIA) is responsible for regulating foreign investment in the country. The Foreign Investment Law outlines the rules and regulations governing foreign investment in Saudi Arabia, including the procedures for establishing and registering foreign-owned companies.

Environmental Laws: Energy companies in Saudi Arabia are subject to a range of environmental laws and regulations that are designed to protect the environment and public health. These laws cover areas such as air and water pollution, waste management, and environmental impact assessments.

Tax Laws: M&A transactions may have tax implications for energy companies in Saudi Arabia. The country has a complex tax system, with different tax regimes for different types of companies and industries. Energy companies should seek professional tax advice before engaging in an M&A transaction.

Securities Law: The Capital Market Authority (CMA) regulates the securities market in Saudi Arabia. Any M&A transaction that involves a public company or the issuance of securities must comply with the requirements of the Securities Law.

In conclusion, the energy sector in Saudi Arabia is expected to undergo significant changes in the coming years, driven by a range of factors such as diversification, renewable energy, foreign investment, new technologies, and the global energy transition. While these changes may bring challenges, they also present opportunities for the country to adapt and thrive in a rapidly evolving energy landscape.

Hammad & Al-Mehdar Contributes the Saudi Arabia Chapter to The Mergers & Acquisitions Review, 14th Edition

Posted on July 2, 2021 - 10:08 am by

HAMMAD & AL-MEHDAR CONTRIBUTES THE SAUDI ARABIA CHAPTER TO THE MERGERS & ACQUISITIONS REVIEW, 14TH EDITION

Hammad & Al-Mehdar partner Abdulrahman Hammad and senior associate Samy Elsheikh author the Saudi Arabia chapter of The Mergers & Acquisitions Review, 14th edition, published by Law Business Research.

The chapter provides a deep dive into the relevant laws and regulations relating to the Saudi Arabia’s M&A sphere, and is an important comparative reading for counsel and managers looking acquisitions or divestitures in the Kingdom.

The chapter is available for download here.

The Unified Registry for Commercial Pledges Takes Effect in Saudi Arabia

Posted on July 2, 2021 - 10:23 am by

THE UNIFIED REGISTRY FOR COMMERCIAL PLEDGES TAKES EFFECT IN SAUDI ARABIA

The Saudi Arabian Ministry of Commerce and Investment (MCI) launched on 17 March 2019 the Unified Registry for Commercial Pledges (URCP) and published the regulations for its implementation. The announced procedural rules envisaged in the Commercial Pledge Law (CPL) that came into effect in April 2018. The CPL stipulates the regulations and procedures for creating, granting, perfecting, and enforcing pledges over movable and future assets as security for “economic” debts.

Whom Should the URCP Regulations Concern?

URCP regulations apply to creditors (pledgees), debtors (pledgers), and any interested third parties. Registering a pledged movable asset with the URCP in strict compliance with the relevant procedural rules gives the pledgee a valid priority security claims over the asset or a recognized right provided for by the CPL against other interested entities.

What are Pledgeable Assets?

According to the CPL, lenders can register commercial pledges with the URCP over any of the following asset categories:

•    Companies: An economic enterprise may agree to a pledge over its entire tangible and intangible business assets.

•    Receivables: The law now recognizes potential business earnings as valid collateral. For example, an organization may qualify for construction financing after agreeing to the registration of a pledge on its future revenue.

•    Bank accounts and deposits: Lenders can take security over pledged bank accounts, deposits, or balances. The pledge agreement on a current account remains valid even if the borrower deposits more funds after the date of the URCP contract registration.

•    Inventory: Enterprises can grant a pledge over their stocks to secure financing. One tool they can use is the floating pledge.

•    Shares: There is now a legal framework for pledging shares, including limited liability companies.

Registering a Commercial Pledge Under URCP Procedural Rules

A person must first open an electronic account to log a pledge with the URCP. The MCI has set up an online portal for this purpose as no other method is acceptable for registering movable assets going forward. Below are some of the mandatory steps in commercial pledge registration:

1.    The pledgee sends a registration application to the URCP via the official online registry. The applicant must attach a copy of the pledge contract and any other pertinent documents to the request. Vital information to provide includes the name and contact details of all parties to the pledge agreement, the value of the pledged asset, date of the security contract, and the secured debt’s maturity date.

2.    The URCP notifies the pledger of having received the pledgee’s application for registration. The URCP can decline the registration request if the pledger formally objects to it within seven days from the date of notification.

3.    The URCP continues acting on the pledgee’s registration request if the pledger approves it or does not object to it within seven days after receiving the URCP’s notification of the application.

Notifying Specialized Registries

Certain pledgeable assets require registration under other regulations besides URCP. For instance, the General Department of Traffic at the Ministry of Interior registers all vehicles in Saudi Arabia. Once the URCP completes the registration of a pledge over such an asset, it must share the contract details with the relevant specialized registry to tag the asset in question as pledged in the appropriate database.

Rules for Amending a Registered Pledge

The new CPL recognizes future assets as pledgeable, and it allows for the creation of securities over the same. What if the status of a future pledged asset changes to current? The pledger must, immediately or soon afterward, formally request the URCP to update the registry account in question with the new status of the pledged asset. The amendment request stands with or without the pledgee’s approval.

A typical case in point is when a bank creates security over future proceeds for money it lends to a business, and it registers the pledge with the URCP. In this scenario, the pledger (borrowing enterprise) must notify the URCP soon after collecting the secured or pledged receivables because they have become available movable assets.

If the pledgeable future asset is subject to pledging procedures in compliance with other relevant regulations, the URCP processes the amendment requests before sending any updates to the applicable specialized registry to capture the new asset status. The URCP notifies the pledger and the pledgee once the amendment is complete.

Criteria for Terminating Any Pledge Registration

Ways to terminate the pledge registration are:

1.    The pledgee can request termination, or a judicial body may order the cancellation;

2.    Expiry of the pledge duration, subject to condition three below;

3.    Termination can take effect 60 days after an enforcement document is issued. Nonetheless, the law permits the pledgee or enforcement agent to request the URCP to extend the pledge term by an additional 60 days.

The law requires the pledgee to end the pledge registration with the URCP not later than three days after terminating the pledge contract, or after the execution of relevant enforcement actions on the property in question.

Who Can Search the URCP Database?

Upon request, the URCP may allow the pledger and the pledgee to view all details pertinent to a registered pledge. To third parties, however, the URCP may only confirm whether an asset is the subject of a registered pledge.

For a fee and with the pledger’s consent, the URCP may provide specific details of a registered pledge to a third party. Approval is contingent on the URCP receiving the name of the individual requiring the information and the particulars that the person is requesting.

When to Commence Enforcement

The pledgee or execution agent may enforce a pledge on an asset registered by the CPL only after obtaining an enforcement document from the URCP. The regulator must not provide the requested paperwork until the pledgee has the legal right to enforce the pledge contract.

The pledgee should request and can only obtain the prerequisite enforcement paperwork before the pledge registration period with the URCP expires. The regulator cannot issue these documents for execution on a future asset. For example, the pledger must first own the pledged asset, such as a car, before the pledgee has the right to initiate the enforcement process.

Perfection and Priorities

To guarantee priority against third parties, the pledgee should complete the pledge registration process with the URCP. However, there can be multiple pledges of varying priority levels over a single movable asset. Still, the pledger may agree with the relevant pledgees to alter the pledgees’ order of precedence over the same pledged property.

Global Guide: Measure Adopted to Support Distressed Businesses Through the Covid the COVID 19 Crisis

Posted on December 31, 2021 - 1:51 pm by

Hammad & Al-Mehdar’s partner Belal Hashmi authored the Saudi Chapter of the Global Guide: Measures adopted to support distressed businesses through the COVID-19 crisis, published by INSOL International – World Bank Group Global Guide.

The chapter discusses government policy responses, legislative reforms impacting stakeholders dealing with companies’ financial distress, legislative reforms for companies in financial distress, financial and regulatory measures, specific measures for micro and small businesses, measures introduced by the courts to deal with increased insolvency cases, and other pending reforms.

To read the chapter, please visit the link.

4th Edition of Fintech Law Review

Posted on December 31, 2021 - 1:56 pm by

Hammad & Al-Mehdar’s partner Suhaib Hammad authored the Saudi Arabia chapter in The Financial Technology Law Review, 4th edition, published by The Law Reviews in April 2021.

This updated review tackles recent mandates by the Saudi Central Bank (SAMA). It also discusses other relevant regulations to the Fintech regime, including general licensing requirements and protection measures.

To read the chapter, please visit the link.

Saudi Arabia: Digital Business 2021

Posted on December 31, 2021 - 2:01 pm by

We are pleased to share our latest Saudi chapter, Digital Business 2021, authored by Suhaib Hammad, a partner and leads the Commercial and IP practice. The chapter discusses the digital business laws and regulations in Saudi Arabia.

To read the chapter, please visit the link.

Saudi Arabia: Fintech 2021

Posted on December 31, 2021 - 2:03 pm by

Hammad & Al-Mehdar’s partner Suhaib Hammad authored the Saudi Arabia chapter of the Fintech 2021 guide, published by Global Legal Group in June 2021.

This chapter discusses the Fintech laws and regulations in Saudi Arabia.

To read the chapter, please visit the link.

Saudi Arabia: Data Protection 2021

Posted on December 31, 2021 - 2:14 pm by

Hammad & Al-Mehdar’s partner Suhaib Hammad authored the Saudi Arabia chapter of the Data Protection 2021 guide, published by Global Legal Group in July 2021.

This chapter discusses the data protection laws and regulations in Saudi Arabia.

To read the chapter, please visit the link.

Recent Developments in Saudi Arabian Arbitration Laws

Posted on March 13, 2022 - 10:53 am by

Arbitration is becoming an increasingly popular way to resolve disputes in Saudi Arabia. The government has taken significant steps to encourage the use of arbitration, and recent developments in the law have made the process even more efficient and cost-effective. As a result, more businesses are turning to arbitration to resolve their disputes.

In 2014, the Saudi Center for Commercial Arbitration (SCCA) was founded as the Kingdom’s first independent arbitration institution. They are a not-for-profit organization that administers Alternative Dispute Resolution (ADR) procedures guided by Shariah principles.

What Is Arbitration?

Arbitration is used as a means to resolve disputes outside the courtroom. It’s a process in which two or more parties agree to have a neutral third party, called an arbitrator, preside over their case, and make a decision.

Arbitration is often seen as a faster and more cost-effective option than going to court. It allows both parties to agree upon an adjudicator of their own choosing, rather than a court-appointed judge. The arbitrator is often a highly accomplished legal professional or former business leader, who gives both parties the opportunity to present their case.

The Introduction of Arbitration Law in Saudi Arabia

Although previously an uncommon choice in Saudi Arabia, the government has sought to increase the use of arbitration as a means to resolve disputes. In 2012, a royal decree was issued which set forth the legal framework for arbitration in Saudi Arabia. This new Law of Arbitration is based on the UNCITRAL Model Law, which is the international standard for best practice in arbitration law.

The Law of Arbitration sets out the rules and procedures that must be followed in order to initiate and conclude an arbitration proceeding. It also establishes the legal rights and obligations of the parties involved in the arbitration process.

Arbitration in Saudi Arabia is a private process, meaning that the proceedings and the award remain confidential unless there is written consent from both parties to publish the details of the award granted.

In 2013, the Enforcement Law came into effect, which provides for the enforcement of arbitration awards in Saudi Arabia. This means that if one party does not comply with the award, the other party can take legal action to have it enforced.

Cost of Arbitration in Saudi Arabia

Arbitration in Saudi Arabia is considerably cheaper than taking a case through the court and the SCCA has taken recent steps to make it even more affordable. In September 2021, they reduced arbitrator fees by 30% and the initial cost of starting proceedings by 50%.

Filing fees have now been eliminated entirely, and parties are simply required to pay a flat registration fee of SAR 5,000, which is later credited towards the administration fee. The SCCA has also introduced three arbitrator pricing tiers: minimum, maximum, and average. Fees are fixed on a case-by-case basis, depending on the complexity of the case and the time required by the arbitrators to hear and determine the case.

The Online Dispute Resolution (ODR) service also experienced a price reduction of 40%. This allows smaller businesses and entrepreneurs to have access to affordable arbitration, without the need to take their dispute to the courts.

Timeframe for Arbitration

Arbitration in Saudi Arabia is a relatively fast process in comparison to court proceedings. The time it takes to resolve a dispute through arbitration will depend on a number of factors, including the complexity of the case and the availability of the arbitrator.

Generally, arbitration proceedings will take between 6 and 12 months to complete. Once the arbitrator has made a decision, the award will be binding on the parties with a requirement to comply.

The Future of Arbitration in Saudi Arabia

According to a recent statistical report by the SCCA, arbitration continues to be supported by the judiciary and is experiencing fast growth as an alternative to court litigation. Saudi courts are increasingly reluctant to set aside arbitration awards, demonstrating their strong support for the arbitration process. Between 2017 and 2020, 107 motions were initiated to set aside awards. Out of those 107, only 6% were accepted.

In light of this continued success, it is likely that arbitration will continue to grow in popularity in Saudi Arabia. Parties who are looking to resolve disputes quickly and cost-effectively should consider arbitration as an option.

 

Saudi Arabia’s Vision 2030 Offers Exceptional Opportunities For French Investors

Posted on March 17, 2022 - 4:13 pm by

Saudi Arabia’s Vision 2030, which was launched by Saudi Crown Prince Mohammed bin Salman in 2016, is the major driver for current investment opportunities presented in the country. In the second quarter of 2021, Foreign Direct Investment in Saudi Arabia reached an impressive $1.4 billion. Through many incentivization programs and regulatory transformations, the government hopes to increase this to an annual figure of $100 billion by 2030.

With Saudi Arabia’s rapid economic recovery in the wake of the global pandemic, French companies and investors have an opportunity to leverage the array of new business and investment opportunities on offer within the Kingdom. However, to engage in business with the Saudi market, French companies will first need to familiarize themselves with the legal and regulatory factors that may affect their business operations in this rapidly transforming nation.

What Is Vision 2030?

The aim of Vision 2030 is to create a more diversified economy that is less reliant on oil revenue. As part of this process, the National Transformation Program seeks to increase non-oil government revenue from SR163 billion to SR1 trillion by 2030.

The government hopes to achieve this goal by the development of public-private partnerships (PPP), encouraging foreign investment in the country, introducing value-added tax (VAT), and privatizing several sectors including transport, education, and healthcare. The vision also includes plans to invest heavily in renewable energy and to develop the nation as a hub of technology and entrepreneurship in the MENA region.

So far, Vision 2030 has already seen significant success, with a string of major international companies, including Siemens and Google, committing to multi-billion dollar investments in the country. Since the program was first launched, the government has pledged over $1 trillion in development schemes. This has led to the creation of over 550,000 new jobs for local Saudis, with a further 1 million expected to materialize before 2030. In addition, foreign investment licenses nearly doubled from 700 in 2018 to 1300 in 2020, demonstrating that there is a keen interest from within the international venture capitalist community to make moves towards Saudi Arabia.

How Can French Business & Venture Capitalists Leverage This Opportunity?

In 2001, the Saudi-French Business Council was set up by the Saudi Arabian Chambers of Commerce & Industry with the aim to further develop business ties between both nations. French investment in Saudi Arabia now stands at $4.37 billion and trade between the two countries has nearly doubled over the past 10 years. French business leaders can build on this positive relationship history and take advantage of the plethora of new opportunities in the Kingdom created by Vision 2030.

The planned expansion of investments in infrastructure, healthcare, education, renewable energy, and tourism throughout the country will undoubtedly create a great number of prospects for French companies and investors across a broad range of sectors. Saudi Arabia has recently unveiled plans to invest over $100 billion to develop its renewable energy infrastructure and solar power capacity. France’s longstanding push towards increasing its use of renewable energy sources makes it a perfect partner for Saudi Arabia’s new infrastructure plans.

In addition to this, Saudi Arabia is positioning itself within the Gulf region as a hub of technological progress and development. However, achieving this status will be no easy feat without the assistance of foreign expertise and investment. French companies and technical experts may find themselves ideally positioned to enter this market given France’s highly developed digital sector.

Legal Considerations for French Businesses Entering The Kingdom

Off the back of the National Transformation Program, there has been a significant lifting of red tape. Local business regulations have been streamlined and simplified, to create a more transparent and agile process. But as with any new business venture, French companies need to be aware of the laws regulating Saudi Arabia’s commercial sector before commencing activities in the region.

Licencing Regulations

Expatriates can now have full ownership of their company based in Saudi Arabia without requiring the involvement of a local business partner. However, they will still need to obtain a MISA Entrepreneurial Licence issued by the Saudi Arabian General Investment Authority before commencing business within the Kingdom. Additionally, they will be required to apply for Commercial Registration and get a certificate from the Chamber of Commerce. For businesses operating in certain sectors, additional licensing may also be required.  With these documents, you will be able to open a bank account and start operating your business within Saudi Arabia.

Saudization (nitiqat) Rules

As a result of the government’s Saudization program, all companies operating within Saudi Arabia are required to employ a certain number of Saudis to maintain their business license. Employers are required to meet these quotas to ensure that the labor market continues to develop within Saudi Arabia rather than simply relying on imported foreign workers. This is particularly pertinent for companies operating in certain sectors such as marketing, where the percentage of Saudi employees must be at least 30% of the total workforce.

Other sectors, such as secretarial, translation, storekeeping, and data entry jobs, are prohibited from employing any non-Saudis. These new regulations will come into place in April of 2022. Any business operating in the Kingdom must adhere strictly to Saudization rules, or they may face penalties.

In addition to employment quotas, Saudi workers are also entitled to a minimum wage appropriate to their industry. This starts at 4000 SAR per month, but it increases to 7000 SAR for certain professionals, such as qualified dental professionals. If your company employs a Saudi national on a part-time basis, then they will only partially count towards your Saudization figures.

Taxation

Saudi nationals and GCC residents in Saudi Arabia are not subject to any form of personal income tax. Businesses owned wholly by Saudis are subject to Zakat, which is a form of Islamic taxation set at a flat rate of 2.5%. However, businesses owned wholly by non-Saudi/GCC nationals will be subject to income tax.

If business ownership is a combination of Saudi and non-Saudi/GCC nationals, then Zakat and income tax will be paid in proportion to ownership. Income tax is set at a flat rate of 20%, but this increases to between 50% and 85% if the income is derived from oil and hydrocarbon production revenue.

In 2018, Saudi Arabia introduced VAT at a standard rate of 5%. However, it has now increased to 15% with an exception for the financial sector.

A Mutually Beneficial Relationship

Vision 2030 has eased investment restrictions and streamlined registration processes for foreigners. This means that there has never been a better time for French investors to start doing business with the Kingdom.

France has always been a world leader in terms of innovation, so they are well-placed to accommodate the needs of Saudi Arabia’s growing technology sector. In the long term, this will be a mutually beneficial relationship for both French businesses and the people of Saudi Arabia.

French companies will have greater access to a market of almost 35 million consumers, where there is a growing middle class seeking innovative and high-quality products and services. As a rapidly developing and youthful nation, Saudi Arabia will benefit from more foreign investment and expertise, while they achieve their national transformation goals.

Unlocking Saudi Arabia with Hammad & Al-Mehdar

Hammad & Al-Mehdar is a new-age law firm bridging traditional and emerging business sectors for private sector companies, family offices and SMEs entering or operating in the Middle East.  We help navigate essential legal and regulatory requirements to grow and succeed in the Middle East, with specialty in the Kingdom of Saudi Arabia given our 40-year track record.  Our firm is forward thinking and has depth of knowledge in business of the past, present and future, and therefore well qualified to support French companies as they evolve their presence into Saudi Arabia and the wider MENA region.  To discuss your business presence and expansion in Saudi Arabia contact Senior Associate, Samy Elsheikh. 

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