Legal Updates – Page 14 – Hammad & Al-Mehdar Law Firm

Mergers & Acquisitions: Trends & Visions In Saudi Arabia

Posted on April 18, 2022 - 7:58 am by perpetual-admin

Mergers and Acquisitions (M&A) have been increasing in Saudi Arabia as the country undergoes economic diversification and privatisation initiatives. The nation is currently one of the most active markets for M&A in the region. For international companies seeking new opportunities, Saudi Arabia presents a unique opportunity to invest in a country with a young and growing population as well as a rapidly expanding economy.

However, the legal and regulatory environment for M&A in Saudi Arabia is still maturing and businesses should ensure they have a clear understanding of the relevant laws before proceeding with any transaction. Early and careful preparation is essential to ensure a successful merger or acquisition in Saudi Arabia.

Current M&A Trends In Saudi Arabia

2020 saw a 73.4% increase in deal value in comparison to 2019, representing a growing trend of high-value M&A activity across the region. In 2021, this pattern continued, with $44 billion worth of announced deals in 2021. Compared to the M&A activity of the entire Middle East and North Africa region in that same time period – $75 billion. Saudi Arabia stands out as being a key market for M&A.

This trend is set to continue in the coming years as the Saudi economy grows and the government continues to encourage privatisation and foreign investment. The highest value deals are being seen in the energy and materials sector, but when it comes to deal count, most mergers and acquisitions have been spread across the consumer, healthcare, education, and ICT sectors.

Legal Considerations During A Merger Or Acquisition

When conducting a merger or acquisition in Saudi Arabia, businesses must consider the relevant legal and regulatory framework. As the regulatory body for M&A activity in the Kingdom, all mergers and acquisitions must be carried out through the Ministry of Commerce, including the final issue of amended commercial registration.

In Saudi Arabia, most private M&A transactions are structured as share purchase deals in which the share capital of the target is acquired by the buyer from the seller. Break fees are customary in Saudi Arabia, but do not usually exceed 1% of the deal value.

Public M&As are regulated by the Capital Market Authority (CMA). Before a public transaction may proceed, the bidder and the target must appoint a CMA approved financial adviser and an independent legal adviser.

If a non-Saudi/non-GCC national is to be involved in any M&A activity, the person must first apply for the relevant foreign investment license. The Saudi Ministry of investment (MISA) – formerly known as SAGIA – is the main governmental body responsible for regulating foreign investments in the Kingdom. MISA provides licenses and approvals for foreign investors and oversees the implementation.

The Saudi Central Bank (SAMA) — previously referred to as the Saudi Arabian Monetary Authority — is responsible for regulating the banking and financial services sector in the Kingdom. SAMA must approve any merger or acquisition involving a Saudi bank or financial institution.

If a merger or acquisition may result in some form of “economic concentration”, then the General Authority for Competition (GAC) must be notified 90 days before the closing of the M&A transaction. The GAC interprets “economic concentration” widely, and we strong recommend transacting parties to thoroughly consider whether their transactions may be subject to competition notification prior to transacting.

Why Businesses Should Prepare Early On

Businesses should prepare early when considering a merger or acquisition in Saudi Arabia. The legal and regulatory framework is still maturing and there is a lack of precedent in many areas. This can make it difficult to predict the outcome of a particular transaction. Early preparation will allow businesses to identify any potential risks and take steps to mitigate them. It’s also important to seek professional advice from a qualified lawyer or advisor who is familiar with the Saudi M&A market. They’ll be able to guide you through the process and ensure that all the necessary legal and regulatory approvals are obtained.

Mergers and acquisitions can be a complex and time-consuming process. However, with the right preparation and guidance, they can be a valuable tool for businesses looking to grow in Saudi Arabia. M&A will play a key role in the development of the Kingdom’s economy as it continues to diversify, with increased private sector participation and foreign investment.

Opportunities For Chinese Investors In KSA

Posted on May 8, 2022 - 6:50 am by perpetual-admin

The Kingdom of Saudi Arabia is well-positioned to take advantage of the opportunities offered by China’s continued pursuit of an international investment strategy. With China’s CIC, the country’s sovereign wealth fund, seeking to diversify its portfolio and invest in foreign assets, Saudi Arabia is an attractive option.

As the world’s largest crude oil supplier to China, Saudi Arabia is in a unique position to offer energy security and assist the Chinese government to meet their growing energy requirements. Additionally, Saudi Arabia’s economic reforms have been designed to foster growth and attract foreign investment, making it an attractive option for Chinese businesses and investors.

The Saudi government is committed to developing the country’s infrastructure and has made significant investments in transportation and logistics. This will make it easier for Chinese businesses to access the Saudi market and set up operations in the Kingdom. KSA also has a large and rapidly growing economy, with a population of over 32 million people.

China & Saudi Trade Relations

The 2019 Aramco IPO was seen as a key part of the Kingdom’s economic diversification program in its efforts to attract foreign investment. Earlier this year, Saudi Aramco initiated a joint venture with China to develop a new refinery and petrochemical complex in the northeast of the country. Saudi Arabia will supply the new Huajin Aramco Petrochemical Company (HAPCO) with 210,000 barrels a day of crude oil feedstock.

This move represents a tightening of economic ties between the two nations and provides a significant boost to Saudi Arabia’s downstream sector. It also reflects China’s continued interest in Saudi Arabia as an investment partner and will strengthen Chinese-Saudi relationships.

In 2020, Chinese imports into Saudi Arabia increased by 17.8 per cent to $28.1 billion. Bilateral trade between the two nations continues to grow at a steady pace and is expected to continue to do so in the years ahead. Political commentator Zaid M. Belbagi told Arab News last year that China increasingly saw relations with the Arab world as “central” to its geostrategic ambitions. In 2017, King Salman visited the country during a six-country Asia tour, which set in motion a “comprehensive strategic partnership” between the two nations. With its strategic location, vast natural resources, and favourable economic climate, Saudi Arabia is ideally suited to assist China in achieving its economic goals in the Arab world.

The Future of Chinese Investment in Saudi Arabia

Looking to the future, it’s clear that there are significant investment opportunities in Saudi Arabia for Chinese businesses and investors. In 2020, the annual flow of foreign direct investments (FDI) from China to Saudi reached approximately $390 million. Rumours that Saudi would start accepting the Yuan during oil sales were quashed earlier this year by Aramco CEO Amin Nasser, but it’s undeniable that China sees Saudi Arabia as a key strategic and economic partner in the region.

For Chinese businesses and investors looking for opportunities in the turbulent global economy, Saudi Arabia remains an attractive and promising option. Chinese business leaders should keep a close eye on the Kingdom in the coming years as it looks to attract more foreign investment and continue its economic reforms.

Renewable Energy In KSA

Posted on May 8, 2022 - 6:55 am by perpetual-admin

The shift to renewable energy is essential for businesses in Saudi Arabia, as it provides a reliable, sustainable energy source that will help to support economic growth. In recent years, KSA has made major commitments to increase its use of renewable energy sources, including solar and wind power. These efforts are supported by new regulations and incentives that promote the adoption of clean technologies and sustainability practices across various sectors.

For businesses to succeed in KSA and compete in the global marketplace, they must consider renewables and cleantech as key factors in their overall business strategy.

Saudi Arabia’s Push Towards A Greener Future

Renewable energy has become increasingly important in KSA over the past few years as the country works to transition away from its reliance on fossil fuels. This transition has been supported by the Saudi Vision 2030 initiative, which aims to diversify the country’s economy and boost private sector growth. One of the primary focus areas of this plan is environmental protection, particularly through increased investment in clean energy sources.

This year, the government awarded two solar photovoltaic (PV) projects with an estimated value of $453m as part of a power-purchase agreement (PPA) that will increase the nation’s production capacity to over 1GW. This will help to align the country with its aim to derive 50% of its domestic electricity from renewable sources by 2030. The government hopes that its investment in renewable energy innovation will attract $20 billion in industry investments over the course of the next ten years.

The global energy trade is also expected to play an important role in the growth of renewable energy in KSA. As the world’s largest oil exporter, Saudi Arabia has historically been a global leader in energy production. However, as part of the worldwide shift towards greener energy sources, Saudi Arabia will be ideally positioned to become a leading exporter of renewable energy technologies with a particular emphasis on solar power. This would provide a major boost to the country’s economy and create new opportunities for businesses looking to invest in clean technologies.

As a result of these efforts, businesses in KSA are increasingly turning to renewable energy as a key part of their overall strategy. This is supported by the growing demand for clean technologies across various industries, including manufacturing, construction, and transportation. The adoption of such technologies can help businesses become more efficient and profitable, while also reducing their environmental impact.

New Regulations Impacting The Renewable Sector

This commitment to renewable energy is also reflected in new regulations and incentives that have been launched in recent years to encourage the expansion of the renewable energy sector. The Saudi government plans to introduce a new form of industrial licences within the renewable energy sector, that will provide companies with a competitive advantage in the marketplace. The Ministry of Energy also announced that they will offer incentives to energy project developers that will allow them to avail of certain benefits and custom exemptions.

Additionally, the Saudi Green Building Forum was launched in 2017 to promote sustainable building practices and support the development of green infrastructure. These initiatives are helping to create a more supportive environment for businesses that are looking to adopt clean technologies and sustainability practices.

Overall, KSA’s push towards a greener future is creating significant opportunities for businesses in the renewable energy sector. By embracing renewable technologies and sustainability practices, companies can not only reduce their carbon footprint but also gain a competitive advantage in a rapidly changing global marketplace. As such, it is essential for businesses to stay up to date on the latest developments in the renewable energy sector in order to make informed decisions about their future growth.

Enforcement Law in Saudi Arabia

Posted on May 12, 2022 - 12:10 pm by perpetual-admin

As the Kingdom of Saudi Arabia continues to pave the way towards Vision 2030, the country continues to reshape its policies and legislation to align with global best practice, whilst attracting foreign direct investment.

In recent years a series of legislations have taken effect, and the codifying of Sharia Law now makes it agile for international entities to pursue legal recourse in Saudi courts.

One of the most important regulations to be applied was the Enforcement Law in 2013 through Royal Decree Number M53. This law guarantees that local and international decisions concerning commercial disputes can be enforced within the Saudi legal system.

The new law provides a different means of litigating and arbitrating cases of commercial disputes in a far different manner to the 1989 Rules of Civil Procedure, which previously determined cases through hearing before a Board of Grievances.

The Perspective of The Enforcement Law

Sharia law allows parties in a dispute to solve their issues out of court and agree on a settlement. If one party fails to reach its end of the settlement agreement, it becomes necessary to seek legal recourse through enforcing a judgment. Another way is by any other legal right executable through an application to an appropriate Saudi court to obtain an execution order.

How the issue goes in front of a judge is dependent on a claim. The claimant must produce written evidence in front of the court that states they have attempted to obtain a voluntary settlement from the other party in the matter. This is where the Enforcement Law comes into play.

Under Articles 7 and 9, the Enforcement Judge is empowered to decide on a broad scope of enforcement disputes, regardless of the value. It will be per provisions that govern summary proceedings. The judge has the power to involve either the police or other law enforcement agencies, and is also capable of;

Imposing or lifting travel bans
Ordering imprisonment or release
Issuing decrees on the disclosure of assets
Notifying licensed credit agencies
Reviewing insolvency claims
Freezing bank accounts

However, parties to a claim should note that the Enforcement Judge is bound under Article 2 to follow the principles established under Sharia Law only if the Enforcement Law has not stated otherwise.

In addition, the debtor is notified of the enforcement judgment and must comply within five days. Article 46 applies if the debtor fails to comply and can face the aforementioned penalties.

Instituting Proceedings Under the Enforcement Law

For a party to obtain an execution order from the Execution Court, the application must comply with Article 34 outlining the Execution Regulations. The application is dependent on these main conditions and procedures.

The application made must be concerning an execution document, which can be a type stated in Article 9 of the law. These documents include;

Orders, decisions, and judgments made by Saudi courts
Awards made by arbitrators and approved for execution in line with Saudi Arbitration Law
Reconciliation minutes issued by departments or those authorized by Saudi courts
Commercial documentation that includes promissory notes, bills of exchange, and checks
Other documents verifiably issued by the debtor as a constitution and a declaration of the debtors’ validity are acceptable to the judge. They will view them as execution documents unless an objection is raised. In case of a protestation, the judge requires the debtor to append their signature on a document declaring the reasons for their objection.

The execution documents before the court must list a specific amount that’s due and payable. The document must be in line with Sharia Law and comply with the requirements stated in Execution Regulations, Article 9.
Suppose a debtor objects to a commercial paper such as a promissory note or a check, the required written objection document must be provided to the court in tandem with the concerned commercial paper.
When the applicant presents their case to the Execution Court, they should also submit an original copy of any power of attorney.
The execution judge must be competent enough to understand the application and should also be within the jurisdiction in which the claimant applies to determine the matter.
In case of an appeal, a judgment stays. The exception is if the decision is by summary execution.

For a company seeking to obtain or recover payments assured to it via a check or other similar commercial paper, or where there are acknowledged settlement or debt agreements, it would be viable to

enforce them via the execution court. This process is quicker than obtaining a judgment via a commercial court.

To discuss the enforcement law further or to explore further insights which may impact your legal position, contact us.

Construction Contracts – Assessing Their Pros & Cons

Posted on May 12, 2022 - 3:26 pm by perpetual-admin

The construction and contracting industry in Saudi Arabia is booming, and presents a significant growth opportunity, particularly with notable large-scale projects such as the Riyadh Metro, The Qiddiya Project, Neom and The Red Sea Project to name a few.

With the scale of opportunity present, the need for legal protection becomes greater, therefore we explore the construction contracting landscape, along with the pros and cons.

There is currently no specific construction law in Saudi Arabia, which enables related parties in the private sector to agree on the method to use for pricing, along with terms. The key element to ensure is that agreements should be Sharia law compliant in order to ensure the terms are enforceable.

Construction contracts outline the contractor’s and project owner’s roles and obligations. The agreements come in various forms, and based on the type, one party may gain more than the other, that is, each contract has its benefits and drawbacks.

Lump-Sum Contracts

A lump-sum contract is the same as a lump-sum agreement or fixed price contract. It is one of the most basic and widespread in Saudi Arabia. The contractor undertakes to perform the job for a set fee, and the project owner agrees to pay the entire cost to the contractor.

The cost of the realization, acquisition of materials, and the marking by miscellaneous expenses and benefits are all in the price.

Pros

Since the contracts are set in stone, completing them under budget means better profits.
With anticipated costs, the owner bears minimal risk
Lump-sum contracts are simple. The contractors don’t have to submit multiple bids and calculate the total price instead.

Cons

The fixed price model is a risk to the contractor when the projects are vast. There is no room for errors, and any missteps with suppliers and subcontractors may lead to losses.
Miscalculations can happen when the lump sum contract fails to account for all the variables. Unforeseen changes can reduce margins.

Time and Materials

In a time and materials agreement, the owner agrees to reimburse the contractor per hour in addition to the materials. The contract is most useful where the project’s scope isn’t well defined.

Pros

The contractor benefits because they do not have to estimate the cost of project completion as with a lump sum contract, and the owner benefits as they only pay for the actual time worked.
The contract allows simple negotiations to cover the unforeseen expenses along the way.
The hourly rate is straightforward

Cons

On the other hand, the contractor can be slow because they are paid for their time.
It is no small task to log in the material costs every time and using the wrong amounts may reduce the profit margin for the contractor.

Cost-Plus Contracts

Also known as a cost-reimbursement contract, the cost-plus method involves paying the contractor for all costs incurred during the contract’s duration. The arrangement sets aside a particular amount as profit, usually a percentage of the project’s overall cost.

A cost-based pricing method is often a moving target and can go out of control. To prevent runaway costs, cost-plus pricing often combines with a guaranteed maximum price (GMP) to set the upper limit for fees and expenses. Anything above it goes to the contractor.

In a nutshell, the cost-plus contract covers the direct costs such as labor and materials, indirect costs, including traveling and communication, and the profit.

Pros

Cost-plus contracts are flexible. Owners can make design alterations along the way, and the contractors know in advance what they stand to make after the alterations.
Unlike lump-sum contracts, miscalculations are not detrimental, given the flexible nature of the arrangement.

Cons

Cost-plus contracts require the justification of costs, and this sometimes is difficult. Owners may be unwilling to reimburse some indirect costs such as administrative expenses.

Unit Price

A unit price contract requires the contractor to establish price per unit of work divided into portions. The method is standard in public work. Also known as measurement contracts, the arrangement allows the contractor to forward the cost of every unit of work instead of an estimate for the whole project. Unit price contracts are practical when the task is tedious, and the material costs are not projectable.

Pros

A simplified invoice is the contract’s strength, allowing for more transparency and fewer disputes.
Ideal for well-defined and repetitive projects
The profit margin stays the same even when there are changes to the scope of the work.

Cons

The owner may insist on comparing the prices, which can cause delays.
It may not be handy with private projects unless as part of other methods such as lump sum for particular work components.
Estimating the final value of the contract is not a walk in the park. The amounts of units needed for project completion is not easy to know.

Construction Contracts Best Practices

While there are different types of construction projects, the contracts follow the same rules and have pretty much the same elements. Here are the best practices when writing construction contracts:

Incentives are helpful when the scope is not very clear, and the budget or costs of the project are not yet determined.
The parties need to agree on defining costs, especially in the cost-plus contract. Will redoing the rejected work be part of the overall costs included in the total bill? What about the contractor’s equipment? What rate will be applied?
How and when will there be communication between the client and the owner? Both parties should know when and how to contact the other before making decisions.
Parties should agree on how to apportion any savings from the project. Will all the savings in the cost-plus method go to the contractor?
Since every project may have unforeseen circumstances, it is vital to accommodate contingencies. It is much easier for the project when there is a roadmap in place if something unplanned happens or there is an unexpected expense.
State the expectations clearly, such as the method of reporting the expenses.

Knowledge of the different types of contracts, their advantages, and their disadvantages is crucial, and it helps to know which one to choose to align with a particular project.

Key Legal & Regulatory Considerations For SMEs & Startups

Posted on May 17, 2022 - 7:53 am by perpetual-admin

As your business transforms from the seed stage to becoming a full-fledged company, it will face different legal challenges. These legal and regulatory requirements change as your business grows, and it’s essential to stay up to date to ensure compliance. Failure to comply with regulations can lead to hefty penalties, which hinder growth.

Hire A Legal Team Early On

One of your key considerations early on should be hiring a legal team. Many entrepreneurs wait until they’re facing a legal issue to seek out legal help, but by then it’s often too late. It’s much better to have a legal team in place to prevent problems before they arise. Your legal team can help you navigate the complex world of business law and ensure compliance with all relevant regulations.

They will also take on the task of keeping up with the latest changes in regulations, so you can focus on running your business. While it might initially seem like an additional overhead expense, hiring a legal team will save you money in the long run by avoiding potentially damaging penalties that set you back financially and reputationally for non-compliance.

Legal Challenges At Each Growth Stage

There are different legal considerations to take into account at each stage of your business’s growth. Here are a few key things to keep in mind at each stage of growth.

Seed Stage

When you’re just starting out, it’s important to get the legal foundations of your business in place. This includes elements like choosing the right legal structure, registering your business, and getting any necessary licenses and permits. You should also consider any intellectual property protections you might need. Investors like to see these types of components in place before offering any funding for your venture.

Early Stage

As you start to grow, you’ll need to put more formal contracts and agreements with customers, suppliers, and employees into place. You’ll also need to be aware of consumer protection laws and start complying with tax laws. If you’re hiring, you’ll need to make sure you’re complying with employment laws.

Growth Stage

Once your business is established and growing, you might need to start thinking about areas like commercial leases and international expansion. Risk management becomes more important at this stage, and you’ll need to put policies and procedures in place to protect your business. Your legal considerations are likely to become recurrent at this stage, as your business starts to run with greater efficiency.

Established Stage

At this stage, your business is well-established, and you’ll need to focus on things like succession planning and exit strategies. You’ll also need to be aware of antitrust laws and regulations. Mergers and acquisitions may come on the horizon, which will require expert legal guidance as well.

Exit Stage

If you decide to sell your business or want to retire, you’ll need to think about things like estate planning and tax implications. You must also be aware of any laws and regulations that govern business transfers.

Key Takeaways

Navigating the legal landscape of business law can be complex and challenging, but it’s essential to ensure compliance with all relevant regulations. Hiring a legal team early on is one of the best decisions you can make for your business. Your legal team helps ensure you’re getting off to the right start and not creating any legal problems for yourself down the road.

Each stage of your business’s growth will bring different legal challenges, but you can prepare for them and avoid common costly mistakes with the support of our legal professionals.

Resolving Shareholder Disputes In Saudi Arabia

Posted on May 22, 2022 - 10:42 am by perpetual-admin

Shareholder disputes are a common occurrence in many business entities worldwide, and Saudi Arabia is no exception. Disputes can arise because of disagreements over the company’s direction, distribution of profits, or management.

When shareholders are unable to resolve their disputes themselves, they may bring the matter to the attention of the board of directors to seek a resolution. In Saudi Arabia, the board of directors has the authority to resolve shareholder disputes. However, if the board is unable to reach a decision, the shareholders may seek resolution through arbitration or the courts. This can be a time consuming and expensive process, so it’s always preferable to try to find a working solution before the situation gets to the point of arbitration or litigation.

What Is Dispute Resolution?

Dispute resolution is the process of resolving conflicts between two or more parties. It can take many different forms, such as mediation, arbitration, and litigation. Mediation is a process in which a neutral third party helps the parties involved in the dispute come to an agreement. Arbitration also involves a neutral third party who listens to both sides of the dispute, but the difference is that they are granted authority to make a binding decision. Litigation is a process in which the dispute is resolved by a court of law.

Key Elements Of Effective Dispute Resolution

The key elements of effective dispute resolution are:

Communication – The parties involved in the dispute must be willing to communicate with each other to reach a resolution.
Cooperation – The parties must be willing to cooperate with each other and the mediator or arbitrator to reach a resolution.
Flexibility – The parties must be willing to be flexible to reach a resolution that is acceptable to all parties involved.
Respect – The parties must respect each other and the mediator or arbitrator to reach a resolution.
Time – The parties must be willing to invest the time necessary to reach a resolution.

Why Are Shareholder Agreements Important?

Shareholder agreements are a key tool in managing and resolving shareholder disputes. These agreements can provide a mechanism for shareholders to resolve their differences without resorting to arbitration or litigation. They can also help prevent disputes from arising in the first place by setting out clear rules and procedures for the management of the company.

How To Start The Arbitration Process In KSA

In 2012, the Saudi government issued the new Law of Arbitration with the aim to modernize and streamline the arbitration process in the Kingdom. This law made arbitration a more viable option for businesses seeking to resolve disputes, which they have failed to resolve internally.

If you are a shareholder in a Saudi company and you have a dispute with another shareholder, you can commence an arbitration process. The arbitration process will typically take about six months to complete. Once the arbitrator has decided, it will be final and binding for the parties involved.

To discuss arbitration in further detail please contact our Head of Dispute Resolution, Ali Altoukhi.

What is the Legal Impact of Web 3?

Posted on May 29, 2022 - 7:29 am by perpetual-admin

Apart from Dubai being a tourist destination, it’s a haven for web 3 and the cryptocurrency community. On March 9, 2022, the city approved the first law for the regulation of operations of digital assets, such as non-fungible tokens (NFTs) and cryptocurrencies. The news was confirmed through a tweet by Sheikh Mohammed bin Rashid Al Maktoum, the prime minister of the UAE.

Under the new law, Dubai wants to establish itself as a key player in designing the global future of virtual assets. In addition, the UAE seeks to form a Virtual Assets Regulatory Authority (VARA), which will be an independent body under the Dubai World Trade Center. VARA will oversee the governance, licensing, and setting of regulations for NFTs, cryptocurrencies, and other virtual assets. As a result, the city has become an epicenter for web 3 entrepreneurs from all over the world.

Web 1.0 and Web 2.0

The World Wide Web, referred to as web 1.0, dates back to the 90s. Web 1.0 was made up of web pages connected by hyperlinks. This first generation of the web was read-only, where businesses only shared information for you to search and read it.

Then in the 20s, web 2.0 came to life, the current version of the internet. The platform created a rise in eCommerce and social media platforms like Facebook, Instagram, and Twitter. This improved version of the first worldwide web has a more friendly user-generated interface. During web 2.0, users have been able to work and earn money through various platforms.

However, in web 2.0, users are needed to give out personal information to access and use the ‘free’ services provided by tech giants like Amazon, Google, and Microsoft. The information gathered is then sold to third parties like shopping sites to offer you targeted advertisements.

Web Version 3.0 Explained

Gavin Wood, a co-founder of the Ethereum cryptocurrency, popularized the term web 3 in 2014 to describe anything involved with the changes on the internet for the next generation by making the platform a decentralized digital infrastructure. A cryptocurrency is a digital currency that does not rely on a central authority like a central bank or the government. As a result, transactions done through web 3 technologies, such as peer-to-peer payments, are free from the control of any central governing body.

Web 3 is a new version of the web built on blockchains that are peer-to-peer and decentralized. This format will allow people to control what is published, archived, and stored in secrecy.

A blockchain is a database hosted by a network of several computers instead of a single computer. This distributed ledger offers its users a transparent and unchanging way of storing information.

A blockchain-centric internet will be harder to manipulate and control since the technology used will be the same as in the cryptocurrency technology, which is built to prevent “double-spending.” This means computers will store data on a network instead of servers as it is now, making it easy to track the stored data as there will be an established record of the movement pattern.

An example of a web 3 application is the peer-to-peer payment app that works on blockchains where instead of opening a bank account, you can use the decentralized app (Dapp) to make payments. Examples of peer-to-peer apps include;

Ziina
Zand
mePay
Rise
YAP
NOW-money

How Web 3 Will Impact Businesses

The third phase of worldwide web evolution will bring revolutionary changes to the UAE’s mode of operating its businesses. There are four main types of legal business structure in the UAE, which include:

Individual establishment – Owned by a single person and responsible for its financial obligations
Civil company – Established by investors from local and foreign countries to provide specialized services in the UAE. They include but are not limited to lawyers, doctors, consultants, and engineers
Commercial company – Business arrangements between two UAE nationals where each partner is responsible for the company
Limited Liability Company – Involves more than two but less than fifty, and each partner is responsible to the company according to the shares bought

The introduction of web 3.0 will allow companies to work efficiently by cutting out the middleman through the connection of artificially intelligent computers. As a result, businesses will experience optimum growth. Below are the benefits and challenges that web 3 will present.

1. Streamlined Business Process

With web 3 integrated into the business format, companies and sole proprietorships will find it easy to maintain their transactional ledger. As a result, continuous customers will enjoy personalized services as their previous purchase information is readily available.

2. Provides an Efficient Collaboration With all Involved Parties

Most businesses fail because there is a lack of transparency. However, web 3 will make the business more transparent to all the parties involved. This is achieved through an unchangeable chain of records visible to everyone on the blockchain.

As a result, slow-performing companies will suffer stiff competition due to the end-to-end transparency system that provides real-time transactional proof and supply chain activities to its customers.

3. No-third Parties

Blockchain technology will allow a business owner to control all their in-house operations, including directly contacting the customer. Although it will reduce cost, save time, and make the business more competitive, third-party service providers will experience a decline in their business due to the lack of demand for their services.

Web 3 might be revolutionary, but it also presents various sets of challenges. For example, if your cryptocurrencies like Bitcoin or Ethereum are stolen, you lack a way of pursuing the case due to a lack of centralized control. In addition, due to the nature of public distributed ledgers which makes transactions visible to all, making it directly opposite to privacy

Why You Should Stay Alert on Web3

Businesses will undoubtedly adapt to web 3 technology as it offers a higher competitive advantage. However, before getting involved in the space, all businesses–small or large, existing or start-ups- should know that endless legal issues can arise. This is because the space is relatively new, and laws are continuously being created to regulate the industry.

Web 3 is still at its infancy stage, and the already existing technologies prove that the future of the internet will usher new tides in businesses. As Dubai fully embraces the idea by creating regulatory bodies to control the space and attract investors, understanding this new technology and its impact on your business will benefit you and your business.

Hammad & Al-Mehdar law firm dutifully serves the legal needs of regional businesses and individuals from the five offices across the Kingdom of Saudi Arabia and the United Arab Emirates. Our firm is well-positioned and structured to handle legal issues while providing you with support to navigate through the implications of web 3 in your business or industry. Contact us for more information or legal representation.

Arbitration and its Role in Family-Businesses

Posted on May 29, 2022 - 7:34 am by perpetual-admin

Family businesses contribute significantly to the GDP of Saudi Arabia, albeit the dynamics of the family business continue to evolve as the second and third generation enter the corporate world.

While family businesses leverage cooperation, disputes may arise which threaten the health of the enterprise. Alternative dispute resolution offers a mechanism family members can use to resolve differences privately and cost effectively.

Common Disputes in Family Businesses

Disputes over succession following the demise of a founding member are common and can take the business on a downward spiral if no succession planning or dispute mechanisms exist.

Often, family and business values will overlap but not necessarily align. Family values will insist on the unity of the members, which sometimes conflicts with the objective of optimizing the economic return of the family business. There may be a reluctance to disassociate a family member whose actions harm the company.

Furthermore, in the event a formal succession plan is not in place, the voting in of a temporary leader may cause unharmony between family members, which brings into question their position and future within the business.

Such rapid changes may lead family members to cash in on their stake, which may give rise to potential liquidation or divestment of stakes, again compromising the family business, brand reputation and future growth plans.

Avoiding Disputes

Families that decide to go into business should plan on ways to resolve conflicts in advance, usually at the outset of drafting company laws.

There are various pre-emptive measures at the disposal of family businesses to prevent disputes. These measures include legal governance structures providing for dispute resolution.

Families must establish a dispute resolution mechanism in their constitution, appointing an arbitrator or mediator.

The constitutional documents should have provisions for family members that want to cash in on their share, allocation of voting rights, processes of operating charities, and a dispute resolution mechanism.

Family businesses should prioritize succession planning in the event the founder expires.

In a nutshell, precautions that family members can take before they decide to go into business together include:

Preparation for conflicts: conflicts are always possible when business and family inter-twin. A careful analysis of the potential pitfalls and interests can preempt conflicts to establish sound mechanisms for resolution.
Focus on transparency: conversations about issues and challenges should come before negotiations on business matters. In addition, discussions on the norms and procedures in conflict resolution should also occur.
Appoint an arbitrator: parties should agree on a competent arbitrator in case of a dispute.

Alternative Dispute Resolution (ADR)

The Saudi government has taken steps to modernize the countries legal system to align with global standards. This includes provisions for mediation and arbitration. Unlike in the past, the parties can choose the foreign law they wish to apply in the ADR process. The provision is practical where one or more parties to the dispute are non-Saudis.

Usually, mediation and arbitration are the two major forms of ADR available to family businesses in KSA. Other variations such as expert determination, conciliation, neutral evaluation, and adjudication may exist, but they are still sub-branches of mediation and arbitration.

Mediation should typically come before arbitration and only move to arbitration when mediation fails. When the government established the Taradhi platform for virtual mediation, the primary objective was to accelerate dispute resolution, which is the overall goal of ADR.

The 2020 Commercial Courts Law introduced various changes to encourage arbitration and mediation in conflict resolution.

The benefit of ADR is control of the process. It is more flexible and inexpensive and provides a faster way to resolve differences between parties.

Arbitration as a Legal Resolution Channel for Family Businesses

With arbitration, dispute resolution between the family members usually involves one or more hearings. The arbitrator is a neutral third party, mutually or contractually engaged by the parties, or the arbitral tribunal based on the arbitration law.

Before the arbitration process, parties to the dispute agree to be bound by the arbitrator’s final decision.

Considering that the arbitration process is private, the public does not access information on disputes or resolutions. However, the parties must sign a non-disclosure agreement to keep all the dispute details confidential.

The process is also preferable when subject matter expertise is necessary. Some arbitrators specialize in particular areas such as construction and real estate law, and the process can leverage this expertise for quick and fair resolutions.

Drawbacks of the arbitration process can include the relaxed evidentiary and discovery rules. The arbitrator may use materials that an actual court may not have to make final decisions, and the result may be an unfavorable outcome that does little to resolve the dispute in the long run.

Normally, the arbitration law in KSA requires the supervision of the process by a court that typically has jurisdiction. Parties can appeal the arbitration decisions through that court, which can lengthen the process. The absence of finality can water down the benefits of the arbitration process, such as swiftness and cost-effectiveness.

The Saudi legal regime is undergoing significant changes, and challenges such as compliance will be apparent. However, the new modifications benefit the overall dispute resolution mechanism and provide greater certainty and clarity.

The decision to include a binding arbitration clause in the governance structure of a family business is up to the members. Nevertheless, the family business should consider drafting a process for arbitration for effectiveness and to avoid wasted time through appeals. Attention to the KSA arbitration law provisions is vital to making informed decisions.

Hammad & Al-Mehdar Law Firm has experience in all legal matters involving businesses and can help with arbitration agreements. Contact us to discuss your requirements further.

Legal Due Diligence: Why Is it Important in M&A Transactions?

Posted on May 29, 2022 - 7:41 am by perpetual-admin

A 2021 report by the Saudi Venture Capital, showed that the VC ecosystem had 88 deals, which were all valued at $152 million. Another report by the financial market data firm, Refinitiv, highlighted the growth of mergers and acquisitions (M&A) across the Middle East and North Africa. The report showed that Saudi Arabia dominates M&A, with deals reaching a record high compared to the previous years.

The increase in M&A activity is attributed to an influx of foreign investment, however such transactions are sensitive and require rigorous legal, due diligence. They also have the tendency to attract the scrutiny of the General Authority for Competition, trying to avoid monopolistic and oligopolistic practices.

What Is Legal Due Diligence?

Legal due diligence involves reviewing a company’s documentation to identify any potential legal exposure and non-compliance issues. Legal due diligence is conducted when a business is interested in acquiring or merging with a target company.

Legal due diligence has different subcategories, which include:

Business
Accounting
Intellectual property

The due diligence seeks to know more about the company:

Lawsuits (pending or potential)
Debts
Leases
Warranties
Compensation
Distribution agreements
Contracts

The company looking to get involved in a M&A will request the following documents from the target company:

Material contracts

The buyer must review all the seller’s material and commitments. The contracts that must be reviewed include:

Guarantees and credit agreements
Indemnification agreements
Employment agreements
Customer and supplier contracts
Partnership or joint venture agreements
Settlement agreements
agreements on past acquisition
Equipment leases
Government contracts
Any other relevant contracts the company is involved in

Employee & Management Issues

The buyer should also try to understand all the issues affecting the employee and the management. Such documentation includes:

Policies or allegations involving sexual harassment
Allegations of any sexual misconduct
Any labor disputes
Relevant information involving previous, pending, or threatened labor stoppage, slowdown, or other similar labor activity.
Any key employees and company officials involved in any criminal proceedings or civil litigation

Litigation

A review of any pending, threatened, or settled litigation or arbitration the seller is involved in. Some documentation to be reviewed include:

Attorneys’ letters directed to the auditors
lawsuits brought against the company

Governmental Regulations, Filings, and Compliance with Laws

The buyer would want to know whether the seller was involved in any regulatory requirements by reviewing the following documents and citations.

Any current or pending governmental proceedings
Government agencies’ citations or notices issued to the seller
Certification of compliance with respect to the company’s regulatory standard
Any cancelled or terminated company permits or licenses.

Once all the information is reviewed and relevant data collected, a business can make informed decisions.

Why is Legal Due Diligence Needed?

Due diligence offers the following advantages, which are all crucial in an M&A deal:

1. An opportunity to understand the target company.

When conducting legal due diligence, all the relevant documents touching on any current or potential legal exposure are collected. All these documents help the buyers understand more about the target.

2. Understand the Target’s Fair Price

Having financial information about the company, including lawsuits, can help come to a conclusion on how much the company is worth. The information gives each party room for negotiation, especially in an M&A transaction.

3. Identify Possible Future Risks

Certain risks a company is facing can become a big problem after an M&A transaction. Identifying all the risks early on can help a company better prepare on how to handle them. Identifying the risks early on can also help a buyer decide whether to proceed with the M&A transaction.

4. Helps Prepare an M&A Contract

Legal due diligence helps identify existing problems that can prevent the deal from going through. When all the parties are aware of these problems, they can discuss solutions that will ensure a smooth transaction.

Significant M&A Transactions in Saudi Arabia

Saudi Aramco closed a US$12.4 billion deal that involved selling a 49% stake in Aramco Gas Pipeline to a consortium of international investors. The investors included Keppel Infrastructure Trust, Silk Road Fund, China Merchants Capital, and Hassana Investment. The deal is part of ongoing Saudi Arabia’s efforts to sell assets and use the proceeds to find other industries and increase oil and gas output.

The private equity sector has also witnessed an increase in M&A activity over the past few years. In the first half of 2020, the venture capital got 45 deals valued at US$95 million. During the same year, the Public Investment Fund allocated US$1 billion to develop the private equity and venture capital ecosystem.

When it comes to prominent industries in Saudi Arabia, the e-commerce industry is still the most targeted industry for the second consecutive year. Along with the fintech industry, the e-commerce industry represents 30% of all the total M&A transactions.

Choosing Who To Manage the Due Diligence Process

Choosing who to conduct and manage the due diligence process is critical. They should be able to communicate the due diligence process, what is covered in the review and what is commercially material to the buyer.

Conducting due diligence on the petroleum and gas business is different from the construction industry. A buyer should choose a legal counsel that is experienced and knowledgeable in matters related to M&A.

Additionally, reviewing all documents in the legal due diligence process is challenging for one person, which is why a buyer should choose a legal firm for the job.

For a smooth M&A transaction, relevant people must be involved to undertake all the work involved in legal and due diligence. Having an experienced legal firm overseeing the whole process will ensure that potential risks are pointed out and worked on early on.

At Hammad & Al-Mehdar Law Firm, we will represent your interests and help conduct the legal due diligence for M&A transactions. As one of the leading private legal practices across Saudi Arabia and the wider Gulf Cooperation Council (GCC) we have decades of experience in M&A transactions. Contact us today to learn more on how we can help you conduct legal due diligence.