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.
