Tag: Restructuring

Inside Saudi Arabia’s Plan to Raise $55bn through Privatization

Posted on August 5, 2021 - 3:57 pm by

Saudi Arabia is planning to raise about $55 billion in the next four years as it embarks on a nascent privatization plan to boost revenue and plug its yawning budget deficit. The move by Crown Prince Mohammed Salman is part of the Saudi government’s plan to pull the country from the oil-addicted, state-dominated economy, and modernize the Kingdom.

 

A pipeline of 160 projects

According to the finance minister, Mohammed al-Jadaan, Riyadh has settled on a total of 160 projects across 16 sectors and public-private partnerships as major beneficiaries of the privatization program. This plan will go a long way in filling the yawning budget deficit, which has been a significant challenge in Saudi’s plans to upgrade its economy and modernize the country.

As part of the privatization program set to run through to 2025, Riyadh intends to outsource the management and financing of health infrastructure and services to the private sector. The move will also rope in transportation networks, school buildings, water desalination, sewage treatment plans, and airport services.

 

The government is also targeting the sale of particular assets, including television broadcasting towers, district cooling, and desalination plants, and government-owned hotels. The move is expected to raise the funds needed to drive the economy forward and improve the living standards of the people.

 

Driving force behind privatization move

Shedding light on the privatization issue, the finance minister stated that it no longer makes economic sense for the central government to run some services and utilities, hence, the need to outsource them to the private sector. This will go a long way to cut down government expenditure and ease the pressure on public finance.

 

The minister further said that Riyadh expected to raise revenue through the privatization program, and the funds would go into plugging the $79 billion deficit, the equivalent of 12% of its gross domestic product. This would improve state services to the citizens. Mr. Jadaan is hoping to raise $38 billion through asset sales, and another $16.5 billion through public-private cooperation.

The Aramco connection

Talks are already underway for the possible sale of 1% government stake in Saudi Aramco, which listed 1.7% of its shares in 2019. Aramco is the country’s global energy company. Shedding more light on the Aramco connection, the finance minister said Aramco was free to monetize its assets and channel the funds into new investments, but the government would monetize its shares in the company.

However, funds raised through future sales of Aramco shares would go to the Public Investment Fund (PIF), the body spearheading the country’s efforts to diversify its economy, rather than the treasury. PIF itself will remain immune to the privatization efforts because of its role in the growth of the economy.

The beginning

The country’s privation plans have been ongoing for the last three years, beginning with the sale of public flour mills, sports clubs, and a water desalination plant. But it wasn’t as fast as people would have expected, as only five asset sales had been made so far — Saudi Service Medical Center, and four milling companies.

However, the government isn’t expecting much foreign interest in privatizations. A Gulf analyst stated that the initiative would largely attract local businesses because foreign investors were still circumspect over the issue. He attributed the reluctance of foreign investors to the tarnished image of the Crown Prince’s leadership by the international community, citing alleged human rights abuses.

Benefits of privatization

The Saudi government looks forward to leveraging privatization to enhance its economy and plug its budget deficits. Although it seems to be slower than expected, the government hopes to raise a massive $55 billion in the next four years.

 

Here are some reason pushing the privatization program:

1.       Improved efficiency

The public sector is known to perform below par because it usually isn’t under any pressure to perform. Many public industries don’t even worry about competition because they are monopolies. By privatizing sports clubs, the health sector, and some milling companies, the Saudi government is looking forward to bettering services for its people. This is because private companies work for profits, forcing them to provide better goods and services.

2.       Way of raising funds internally

The government hopes to raise a whopping $55 billion internally, so it won’t have to worry about foreign dependence. Privatization will help it gather the financial resources needed to plug its budget deficits, instead of having to borrow from external financial firms, as other countries do.

3.       Cuts down government expenditure

Privatizing certain sections of the public sector relieves the government of its financial responsibility. Some of these public entities need huge sums of money to run and maintain, but may not fetch enough money in profits. A good example is the management of sports clubs, which the government hopes to sell to the private sector.

4.       Fosters economic democracy

The Saudi government hopes to broaden the space for the private sector struggling in a state-dominated economy. There had been numerous complaints from companies crowded out of the market by the PIF. Privatization should be a lasting solution to this challenge. As John Sfakianakis, a Gulf expert based at Cambridge University puts it, the government now wants to include the private sector in economic growth.

5.       Creation of jobs

The many Saudis locked out of employment from the public corporation now have something to look forward to as privatization takes shape in the country. The Gulf expert at Cambridge says the government wants to slim down on its business operations, reduce its liabilities, and outsource financial and health services to private entities. This would open up the private sector for more jobs.

 

You can take advantage of the privatization program

As the privatization move gathers momentum, it’s clear that local businesses stand to gain massively if they position themselves well. As a local businessperson, you need professional and experienced lawyers to help you understand the legal implications of privatization. Such lawyers will also help you interpret the privatization law, which the government will enact in July.

 

You can ensure your business is in the best position to tap into the privatization move by the government by partnering with the best law firm. If you are looking for the best lawyers, please contact HMCO today to get started.

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.

New Reconciliation Proceedings Announced

Posted on December 31, 2021 - 2:02 pm by

Saudi Arabia’s Ministry of Justice has announced it has decided certain dispute cases should be referred to reconciliation before submitting it to the courts.

Under the Decision will cover cases of less than SAR 20,000. They include cases related to renting, custody of children, labor wages, and termination of contracts.

The aim is to improve judicial services provided to citizens and expatriates and promote the courts’ ability to process cases.

Implementing Regulations to Accounting and Auditing Professions Law Approved

Posted on December 31, 2021 - 2:15 pm by

Saudi Arabia’s Ministry of Commerce has announced it has approved the Implementing Regulations to the Accounting and Auditing Professions Law. The regulations state that the license will be granted to someone who holds a relevant university degree.

The applicant should pass a training program. The regulations also state that the license will last for three years for part-time accountants and auditors.

Hammad & Al-Mehdar Contributes to the Saudi Arabia Chapter in The Cartels and Leniency Review, 9th Edition

Posted on March 31, 2021 - 7:34 am by
Saudi Arabia Chapter in The Cartels and Leniency Review, 9th Edition

Hammad & Al-Mehdar’s partner Belal Hashmi has authored the Saudi Arabia chapter in the leading competition publication of The Cartels and Leniency Review, 9th Edition, published by The Law Reviews in January 2021. 

The Cartels and Leniency Review bring together leading competition law experts from 26 jurisdictions to address an issue of growing importance to large corporations, their managers, and their lawyers: the potential liability, both civil and criminal, that may arise from unlawful agreements with competitors as to price, markets or output.

The chapter is available for download here.

Background About the Author:

Belal Hashmi is a partner at Hammad & Al-Mehdar in Saudi Arabia. He is an analytical professional with a vast educational background and extensive legal experience in leading commercial and corporate practices and strategic legal initiatives while overseeing compliance and risk management operations. He has demonstrated experience in advising clients on complex cross-border M&A and joint venture transactions, corporate structuring and reorganization, and negotiating with government regulators. He is skilled in establishing and maintaining communication and collaboration across various business units, practice groups, legal departments, and corporate functions to resolve complex business and risk management issues. Belal diligently maintains his knowledge of current laws, regulations, and legislation to ensure continuous corporate compliance. Belal double majored in literature and political science and held a bachelor’s in law from the University of Punjab.

Rules Governing the Transfer of Shares in Saudi Arabia

Posted on January 8, 2020 - 3:23 pm by

On November 9, 2015, the Council of Ministers in the Kingdom of Saudi Arabia assented the Kingdom’s company law 1437H/2015G (The New Law) that was enacted in May 2016. The New Law modernized the Current Law following the consent of Saudi Arabia to the World Trade Organization and the continued initiative to modernize the legal and regulatory environment in the Kingdom to match with international trade trends and standards.

The New Law aims at promoting investment in SMEs by establishing a flexible entry strategy for investors. It also introduces the Kingdom to new corporate governance rules to align with international best practice. It aims at establishing clarity and efficiency in the regulatory framework to match the growth of the Saudi Arabian stock market, which has been opened up for Foreign Direct Investment.

The Ministry of Commerce and Investment will continue acting as the primary regulator of listed liability companies under the New Law. The Capital Markets Authority will oversee the operations of listed joint-stock companies. The two organizations will work together to draft and implement the requirements of share transfers under the New Law.

In the Saudi Arabian market, leveraged buyouts and venture capital investments constitute the primary private equity transactions. The market is predominated by local and regional private equity firms, quasi-government entities, family offices, and sovereign wealth funds. Private equity transactions usually involve investors acquiring the majority stake or significant minority interest through the transfer of shares. Unlike in established markets where the general partner and limited partners investment structure exists, the Saudi Arabian market supports direct investments by investors and through a fund established by a local asset manager who determines who will acquire the shares of a target. This is usually done through limited liability companies and joint-stock companies.

Share Transfer in a Limited Liability Company

The transfer of shares in a limited liability company is outlined by the Ministry of Commerce to entail the following steps:

  1. Preparation of an amendment to the articles of association of the target company to reflect the name of the investor and exit of a shareholder, including identifying in the relevant shares and percentage to be owned by each party. The Ministry of Commerce & Investment (MOCI) regulations require the articles of association to be amended and presented for approval.
  2. The next step involves seeking the approval of MOCI on the amendments done on the articles of association.
  3. The Ministry of Commerce and Investment will then publish the amendment on their website as a public notification of the intent to transfer shares.
  4. The final step is updating the commercial registration of the target.

Transfer of Shares in a Joint Stock Company

For joint-stock companies with foreign investors, if a license from the Saudi Arabian General Investment Authority is expected to be amended as part of the process, the same will be processed prior to commencing with the MOCI steps identified above. Similarly, if the foreign investment license is not required or does not need to be updated as part of the transfer process, closing the share transfer transaction in a CJSC will be a much easy process. It will only require the preparation and performance of the share transfer agreement and an update of the share register of the target.

If an amendment to the by-laws is required as part of the closing process, then a shareholders’ general meeting is required to approve the amendments to the by-laws. The notice for the meeting will be issues in a minimum of ten days. The general meeting approvals must be obtained prior to commencement of the share transfer process, which is usually completed in one business day. Post-completion of the commercial registration of the target will need to be updated to reflect any amendments to the target’s board of directors.

During the share transfer process, Saudi Arabia’s law implies a wide seller representation and warrant as to the ownership and title of the transferred shares and authority to transfer the shares. The implications are adopted from the sharia law, which prohibits unfairness in dealings (Ghobn) under which it is unfair for a transferor to sell shares they do not own.

Restrictions on Share Transfer

Article 161 of the Companies Law provides preventative right to existing shareholders of a limited liability company to acquire the shares of a transferor. The Minister of Commerce and Investment issued a ministerial directive on April 18, 2018, indicating that the admission of new shareholders into a limited liability company through the issuance of shares will require the unanimous approval by the existing shareholders. A transformer wishing to transfer their shares must notify the existing shareholders in writing, through the company’s management. Existing shareholders will then exercise their pre-emptive rights by bidding to purchase the shares offered at fair value within 30 days from the day the transfer notice is given.

Article 107 of the Companies Law restricts the transfer of shares to third parties in joint-stock companies prior to the publication of financial statements covering not less than two years since its formation or conversion from a LLC. However, the Capital Markets Authority may change the 2-year lock period for any joint-stock company that wishes to trade its shares publicly. Any shares bought back by a joint-stock company are deemed as non-voting shares under the New Companies Regulations. There are generally no stamp duty taxes or duties payable upon the transfer of shares in both an LLC and a JSC. Since Saudi Arabia is still governed by the Sharia law in its operations, it does not support the taxation of share transfers. However, a non-resident imposes a 20% capital gains tax on the disposal of shares of a Saudi entity.

Are you a local or foreign investor interested in investing in Saudi Arabia’s economy? Hammad & Al-Mehdar Law Firm is dedicated to providing you with a comprehensive outline of the regulatory and procedural changes, which will affect private equity investment in the form of shares. Contact us today and get the latest updates on Saudi Arabia’s Companies Law and the clauses that affect you when transferring shares.

Recent Cases of Insolvency Law in Saudi Arabia and the UAE

Posted on October 7, 2019 - 12:48 pm by

Insolvency refers to the inability of an entity to meet its financial obligations on time, such as paying its lenders. It may result from a reduction in cash inflow, an upsurge in expenditure, and poor fiscal management, among other reasons.

There is a slight difference between being insolvent and bankrupt. You can utilize different strategies to survive insolvency. Your options may include borrowing money, growing your income, or developing more lenient payment plans with your creditors. You become bankrupt when you run out of options to clear your debt.

Insolvency and Bankruptcy in Saudi Arabia

Before the bankruptcy law of 2018, insolvent companies in the UAE and Saudi Arabia had limited alternatives. It was criminal by default to be bankrupt, and business owners would get detained for failing to pay debts. For this reason, many would flee when their inability to pay became apparent.

Let’s discuss the genesis of the insolvency law in Saudi Arabia and the UAE and highlight some recent cases of insolvency.

The Inspiration Behind the Insolvency Law

The drop in oil prices from $115 per barrel in 2014 to a mere $27 in January 2016 hurt the economy of Dubai and Saudi Arabia significantly. Most small and medium-sized enterprises went into financial distress after customers couldn’t pay on time. The price of oil remains unstable despite having risen.

The UAE’s economic growth dropped to 3.1 percent in 2014 from 6.8 percent in 2012. At that time, the International Monetary Fund predicted that it would sink further to 2.3 percent by 2016. Experts reported more than 800 cases of business owners who had fled the UAE due to debt accumulated in six quarters.

Most of the runaway incidents involved companies that traded in goods. A decrease in bank lending and lack of liquidity had fueled the massive payment delays, forcing entrepreneurs to close shop.

Due to this trend, Saudi Arabia and the UAE found it necessary to reexamine the laws surrounding insolvency. There was a need to reassess the crime of bankruptcy and review the conditions for bounced checks. The insolvency law to come would also address insolvency proceedings initiated by creditors.

The Kingdom of Saudi Arabia (KSA) authorized the bankruptcy law in February 2018, which came to effect later in August. It consists of 17 chapters and 231 clauses which outline the procedures for bankruptcy. It provides friendlier avenues for dealing with insolvent entities to make business smoother in Saudi Arabia.

The UAE Supplier Who Fled to Britain

Pervez was a British trader who lost his business after becoming insolvent in Dubai. The construction materials supplier set up shop in the UAE before a financial crunch struck Dubai from 2008. His real estate customers would later pay only a percentage of invoices issued for supplied products and services.

He managed to survive as large scale construction work resumed in 2011 after the Arab Springs anti-government protests subsided. In 2014, another crisis took place following a regional slump in oil prices. Most customers in the construction industry either paid late or defaulted.

A fraction of his debtors ran away to avoid imprisonment, plummeting his market considerably. After some time, Pervez could not service his debts, and the bank froze his account.

He decided to flee to Britain when due dates of checks he had guaranteed approached. Soon after departure, his staff collapsed the business.

The case is synonymous to what many construction and trading companies have gone through in Saudi Arabia.

Saad Group and AHAB Bankruptcy

Maan al-Sanea owns the Saad Group, a company with interest in banking and healthcare in the city of Khobar, Saudi Arabia. Together with, Ahmad Hamad al-Gosaibi and Brothers (AHAB), Saad defaulted about $22 billion owed to banks in 2009.

For the past decade, creditors have been pursuing Saad and AHAB for the unpaid debts. Maan al-Sanea became insolvent despite having featured in the Forbes list of the world’s 100 wealthiest people in 2007. The authorities detained him in 2017 for failing to meet the said financial obligations.

Maan Al-Sanea’s Bankruptcy Filing Approved

Saad, Sanea’s company, was quick to file for bankruptcy soon after the new law came into effect. The court accepted his request, according to the Saad Group’s financial advisor.

The ruling was a leap towards resolving one of the biggest debt sagas in Saudi Arabia. In March 2018, the public gathered as Saudi government agents auctioned Maan al-Sanea and Saad’s vehicles and possessions in Dammam.

Regional and international creditors claimed at least 85 percent of the debt. Given the commercial law practices surrounding the Saad’s debt, experts saw a high chance of success in resolving the matter through bankruptcy law.

On approving the application, a Dammam commercial court appointed a third-party trustee to supervise the process of financial reorganization. Saleh A. Al-Naim, the trustee, notified Saad’s creditors to submit their claims in 90 days.

AHAB’s Application Accepted

A commercial court based in Dammam approved AHAB’s request to settle their decade-long dispute with creditors under the bankruptcy law. The ruling saved the conglomerate from liquidation as per the HSBC and Raiffeisen Bank filing.

The International Bank Corporation (TIBC) was pleased with the court’s decision to allow financial restructuring. AHAB owes the Bahrain bank close to $3 billion. In what a court in the Cayman Islands called a massive Ponzi scheme, TIBC had raised money in international markets and transferred it to AHAB.

This case was among the first ones to put the kingdom’s bankruptcy law to test in solving insolvency. After approving the filing, the court would appoint a bankruptcy trustee to evaluate and collect the claims of the creditors.

How the Bankruptcy Law Can Benefit You

The Kingdom of Saudi Arabia finally enacted the bankruptcy law in 2018. It provides better solutions to disputes between creditors and insolvent debtors in the KSA.

The law will allow distressed investors to re-evaluate their finances and meet their pending obligations to creditors. As a result, they will run their operations in smoother and more tolerable conditions.

The government hopes to boost the growth of the investment market and reduce cases of business liquidation. By so doing, KSA will stop losing substantive investors who undergo resolvable financial crises.

Contact us to discuss any matters of business law in Saudi Arabia and the UAE.