Mergers and Acquisitions (M&A) are among the most prominent legal tools companies use to expand their business scope, improve financial efficiency, or achieve a safe market exit. The new Saudi Companies Law, issued in 1443H (2022G), has addressed these operations with clear and balanced regulations that protect the rights of all parties, including partners, creditors, shareholders, and administrative bodies.
In this article, we review the systematic aspects of M&A as stipulated in the Companies Law, along with a legal analysis of the key provisions and their significance, enabling investors to make informed legal decisions.
First: The Legal Framework for M&A Operations:
The Law permits any company, regardless of its form, to engage in a merger or acquisition within specified controls, as stated in Article 227:
“A company may merge into another company of the same or a different form, acquire another company, or be acquired by another company, in accordance with the provisions of this Law and related regulations.”
This article opens the door for various companies—whether joint-stock, limited liability, or otherwise—to execute mergers and acquisitions, thus enhancing market flexibility and allowing for expansion or restructuring opportunities.
Second: Conditions for the Validity of a Merger or Acquisition:
An operation does not gain legal validity until a number of official procedures are completed. Article 228 of the Law stipulates the following:
“The merger or acquisition shall not be effective until the systematic procedures are completed, the contract is authenticated, registered in the Commercial Register, and publicized in accordance with the provisions of this Law.”
Accordingly, this text establishes the principle of mandatory formality, making the authentication, registration, and publication of the contract conditions for validity and enforceability, rather than mere administrative requirements. Failure to complete any of these procedures may render the operation ineffective towards third parties.
Third: Legal Effects Following the Effectiveness of the Merger:
A merger entails several important effects, most notably the transfer of rights and obligations to the new or absorbing entity. Article 229 states:
“The merged company shall be deemed dissolved on the date the merger becomes effective, and all its rights and obligations shall be transferred to the absorbing company or the company resulting from the merger. This shall not release the partners, shareholders, directors of the merged company, or members of its board of directors from the obligations of the company arising before the merger.”
Thus, the merger leads to the dissolution of the merged company by operation of law, while the liability of the partners or directors for prior obligations remains, serving as a guarantee for the rights of third parties, especially creditors.
Fourth: Requirements for the Merger or Acquisition Contract:
The Law imposed a minimum set of data that must be included in the merger or acquisition contract. The goal is to achieve transparency and protect the contractual balance between the parties, avoiding disputes related to valuation or the effect of the operation on prior obligations. This is mentioned in Article 230 of the Law, which states:
“The merger or acquisition contract must include, in particular, the following:
a- The fundamental data of the companies.
b- The method of valuing the shares or stock.
c- The method of exchange.
d- The effect of the operation on contracts and rights.
e- Any other detailed provisions.”
Fifth: The Right of Exit for Objecting Shareholders:
The Law guarantees the right of exit for shareholders or partners who do not approve the merger or acquisition decision, granting them the right to request divestment if they do not wish to participate in the new entity. This achieves a balance in the interests of the partners, as stipulated in Article 231:
“Partners or shareholders who object to the merger or acquisition decision shall have the right of exit in accordance with the conditions specified by the regulations.”
Sixth: Creditors’ Right to Object:
The Law did not overlook the protection of creditors’ interests in these operations, granting creditors the right to object to the merger or acquisition decision. It grants the competent court discretionary authority to take appropriate measures to protect their rights, such as halting the operation or imposing necessary guarantees. Article 232 states:
“Any creditor of the companies party to the merger or acquisition may object to the operation during the period specified by the regulations. If the competent court finds that the operation prejudices their rights, it may take whatever measures it deems appropriate.”
In conclusion, the Saudi Companies Law, in its regulation of M&A, balances the freedom of companies to restructure their commercial entity with the protection of the rights of partners and creditors.
To ensure the correct execution of M&A operations, we recommend the following:
- Prior verification of the fulfillment of all formal requirements (“Authentication – Registration – Publication”).
- Thorough review of the merger or acquisition contract, ensuring it includes all systematically required elements.
- Informing all partners and creditors of their systemic rights, including objection or exit.
- Obtaining specialized legal advice when there is more than one party or different types of companies involved.