Saudi Arabia: Saudi Attempt To Limit Scope Of Merger Control Regime May Backfire. New Thresholds And Local Nexus Test.

On 1 November 2023, the Saudi General Authority for Competition (GAC) announced amendments to the Saudi merger control notification threshold, adding a local turnover requirement as well as a minimum turnover threshold for the target. The stated purpose of these amendments was to limit the scope of application of the Saudi regime. However, the amendments may fall short of this goal as—even after the recent amendments—the regime continues to catch transaction with no relevance to Saudi Arabia. Considering the significant increase in enforcement activity we have seen over the past 18 months as well as the drain of experienced staff from GAC, the amendments raises concerns as to the way forward for merger control in Saudi.

Notification threshold

In 2019 the Kingdom revised their competition law and introduced a new turnover based notification threshold. Initially the threshold was SAR 100m (approx. USD 26m) total combined annual, worldwide turnover of the parties involved in the transaction. There was no local nexus test, and the threshold could be met by one party alone. Hence, technically, transaction between small businesses without any relation to Saudi Arabia triggered a notification obligation under the new regime. This excessive application of the regime was further confirmed in April 2020 with the 1st GAC Merger Guidelines, which explicitly reenforced this interpretation.

Introduction of local nexus test

A year later GAC attempted to address this excessive application of the Saudi merger control regime. With the 2nd GAC Merger Guidelines issued in June 2021 the authority introduced a local nexus test. The 2nd GAC Merger Guidelines provided that while the notification threshold was still based on worldwide turnover, a notification was only mandatory where the transaction had a local effect in Saudi Arabia. According to the guidelines a local effect 'could' be established by 'more than trivial' sales of at least one party in Saudi Arabia or a different geographical area with sufficient link to the Kingdom. The guidelines did not specify what was meant by sales 'could' establish a local effect. Also, they did not specify when sales were 'more than trivial'.

In practice GAC clarified that relevant sales in Saudi Arabia always established a local effect. Still, transactions could be deemed to have a local effect, even if the parties had no sales in Saudi Arabia, provided the transaction for other reasons (potentially) had effects on competition in Saudi Arabia. Such other reasons could be potential sales in Saudi Arabia, sales through intermediaries (i.e. unrelated third party re-sellers), or impacts on regional or global supply or pricing. Furthermore, the authority made it clear that no overlap between the businesses of the parties was required to established a local effect. Hence, Saudi sales by any party in any sector—i.e. sales by the acquirer in a market unrelated to the target's business—technically met the local nexus test, provided such sales were 'more than trivial'.

What was 'more than trivial' within the meaning of the local nexus test was determined by the authority on a case by case basis. Meaning case handlers would consider a variety of factors—some of which were not competition related—to determine what was trivial for the specific transaction. Aside from the value of Saudi sales and the size of the relevant market, GAC would typically consider (1) whether there was an overlap (an overlap was not required to meet the local effects test. However, an overlap would lower the threshold for what was deemed trivial), (2) how competitive the relevant market was, (3) foreclosure risks, as well as FDI related matters such as (4) whether the transaction concerned a sensitive sector, and (5) the identity of the acquirer and their shareholders. GAC did not disclose their reasoning with their determination of whether the sales were more than trivial within the meaning of the local nexus test. Hence, it remained difficult to determine how GAC would weigh the different factors in their assessment.

Increase of notification threshold

In March 2023 GAC increased the notification threshold from SAR 100m to SAR 200m (approx. USD 52m). The threshold was still based on worldwide turnover. Hence, the new, increased threshold did little to limit the application of the regime aside from excluding transactions between very small parties.

However, starting in mid 2022 we saw GAC take a more restrictive view when applying the local nexus test introduced with the 2nd GAC Merger Guidelines. Since the second half of 2022, the authority rarely required that transactions that involved targets with no (potential) turnover in Saudi Arabia be notified. They would only do so where (1) the acquirer had substantial turnover in Saudi Arabia, (2) the transaction concerned a sector of considerable strategic importance to Saudi Arabia, or (3) the acquirer or their shareholders were from a country deemed 'hostile' by the Kingdom.

Introduction of local turnover and target turnover requirements

On 1 November, GAC announced new thresholds that took effect a day later. According to these new thresholds a transaction requires notification to GAC for merger control review, if:

• the total combined annual, worldwide turnover of the relevant parties is at least SAR 200m (approx. USD 52m);
• the target has an annual, worldwide turnover of at least SAR 40m (approx. USD 10.4m);
• the total combined annual, Saudi turnover of the relevant parties is at least SAR 40m (approx. USD 10.4m).

The new thresholds will only be fully applied to mergers and acquisitions. For joint ventures the second criterion does not apply. Thus, joint ventures still require notification where the parties have a the total combined annual, worldwide turnover of SAR 200m and a total combined annual, Saudi turnover of SAR 40m. A minimum turnover requirement of the joint venture is not required. Green field joint ventures will continue to fall under the Saudi merger control regime. Furthermore, it appears that the minimum Saudi turnover requirement will not be applied to foreign-to-foreign transactions. According to the amended 2nd GAC Merger Guidelines foreign-to-foreign transactions will be deemed to have a local effect in Saudi Arabia, if the parties to it have a combined, annual turnover of SAR 40m in Saudi Arabia. However, the guidelines go on to state that turnover in Saudi Arabia is not required to establish a local effect. This suggests that foreign-to-foreign transactions may require notification, if the parties to them have less than SAR 40m Saudi turnover.

Implications for mergers and acquisitions

Initially, the new thresholds raised three questions in the context of mergers and acquisitions: (1) does the third criterion require that the target has turnover in Saudi Arabia, and (2) how will the local nexus test introduced with the 2nd GAC Merger Guidelines be applied alongside the new thresholds. According to initial guidance received from GAC the local turnover threshold can be met by one party alone. Acquirer turnover alone may suffice. This was further affirmed on 6 November when GAC issued amended merger guidelines. The amended 2nd GAC Merger Guidelines explicitly state that one party alone can meet the local turnover requirement of the new thresholds.

This will arguably lead to an increase of transactions being caught by the Saudi merger control regime. Until 1 November 2023, acquirer turnover in Saudi Arabia alone also sufficed to trigger a filing obligation. However, in practice GAC applied the local nexus test more restrictively since mid 2022. Outside of some exceptions the authority did not require notification of transactions unless the target at least (potentially) had some Saudi business. While this practice had not been explicitly adopted by resolution or guidelines, it at least allowed for parties to take the position that there were reasonable arguments for a filing not being required where the target had no actual or potential turnover in the Kingdom. With the new thresholds and GAC's position that one party can meet the local turnover requirement alone, this line of argumentation now is not available anymore.

The amendments of the 2nd GAC Merger Guidelines clarify that a local nexus test will continue to apply to foreign-to-foreign transactions. The guidelines state that these will be deemed to have a local effect in Saudi Arabia, if the parties to them have a combined, annual turnover of at least SAR 40m in Saudi Arabia. However, the guidelines go on to state that turnover in Saudi Arabia is not required to establish a local effect. This passage conflicts with the newly introduced thresholds that strictly require that the parties have at least SAR 40m turnover in Saudi Arabia.

According to the guidelines it appears that the new notification thresholds only strictly applies to domestic transactions. For foreign-to-foreign transactions the combined worldwide turnover of the parties (SAR 200m) as well as the minimum, worldwide turnover requirement for the target (SAR 40m) apply. However, foreign-to-foreign transactions do not need to fulfil the Saudi turnover requirement of SAR 40m. Instead, the guidelines suggest that a local nexus test will be employed to foreign-to-foreign transactions. This local nexus test is met, (1) if the parties have at least a combined turnover of SAR 40m in Saudi Arabia, or (2) the transaction for other reasons (potentially) has a local effect in Saudi Arabia. Hence, following the wording of the guidelines, a foreign-to-foreign transaction could require filing, even if the parties have less than SAR 40m turnover in Saudi Arabia, provided other factors establish a (potential) effect in Saudi Arabia. This position conflicts with the new notification thresholds that strictly require a Saudi turnover of SAR 40m.

Treating foreign-to-foreign transactions differently in this way makes little sense. In purely domestic transactions the minimum Saudi turnover requirement will typically be redundant as Saudi businesses will (most likely) automatically meet the SAR 40m Saudi turnover threshold, if they meet the SAR 200m worldwide turnover thresholds. Hence, the minimum Saudi turnover threshold makes most sense when applied to foreign-to-foreign transactions, which now appear to be excluded from its application by the guidelines. Considering the guidelines, it appears that foreign-to-foreign transaction strictly require notification, if the combined, annual turnover of the parties in Saudi Arabia is at least SAR 40m, and they meet the other filing requirements (worldwide turnover thresholds and change of control). However, unlike domestic transactions, foreign-to-foreign transaction also may require notification, if the parties have less than SAR 40m in Saudi turnover, if other factors establish an effect on competition in the Kingdom.

There may be transactions that target entities that do not have Saudi business and still (potentially) impact competition in Saudi Arabia; i.e. due to planned expansion of the target's business to Saudi Arabia or secondary effects on the Saudi market. Still, such transactions will be rare and could be better addressed by other means such as giving GAC authority to call in transactions that fall below the thresholds or providing specific filing requirements for particular transactions such as killer acquisitions or transactions involving gatekeepers. Catching all transactions that involve one party with relevant turnover in Saudi Arabia, however, will likely lead to transaction with no relevance for Saudi Arabia being caught by the Kingdom's merger control regime. For instance, a company with turnover in Saudi Arabia of over SAR 200m acquiring an ice cream shop with stores in the US would require notification, if the ice cream store has at least SAR 40m in annual turnover. This expansive application of the Saudi merger control regime could be mitigated by continuing to apply the local nexus test as initially introduced by the 2nd GAC Merger Guidelines in 2021 in parallel to the new thresholds. However, as now confirmed by the amended 2nd GAC Merger Guidelines, the local nexus test will be modified in a manner that makes it clear that transactions will strictly require notification, if the combined turnover of the parties involved in the transaction together have at least SAR 40m turnover in the Kingdom. Hence, the new thresholds together with the amended local nexus test will likely considerably increase the amount of foreign-to-foreign transactions caught.

Implications for joint ventures

GAC confirmed that the minimum target turnover requirement will not apply to joint venture transactions. This was further confirmed by the amended 2nd GAC Merger Guidelines, which still provide that greenfield joint ventures require notification.

Enforcement practice

Over the past 18 months GAC has increased its enforcement activity considerably. Between September 2019 when the new regime came into force and early 2022 the authority enforced gun jumping fines in four cases. Until end of 2022 this number rose to 15. While official numbers have not been published for 2023, we expect this trend to continue. The number of investigations that were concluded by settlement also rose substantially in the same period.

Implications due to loss of experienced staff

Starting end of 2022/early 2023 we saw a number of case handlers and investigators who have been with the authority since the early days of the new regime depart. This resulted in a slow down of merger reviews. In late 2022 review times for no to limited issues transactions had shrunk to four to six weeks as of initial submission. Since then review times rose to eight to ten weeks for similar transactions. Also case handlers and investigators more frequently request information that have little relevance for competitive analysis or take positions that are difficult to reconcile with the Saudi merger control regime and general competition law standards.

What to expect going forward

The new thresholds and amended local nexus test paired with increased enforcement activity and loss of experienced GAC staff raise concerns. The application of the new thresholds with the amended local nexus test (for foreign-to-foreign transaction) will lead to an increased number of transaction with no relevance to Saudi Arabia being clearly caught by the Kingdom's merger control regime. The lack of experience of current GAC staff poses the risk of them taking a strictly literal interpretation of the new thresholds and guidelines. Inexperienced case handlers have typically taken a 'rather call in' approach to avoid making a call on a transaction their supervisors may disagree with. In the context of the new thresholds this likely means that they will call in any transaction that technically meets the thresholds. Moreover, inexperienced investigators may take the position that failure to notify a transaction where the acquirer alone meets the local turnover requirement would be a violation that warrants penalties. Hence, increasingly transactions without relevance to Saudi Arabia may be called in for merger control review or be subject of investigations. Furthermore, with the increase of enforcement activity there is an increased risk that more of these transactions will in fact be caught.

What to do now

The new thresholds fall short of GAC's goal to limit the application of the Saudi merger control regime. The introduction of a minimum turnover threshold for the target and a local threshold requirement may reduce the number of small, domestic transactions being caught. However, foreign-to-foreign transactions will be more frequently caught than under the old threshold applied in connection with the old local nexus test. Furthermore, claiming good faith in assessing an ambiguous local nexus test will not be a strategy when transactions are called in going forward. Under the new thresholds there are now clear thresholds of local turnover that if met strictly require filing—that being SAR 40m of annual Saudi turnover by at least one party to the transaction. For foreign-to-foreign transaction the situation is additional complicated due to the uncertainty as to whether they require notification even if they do not meet this threshold.

Looking at the history of GAC developing the Saudi merger control regime, we do expect these issues to be addressed in the future. However, considering past practice it will likely take some time until they are. Thus, at least for the time being the parties will have to adjust their view on the Saudi merger control regime. In particular, those businesses that have internally defined domestic turnover thresholds for targets that would determine whether they consider notifying in Saudi Arabia. This approach cannot be reasonably defended after the most recent amendments to the Saudi merger control regime.

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