Saudi Arabia’s Foreign Investment Law 9 requires that any non-citizen of the Gulf Cooperation Council (including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) (the GCC) and/or any company carrying any element of non-GCC ownership (tracing all the way up to the ultimate natural human owner(s)) obtain a foreign investment license (colloquially referred to as the SAGIA License) in order to establish or acquire an interest in a company registered in Saudi Arabia.
Issuance of the SAGIA License is supervised and carried out by the Saudi Arabian General Investment Authority (SAGIA).
In the past and recent years, obtaining the SAGIA License could be described as both tedious and onerous – a document-heavy due diligence exercise requiring the submission of information such as three years of audited financial statements, evidence of five years experience in the activities for which the license is sought, as well as a business plan, feasibility study, Saudization 10 plan, and so on.
To make the process more cumbersome and expensive, all documentation must be fully legalized by the Saudi embassy or consulate in the applicant’s jurisdiction and ultimately translated by a certified in-Kingdom translator. Not surprisingly, the paperwork can become both time-consuming and expensive.
The rigidity and difficulty of dealing with SAGIA’s background requirements has in practice been a bane to cross-border investment, joint venture, and M&A activity in Saudi Arabia – especially with regard to target entities located in Saudi Arabia in global acquisitions, as well as companies who prefer to maintain an organized corporate structure for foreign investments and tax purposes with the use of NewCo’s, holding companies, and offshore entities.
Firstly, SAGIA is a bureaucracy and employs bureaucrats rather than industry specialists and experts. However, part of SAGIA’s mandate is to be the gatekeeper in order to ensure that only positive investments are made in the Kingdom – those investments that will contribute to the local society and economy and lead to high-paying, cutting-edge, and senior managerial jobs for Saudi citizens.
For this reason, business plans and feasibility studies are required as part of the SAGIA License application. In some cases, it can be difficult to convince a non-specialist SAGIA bureaucrat that an applicant’s proposed investment will fulfil these mandates.
Secondly, as gatekeeper, SAGIA has been loath to permit licensing of shell corporations, NewCo’s, holding companies, and even well-known, highly regarded investment firms.
Due to the requirement to submit three years of audited financial statements, SAGIA typically did not license NewCo’s for investment into Saudi Arabia. In global M&A transactions, it is very common for purchasers to use an offshore NewCo or similar off-the-shelf holding entity to transfer ownership of shares to the purchaser. However, in Saudi Arabia this has not been possible in practice because SAGIA typically will not license a NewCo to be registered owner of shares in a Saudi company.
SAGIA also looks at the audited financial statements to examine the financial performance and capability of the applicant. Even if a holding company was incorporated years ago, if there is no cash flow, no invoicing, and otherwise no activity occurring, typically no license will be granted.
Similarly, investment firms have typically been unable to directly penetrate the Saudi market under SAGIA’s supervision. Since SAGIA required evidence of five years experience in the commercial objectives for which the license is sought, investment firms typically do not fulfill this criteria.
For example, assume a highly regarded investment firm or private equity house (e.g., Bain Capital, KKR, Blackstone, etc.) has made a global acquisition of a multinational’s food & beverage retail business with operations incorporated in Saudi Arabia.
With respect to completing an acquisition in Saudi Arabia, such investment firms are in the business of holding shares of other companies and are not likely to have any direct experience in the food & beverage retail industry and thus would likely have to put forward a subsidiary entity with at least five years experience in this field in order to register its ownership in a Saudi target entity.
However, global acquisitions are rarely negotiated from Saudi Arabia and thus local requirements in such global acquisitions can often be overlooked – and purchasing entities are often determined and meticulously agreed beforehand for tax, corporate liability, and other considerations.
Thus, M&A activity in Saudi Arabia can require a bit of creativity and outside-the-box thinking (in a literal sense). In that regard, the most common approach is to complete the acquisition at the shareholder level so that obtaining SAGIA approval is not needed – particularly, instead of the buyer acquiring the shares in the Saudi target directly, the acquisition is simply made outside of Saudi Arabia whereby the buyer purchases the shares of the shareholder(s) in the Saudi target in some fashion.11
Notwithstanding the abovementioned difficulties, in recent times obtaining the SAGIA License has become easier with implementation of the “10 Minute License” for publicly listed companies – whereby the applicant need only produce evidence that it is publicly listed on a regulated stock exchange in its home jurisdiction. In some cases, SAGIA will even take the initiative to issue the 10 Minute License to wholly-owned subsidiaries of publicly listed companies.
However, given continued oil price volatility and a “new normal” of lower prices following previous all-time highs, SAGIA and other Saudi authorities have recognized the immense need for foreign investment in order to contribute to the continued employment and training of Saudi citizens in the best, most cutting-edge jobs – as well as diversifying the economy into productive areas other than oil.
Thus, to further ease foreign investment challenges, SAGIA announced in early 2018 that the previous licensing procedures requiring significant documentation described above are no longer applicable. Now, applicants need only submit evidence of their incorporation certificate in the jurisdiction of incorporation as well as the last year’s audited financial statements in order to complete the SAGIA application for licensing assessment.12
It is important to note that SAGIA’s new licensing rules were only recently announced, and most law firms in Saudi Arabia have not had the occasion to undergo the new procedures yet – although the author has confirmed the authenticity of the new procedures with SAGIA.
In any event, the simplified licensing procedures requiring only evidence of the incorporation certificate and one year audited financial statements should work to ease past cross-border investment, joint venture, and M&A challenges.
Particularly, it seems now that SAGIA is not interested in verifying business plans and feasibility studies for proposed investments. Rather, SAGIA is only interested in the proper incorporation of the applicant entity and only the last year of the applicant’s financial activity. This should particularly make joint ventures and establishing an entity in Saudi Arabia significantly easier.
Under the new procedures, it seems SAGIA is also not interested in ensuring that applicant entities have five years of experience in the activities for which the SAGIA License is sought. Thus, investment firms completing global acquisitions should be permitted to acquire a direct interest in Saudi target entities. This development should work to further streamline global M&A activity where the target has operations incorporated in Saudi Arabia.
However, under the new licensing rules, NewCo’s still will not be granted a SAGIA License. As NewCo’s are incorporated off-the-shelf solely to complete a transaction, there will not be one year’s worth of audited financial statements to submit to SAGIA as part of the application. Thus, although global M&A transactions will allow investment firms to directly penetrate the Saudi market, they still will not be able to do so directly via a NewCo. However, NewCo’s and holding companies can play an outside-the-box role in Saudi cross-border M&A transactions.
It is unclear if holding companies with past financial statements will be eligible for a SAGIA License. Although SAGIA has decreased the amount of financial years required to be covered, SAGIA did not express any particular purpose for the requirement to provide financial statements. In the past, financial statements have been required to ensure that the applicant entity is in a strong financial position and is not being used as a dummy corporation or shell entity for unwanted reasons. As part of SAGIA’s mandate to ensure foreign investment has a positive impact on the Saudi economy, financial statements can show the ability of the applicant entity to fund and nurture its investment in Saudi Arabia.
Thus, if in a cross-border investment, joint venture, or M&A transaction a foreign shareholder attempts to funnel its shareholding in a Saudi company via an offshore holding company with financial statements indicating minimal cash flow or direct activity, SAGIA may view the proposed shareholding as suspicious – even under the new licensing rules.
Although obtaining a SAGIA License for cross-border investment, joint venture, and M&A transactions has been difficult in the past, SAGIA has been slowly liberalizing restrictions over time – beginning with easing restrictions on foreign publicly listed companies and their subsidiaries, and now with new procedures cutting down the large amount of documentation previously required.
Nevertheless, cross-border investment, joint venture, and M&A activity in Saudi Arabia is still burdened by restrictions on the use of NewCo’s to facilitate transactions – as well as uncertainty with respect to the use of holding companies in such transactions. However, these types of entities have had and will continue to have a role in outside-the-box transactions.