Robust Competition and Merger Enforcement Activities in the Kingdom of Saudi Arabia - The New Normal
The Kingdom of Saudi Arabia (“Saudi Arabia”) is quickly becoming a more sophisticated and prominent competition law jurisdiction. The implementation of an updated merger control regime in in September 2019 has triggered increased awareness in the local and international business community and increased enforcement activity by the General Authority for Competition (“GAC”).
The first legislation regulating competitive practices came into force pursuant to Royal Decree No. M/25 dated 04/05/1425H (corresponding to 22 June 2004G). This was enacted shortly before Saudi Arabia’s accession to the World Trade Organization.
With the development of the economic and general business landscape in Saudi Arabia, which brought with it an influx of direct foreign investments, Saudi Arabia has been continuously updating its competition legislation. The most significant change occurred in 2019 when Saudi Arabia issued a new competition law, pursuant to Royal Decree No. M/75 dated 29/06/1440H (corresponding to 6 March 2019G) (the “Competition Law”), which introduced the new merger control rules. This has led to a significant increase in the number of merger control filings and, at the same time, an increase in enforcement by the GAC on anti-competitive practices and gun-jumping. As an example of recent investigations and enforcement against anti-competitive practices, the GAC conducted an investigation against BEIN Sports, an international sports broadcast network, and imposed a penalty of SAR 10m, in addition to, among other imposed penalties, the cancellation of the network’s broadcasting license in Saudi Arabia.
From a practical perspective, companies should be aware that the Competition Law’s Implementing Regulations now helpfully provide for the opportunity to engage in informal discussions with the GAC prior to submitting a transaction for review. In our experience, the GAC has certainly been very willing to engage in such discussions and to provide general, non-binding guidance, including on a no-names basis.
II. Brief Overview
The Competition Law applies to entities operating in Saudi Arabia, regardless of their legal form, and also to practices taking place abroad if such practices would have an adverse impact on fair competition in Saudi Arabia. The main aims of the Competition Law are protecting and promoting fair competition and fighting monopolistic practices affecting legitimate and fair competition in Saudi Arabia.
It should be noted that the Competition Law applies very broad definitions to define its scope and jurisdiction, which grant the GAC broad discretion to conduct investigations into anti-competitive practices in Saudi Arabia. The GAC issues an annual report that records, among other things, the number of merger control filings and sanctions for anti-competitive practices. The GAC’s annual reports for 2018 and 2019 signal a significant increase in both merger control filings and sanctions/penalties imposed.
One of the key observations from the GAC’s 2019 Annual Report is that, already prior to the entry into force of the new merger control rules and related changes, businesses and regulators in Saudi Arabia are showing an increased awareness of merger control and what constitutes anti-competitive practices. This is evidenced by the fact that the GAC received 54 economic concentration applications in 2018 and 57 in 2019 (233 applications since the inception of the GAC).
III. Merger Control Regime
As noted in the 2019 Annual Report, one of the most significant elements of the Competition Law is the introduction of a new merger control regime under the Competition Law and its Implementing Regulations. The GAC also issued in 2020 Guidelines for Reporting Economic Concentrations.
The Competition Law’s Implementing Regulations define an “economic concentration” as all acts involving the complete or partial transfer of ownership of assets, rights, shares, stocks or obligations of an entity to another entity through merger, purchase, acquisition of the grouping of two or more departments under joint management, or otherwise by any other means resulting in control over an entity or more.
The Competition Law provides that any entity seeking to participate in an “economic concentration” where the total sales of all participating entities, together or individually, exceed SAR 100m (approx. US$26m) must notify the GAC. Measured by international standards, this threshold is relatively low considering that it can be met by only one “company participating in the concentration” and because is it not limited to revenues generated in Saudi Arabia. In addition, the Competition Law does not explicitly require a nexus between the transaction and the Saudi Arabian economy. However, in our experience, the GAC may, depending on the nature of the transaction informally apply a local nexus test. As a result, any transaction that would constitute an “economic concentration” should in principle be notified to the GAC if the buyer, seller and target, or any company that is part of the group of companies to which those firms belong in a transaction generate individual or combined global revenues in excess of SAR 100m (approx. US$26m) in the most recent full financial year.
The notification period is relatively lengthy: the filing must be submitted at least 90 days prior to closing or completion of a transaction that would constitute economic concentration. During this time, the GAC must issue its approval, conditional approval or objection to the transaction. However, the 90-day clock only officially begins when the GAC is satisfied that it has all the information it needs to analyse and issue its decision. In contrast to many merger control regimes in and outside the Middle East region, the Saudi Arabian merger control rules do not distinguish between a first phase review and a more detailed second phase review.
The Competition Law imposes sanctions for failure to notify the GAC of an “economic concentration” transaction equal to 10% of the annual sales of the violator(s); and where sales cannot be determined, the sanctions could be up to SAR 10m (approx. US$2.6m). Furthermore, multiple sanctions can be imposed depending on the violations. Without implying a ceiling, past sanctions have reached, for example, SAR 20m (approx. US$5.2m) for engaging in certain anti-competitive practices.
With the GAC becoming increasingly active, it is evident from its 2019 Annual Report that the GAC is continuously developing its practices to further align with international standards. It may therefore be prudent for parties looking to enter into transactions that may trigger the thresholds seek specialized advice to properly factor any notification or filing requirements into the planning and the closing terms of such transactions.
IV. GAC 2019 Annual Report
The GAC has issued its annual report for the year 1440-1441H (2019G), highlighting key facts and statistics on its competition and merger enforcement activities and the GAC’s achievements in promoting fair competition. The Competition Law came into effect late September 2019. Thus, the below enforcement record of the GAC covers the year before the Competition Law entered into force.
A. Figures and Statistics Overview
During 2019, the GAC reviewed 57 economic concentration applications, considered 95 complaints concerning violations of the Competition Law, issued 12 final judgments (through the Administrative Appeal Court), and investigated 136 investigations and raids.
The below table provides a comparison between 2018 and 2019.
|Number of economic concentration applications||54||57|
|Number of complaints and initiatives||52||95|
|Number of final judgments||22||12|
|Number of investigations and raids||122||136|
While it is clear that the number of economic concentration applications, complaints and investigations have rapidly increased in 2019, it is expected that the number of economic concentration applications will continue to significantly increase as a result of the new Competition Law.
B. Economic Concentration
Considering the 57 applications for review in 2019, 48 applications were approved unconditionally, 1 conditionally, 6 were withdrawn by the applicants, and 2 applications deferred to 2020.
C. Complaints and Initiatives
Any natural or legal person can submit an online complaint through the GAC’s official website concerning any alleged violation of the Competition Law. Once a complaint is submitted, the GAC will review and make its recommendations to the board of the GAC, who will then decide whether or not to initiate an investigation and prosecution process. In August 2020, the GAC announced that fines of up to 53m Saudi Riyals (approx. US$14,1m) have been imposed on four companies. Two of the companies are soft drink manufacturers that were fined 20m Saudi Riyals (approx. US$5.3m) for breach of the rules regarding economic concentration, an IT company was fined 10m Saudi Riyals (approx. US$ 2.6m) for limiting the entry of a competitor to the market, and a gas company was fined 3m Saudi Riyals (approx. US$ 799,902) for undesirable conduct which led to a firm leaving the market.
The number of complaints and initiatives have increased from 52 in 2018 to 95 in 2019. The following sectors had the highest number of complaints:
1. Communication and information technology: 14 complaints;
2. Construction: 13 complaints;
3. Food: 10 complaints;
4. Contracting and public services: 10 complaints; and
5. Retail: 8 complaints.
D. Anticompetitive Practices and Violations
According to the GAC, anti-competitive practices may have serious consequences which affect not only the growth of the economy, but also the security and society of a country. The GAC’s 2019 Annual Report states that the most anticompetitive practices and violations in Saudi Arabia were:
1. Price fixing (44.5%);
2. Abuse of dominance – retail constraints (15%);
3. Market allocation (10%);
4. Abuse of dominance – exclusive dealing (8%);
5. Bid rigging in government tenders (8%); and
6. Other (e.g., bundling, services concealment from customers and refusal to cooperate with the GAC or providing misleading information during investigations) (14.5%).
Note that “intention” is not required to constitute an anti-competitive practice or violation. Therefore, companies operating in the Saudi Arabian market should consider assessing their current business arrangements and contemplated M&A transactions to ensure compliance with the Competition Law.
1. Fees collected from the submitted economic concentration applications: SAR 1,488,941.53 (US$ 396,960.98).
2. Fees collected from violators of the Competition Law: SAR 56,580,000 (US$ 15,084,576.53).
Given the broad scope of the newly amended Saudi Competition Law and the wide jurisdiction of the Saudi Arabia General Authority for Competition, in particularly due to the low threshold under the merger control regime, it would be prudent for parties to a transaction to consider whether a transaction would fall under the scope of the Competition Law and would, therefore, require a notification to the GAC.
The GAC’s 2019 Annual Report confirms that the GAC is on a clear path to become a very influential competition enforcement agency in the region. The 2019 statistics do not fully capture the impact of the Competition Law which came into effect late 2019. However, as the concept of antitrust and the merger control rules in Saudi Arabia evolve, companies active in the region (either directly or indirectly) may take the opportunity to evaluate their current merger control strategies and compliance initiatives in the region.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.