The Z&Co. transactions team works on cross-border joint ventures in Saudi Arabia with Linklaters’ market-leading corporate team.
Corporate joint ventures between foreign investors and local entities are very common in the Saudi market. Generally, such ventures adopt the same structure as international JVs, including reserved matters that require approval from all shareholders, board representation, information rights, and share transfer arrangements, such as pre-emption rights and compelled transfers in certain situations, e.g. a default or transfer of the majority of the shares.
Sharia and Corporate Law Issues
Due to their possible interpretation as non-binding ‘promises’ rather than binding obligations, there are potential Sharia law issues with the enforceability of such share transfer provisions. Moreover, there is an additional share transfer risk where the joint venture vehicle is a limited liability company (“LLC”), as LLCs do not issue share certificates; rather, transfers of shares are completed by the shareholders executing an amendment to the LLC’s articles of incorporation before a notary public. Specifically, this means that a shareholder may be able to veto any share transfer by refusing to execute the amendment before the notary public. There are, however, a number of steps that a foreign investor might consider to mitigate such issues:
- having the joint venture agreement subject to a foreign law, such as English law, under which the enforceability of an agreement to transfer shares in the future is more established;
- agreeing to resolve disputes under the joint venture agreement through arbitration outside Saudi Arabia (otherwise, there is a risk that a Saudi court will accept jurisdiction and apply Saudi law);
- if the above structure is not possible, to at least have the agreement subject to arbitration in Saudi Arabia and specify the Maliki school of thought in Sharia, under which such provisions are more likely to be enforced; and
- adopt an offshore holding structure, with the company in which parties hold shares being incorporated in a common law jurisdiction (such as England or the Dubai International Financial Centre), where the share transfer clauses will be enforced and the potential LLC veto is not applicable.
Other Saudi Law Issues
There are certain issues specific to Saudi companies of which foreign investors should be aware before committing to a corporate joint venture:
- before being incorporated, any Saudi company with a foreign (non-GCC) shareholder must obtain a foreign investment licence from the Ministry of Investment of Saudi Arabia (MISA);
- all Saudi businesses (regardless of whether they have a foreign shareholder) must comply with ‘Saudization’, based on the Nitaqat system of the Ministry of Labour. This requires, e.g., the employment of a minimum number of Saudi citizens, with the numbers determined by the sector and number of employees of the company concerned. Failing to adhere to Saudization requirements may lead to issues such as not being able to obtain additional expatriate visas and an inability to block transfers of expatriate employees to third parties;
- at least 10% of net profits must be transferred each year to a statutory reserve (the shareholders may resolve to cease such transfers once that reserve equals at least 30% of the share capital); and
- there are consequences if losses reach 50% of capital (e.g. mandatory recapitalisation or liquidation for a joint stock company and a compulsory decision to continue the company or liquidate it for a limited liability company).
The Z&Co. team has worked on a number of recent joint venture transactions, including with:
- Savola Group on the acquisition of a 51% stake in the Al Kabeer group, a frozen foods business in the Middle East, from the Subberwal family;
- The Public Investment Fund on the EUR 4.4 billion acquisition of a 55%-stake in AccorInvest;
- GE and Dussur on the establishment of their SAR1 billion joint venture to manufacture gas turbines;
- The restructuring of the franchise to bottle an international beverage in Saudi Arabia, including the adoption of an offshore DIFC holding company structure;
- GEFCO on its joint venture with Almajdouie Group to provide transport logistics services in Saudi Arabia;
- Finablr on its investment in Bayan Payments; and
- A leading consumer goods retailer on the conversion of its relationship with a local commercial agent into a corporate joint venture.