In February 2019, the Saudi Arabia Venture Capital and Private Equity Association (“SAVCPEA”) was established by a resolution issued by the Council of Ministers. The aim of this body is to promote the private equity industry and facilitate links between innovative, high-growth businesses and venture capital and private equity companies. Its establishment emphasises the importance of private equity transactions in the Kingdom.
A number of private equity investment funds have been offered to local investors through private placement offers. They cover a wide range of sectors in the market, such as healthcare and energy. Funds in Saudi Arabia are regulated by the Capital Market Authority (“CMA”) and require a fund manager that is a Saudi joint stock company authorised by the CMA to conduct securities managing activities in the Kingdom. The fund is constituted as a contract between the unitholders and the fund manager.
Outside of the funds arena, private equity transactions are usually structured as a direct acquisition of shares in a Saudi company. For a foreign investor, the target company must be either a limited liability company (a relatively informal structure that may, but need not, have a board of directors rather than a single manager) or a joint stock company (an entity more like a typical company in a common law jurisdiction with formal separation between a board or directors and shareholders and governance provisions that are prescribed by law). Foreign investors may prefer to invest through an entity established in an offshore jurisdiction such as the Dubai International Financial Centre (“DIFC”). Such use of the DIFC may mitigate the risk of a local shareholder blocking certain corporate actions by, for example, refusing to attend before a notary public. The DIFC is a free zone in Dubai and its courts apply English law if an issue is not subject to DIFC law.
Private equity transactions to acquire Saudi-listed companies have been rare, historically. For foreign investors, this is attributed to the regulatory restrictions on foreign ownership of quoted companies. Foreign takeovers, for example, have only recently been permitted by “strategic investors” approved by the CMA, and such investors are subject to a two year lock-in period during which the investor cannot sell their shares. In all other cases, foreign shareholders are each limited to a 10% stake in any company listed on the Tadawul, with a total cap of 49% for all foreign investors in any category.
The transaction documentation for a Saudi private equity transaction will usually take a form that is familiar to investors in common law jurisdictions, including, e.g., provisions for representations and warranties, specific indemnities, disclosures, conditions to completion, completion mechanics, and post-completion restrictive covenants. Under Saudi law, however, there may be enforceability issues regarding some of these provisions, particularly indemnities and future agreements.
Consequently, it is common for acquisition agreements to be governed by English or New York law, with disputes subject to resolution by arbitration outside of Saudi Arabia. This increases the likelihood of the agreement being interpreted by a court in accordance with its stated terms while also being enforceable in Saudi Arabia.
The Z&Co. team has worked on a number of private equity transactions, including: