New legislation in Saudi Arabia to attract foreign investment

In 2017 the Kingdom witnessed a level of regulatory reform and change in the legal landscape unprecedented in its recent history. The Saudi Stock Exchange (Tadawul) has been very active on a number of fronts. Furthermore, a number of ministries have also been considering new laws and regulations with many of these expected to come into force in early and mid-2018.

With the aim of consolidating the Kingdom as one of the world’s ten most competitive nations and one of the most lucrative markets for investing, the Saudi Arabian government has embarked on an ambitious programme to reduce its dependency on oil and to increase private sector participation. Vision 2030 sets out a blueprint for the future of Saudi Arabia. The implementation of Vision 2030 and the National Transformation Programme 2020 is being overseen by the Council of Economic and Development Affairs (CEDA), which is chaired by Crown Prince Mohammed bin Salman Al Saud. The coming months will continue to see much in the way of legal and regulatory reforms.

In February 2017 Tadawul launched Nomu, the first parallel market in the GCC, which features less restrictive listing rules and should therefore increase the number of companies which are eligible to be listed in Saudi Arabia. Then came the issuance of the T+2 regulations, including the Securities Borrowing and Lending Regulations and the Short Selling Regulations. The Capital Market Authority (CMA) then issued new mergers and acquisitions (M&A) regulations in October 2017.

A new VAT Law was approved in July 2017 and its Implementing Regulations were issued at the same time. The new VAT regime was set to come into force in early 2018. Separately, the new Insolvency Law is also expected to come into force in early 2018, and the new Procurement Law is also due to be issued imminently.

Nomu Parallel Market

Nomu is restricted to qualified investors, has a minimum market capitalisation requirement of SR10m ($2.7m) and at least 20% of an issuer’s shares should be publicly offered. Many reporting and disclosure obligations remain on the issuers, including continuing obligations, and the rules allow for a greater degree of fluctuations in the share price (±20%). Between the launch of Nomu and December 2017, nine companies had already listed and another company was preparing for listing on Nomu.

New Tadawul Regulations

In April 2017 Tadawul announced a move from T+0 (same day settlement for listed securities) to a T+2 regime – consistent with international markets – and introduced securities lending and short-selling of its listed securities. The move to T+2, where all types of securities’ transactions are completed after two business days following the transaction execution date, is designed to provide enough time to investors to scrutinise and verify transactions and for Tadawul to deal with errors should they arise, thus ensuring asset safety for investors.

Tadawul also issued the Securities Borrowing and Lending Regulations (SBL). These regulations permit and regulate the borrowing and lending of Tadawul-listed securities. SBL transactions may only be entered into in respect of Tadawul-listed securities that have been approved by the Securities Depository Centre and may only be entered into between eligible participants (i.e., legal persons, investment funds and clients of Saudi-licensed asset managers, where the decision to enter into the transaction was made by the asset manager on behalf of the client). SBL transactions may not last beyond 12 months, and a written SBL agreement, containing certain prescribed terms and conditions as set out in the regulations, must be executed. The borrower is obliged to maintain collateral, which at all times covers 100% of the market value of the securities borrowed.

Tadawul also issued Short Selling Regulations which permit and regulate covered short-selling of Tadawul-listed securities. Short-selling transactions may only be entered into in respect of securities that have been borrowed pursuant to an SBL agreement, and the restrictions in the SBL in respect of the securities and classes of persons that may be involved in an SBL transaction would apply similarly to a short-selling transaction. The rules also require that before the execution of the sale, the seller has borrowed the relevant security and that it has been transferred to the seller’s short-selling account opened in accordance with the Securities Depository Centre Rules.

New M&A Regulations

The new M&A regulations issued by the CMA serve to encourage increased M&A activity in publicly listed shares including block trades as well as consolidation across a number of sectors. The regulations apply to transactions involving purchases and sales of listed voting shares resulting in a person owning or controlling (individually or collectively by acting in concert) over 10% of the relevant target company. They also cover transactions involving an offer (i.e., a tender offer or a merger of the target company) to acquire voting shares of a listed company, pursuant to which the offeror increases its ownership ( individually or collectively by acting in concert), or the shares under its control, to 10% or more of the share capital.

One of the key new developments is the introduction of the concept of regulating private sale transactions where a sale or purchase of shares carrying voting rights in a listed company may be negotiated between the offeror and the selling shareholder(s) without making an offer or involving the other shareholders or directors of the offeree company. The rules cover the exchange and sharing of confidential and price-sensitive information, as well as the announcement obligations of the various parties involved. Further, the selling shareholder(s) and the offeror may agree on any purchase price they deem appropriate for the relevant shares, and this may be at a premium or a discount at their discretion. A further significant development is the introduction of a squeeze-out rule for transactions involving acquiring 100% of the shares in a listed company in exchange for listed shares in the acquirer. Under the new rules, such a transaction will be binding to all shareholders of the target if the transaction is approved by shareholders representing 75% of attending shareholders in a duly convened extraordinary general assembly.

The old permissive offer regime (at 30%) has been removed and under the new regulations, any person acquiring 40% or more of the voting shares of a listed company (or having control over them) may not dispose of such shares in a six-month period without the prior approval of the CMA instead. The new regulations also place disclosure obligations on the purchaser who has reached or exceeded the 40% threshold. The new regulations also now cover partial offers and have widened to cover the concept of “acting in concert”.

New Vat Regime

The Value-Added Tax (VAT) Law outlined in the Unified Agreement for VAT of the Cooperation Council for the Arab States of the Gulf, was approved in July 2017 and came into force early 2018. The standard rate of VAT is set at 5% and will be imposed on all goods and services that are bought and sold by businesses, with a few exceptions such as certain medicines and medical equipment.

New Insolvency Law

The new draft Insolvency Law is geared towards attracting foreign investment, encouraging private sector activity, and more importantly, preserving value. The previous bankruptcy regime, which was based on a chapter from the Commercial Court Law and a Royal Decree giving effect to the Law of Settlement Preventing Bankruptcy, faced criticism for not providing respite from creditor actions and for having a history of lower recovery for its creditors.

The new draft law has drawn on the experiences in other jurisdictions and therefore restructurings will likely become more common in insolvency situations in the future. It provides a moratorium against creditor actions, and there will be some aspects of preferential creditors in place. The draft new law also establishes a Bankruptcy Commission within the Ministry of Commerce and Investment, and introduces the new mechanisms of conciliation and rehabilitation.

Under the concept of conciliation, companies may enjoy a moratorium from creditor actions (by way of a standstill agreement, for example) either before or after the company enters into an insolvency process. Any restructuring will be proposed with the aim of fairness to all creditors, who will then be bound by a majority vote of creditors of equal standing. However, creditors will have the opportunity to challenge any proposed restructuring in court. Companies can also benefit from a stay against creditor claims, which may then be settled within the liquidation. Capital injections will be permitted, and those injecting such capital in a conciliation will enjoy a preferential status over other creditors.

Under the concept of rehabilitation, companies that are seen as capable of returning to profit and recovering from their financial difficulties will be allowed to consider restructuring plans, which will have the support of the courts who can impose this on creditors. The companies will also be supported by way of rescheduling or cancellation of debt, asset disposals and debt for equity swaps. Capital injection will be permitted, and those injecting such capital under the concept of rehabilitation will enjoy a preferential status over other creditors, as in conciliation.

The new draft law also includes provisions that would ensure simplified and swift remedial action to deal with small and medium-sized enterprises (SMEs) in case of financial difficulty. Owing to these new provisions, the new law will no doubt provide a greater degree of certainty on the outcome of the insolvency proceedings for investors.

New Procurement Law

The government of Saudi Arabia undertook a review of the procurement law, focusing on key areas such as boosting value, increasing transparency and greater participation, particularly in local content and SMEs. The new draft of the procurement law was launched for public consultation and appears to deliver on those key areas of focus. Under this draft law, a Strategic Procurement Unit will be established to finalise framework agreements for commonly procured goods and services whilst ensuring competitive pricing. A committee will also be formed to determine the percentage of such goods and services that are to be sourced from local content and for SMEs.

The new draft law also introduces the concept of advance planning and the annual publication of these plans through an online portal, which will contain the records of projects and procurement needs of each governmental body. Also introduced are the concepts of pre- and post-qualification of bidders, along with performance measurement. To ensure greater participation, SMEs, non-profit organisations and endowments will not be obliged to submit bid bonds. Instead, a commitment would be required from the bidder that they will provide performance guarantees should the contract be awarded to them.

The new draft law also introduces mechanisms where both price and non-price criteria are considered as part of the bid evaluation. New procurement methods such as multi-stage tendering and electronic reverse auctions will also be expanded. Tender submission and bid opening shall run through an integrated electronic portal to allow for greater visibility. A standstill period will also be introduced between the announcement of the winning bid and the awarding of the contract to allow for any of the losing bidders to raise complaints.

Payments made to contractors will be linked to the level of performance, and payments may be reduced if the performance is not satisfactory. In the event of changes in the prices of the main materials, Customs tariff or taxes, the new draft law includes provisions to ensure appropriate compensation to the contractors.

Investment Policies

Saudi Arabia’s growing economy and large-scale infrastructure investments attract a large amount of foreign investment. There is a real drive to promote Saudi Arabia as being open for business to the world. It is the largest destination for foreign direct investment in the Arab world, with the US and China being the largest sources of foreign direct investment in the Kingdom. Foreign investment is generally permitted in all sectors of the Saudi economy, and exceptions to this general rule are included in a so-called “negative list”. In 2000 the Saudi Government enacted the Foreign Investment Law which introduced major regulatory incentives including:

• The establishment of the Saudi Arabian General Investment Authority (SAGIA), which considerably improved the investment process and transparency;

• Accelerated investment application, business registration and set up processes;

• Direct property ownership for licensed companies, in accordance with regulations;

• Transfer of capital and repatriation of profits;

• Flexibility for transferring/allocating shares of companies between shareholders, in accordance with regulations; and

• Sponsorship for the investor and its employees (non-Saudis) by the company. Financial incentives include:

• Availability of financing;

• No personal income taxes;

• Corporate taxes are at 20% of total profits of companies;

• Ability to transfer losses for future years in regard to taxes; and

• Foreign investors have access to generous regional and international financial programmes and incubators. As per regional incentive policies, GCC members enjoy various privileges when it comes to trade and investments within the GCC. In Saudi Arabia, GCC companies enjoy equal treatment as Saudi companies, save for certain exceptions such as real estate ownership in the holy cities of Makkah and Medina. However, it is worth noting that in order to take advantage of these privileges, a GCC firm will only be considered a GCC national if 100% of its shares are owned by GCC nationals.

Qualified Foreign Investors

Since 2015 qualified foreign investors (QFIs) have been able to invest in shares listed on the Saudi Arabian Stock Exchange. QFIs must be a financial institution with a certain amount of assets under management. The CMA has recently published proposed amendments to the QFIs regime for public consultation. Those amendments are aimed at significantly simplifying the qualification process by reducing the qualification conditions and simplifying the application process.

Anti-Trust & Competition

Saudi Arabia has strict competition laws which should be kept in mind in the context of pricing policies. Saudi Arabia’s Competition Law was enacted by royal decree in June 2004. The Competition Law has a broad scope and applies to all plants, establishments, companies and associations carrying out commercial, agricultural, industrial or service works, or buying and selling goods or services in the Saudi markets, whether or not they are physically located in Saudi Arabia. Public corporations and wholly state-owned corporations are exempt from this law. The Competition Law establishes independent body recently renamed the Competition Authority, which is responsible for approving cases of merger, acquisition, or the combining of two or more managements into one joint management, resulting in a dominant position in the market.

The Competition Law prohibits all practices, agreements and contracts – whether written or verbal, expressed or implied – between competing establishments or likely competing establishments where the intention or the result of such practices, agreements or contracts is to restrict commerce or limit competition between establishments. The Competition Law also prohibits any establishment or group of establishments that is able to influence the market price of a product or service through control of a certain percentage of the aggregate demand from engaging in practices that limit competition between establishments.

There are hefty fines for any violation of the Competition Law, and the Competition Authority has the power to demand the violator remedy the violation of the Competition Law within a set period of time and/ or to dispose of some of its assets, shares or property rights.

Anti-Dumping

Saudi Arabia acceded to the World Trade Organisation (WTO) in 2005 and signed the agreement on anti-dumping. In its latest Trade Policy Review for Saudi Arabia, the WTO noted that Saudi Arabia had no national laws or regulations related to anti-dumping but had adopted the GCC Common Law on Anti-Dumping, Safeguards and Countervailing Measures through royal decree. The GCC Common Law has now been ratified by all member states, which will allow the GCC to begin investigating anti-dumping cases. We understand that the GCC-Bureau of Technical Secretariat for Anti Injurious Practices in International Trade administers the cases relating to anti-dumping and safeguard measures, and according to publicly available information, this body has started to investigate cases relating to anti-dumping and safeguard measures.

Wholesale And Retail Activities

Commercial agencies are restricted to Saudi nationals and companies. However, some GCC nationals and companies may also be allowed to become agents on the basis of reciprocity. In line with the Foreign Investment Law and the WTO Accession Rules, foreign investors can own up to 75% of the capital of a wholesale and retail company, provided that the capital contribution of the foreign investor is at least SR20m ($5.3m). However, the Saudi government has also approved the rules and regulations for issuing licences to foreign investors for owning 100% of the capital in wholesale and retail companies in Saudi Arabia. Under these rules, the foreign investor applicant must be present in at least three regional or international markets. The initial share capital of the local company to be established by the foreign investor must be at least SR30m ($8m), and the foreign investor must invest at least SR200m ($53.3m) over a period of five years commencing from the date of issuance of the foreign investment licence for the company by SAGIA.

The foreign investor is required to commit that the local company will employ the required number of Saudi nationals in order to comply with Nitaqat as well as train at least 30% of the Saudi employees annually. It will also be required to provide a plan that allows Saudi nationals to hold key positions during the first five years in the company and ensure continuation of their employment.

The local company must achieve one or more of the following development targets, within five years of its incorporation:

• At least 30% of products distributed by it have been manufactured in the Kingdom;

• At least 5% of its total sales revenue must be allocated for research and development programmes in the Kingdom; or

• It must establish a centre to provide logistic, distribution and after-sales services in the Kingdom. Notwithstanding the minimum capital contribution requirements, foreign investors who invest SR300m ($80.0m) in the Kingdom over a period of five years (inclusive of the initial SR30m [$8m] capital contribution) from the date of receipt of the investment licence by SAGIA are not required to comply with any of the above-mentioned development targets.

SAGIA’s Board may grant exemptions from compliance with all of the licensing conditions. Whilst no specific criterion is set out for the granting of any exemption, the rules provide that exemptions must be granted on the basis of general, clear and non-discriminatory principles.

The foreign investor wishing to be directly involved in retail in Saudi Arabia should bear in mind that while a Saudi partner is no longer required, the conditions to set up a wholly foreign owned retail or wholesale company are stringent.

By and large, the Saudi Government is encouraging foreign investors to reduce the state’s dependency on oil as the main source of income, and at the same time opening employment opportunities for the Saudi population, which has a low median age.

Saudiisation

The term Saudiisation refers to the various initiatives of the government of Saudi Arabia to encourage the employment of Saudi nationals in the private sector. The latest Saudiisation initiative, which has been launched under the auspices of the Ministry of Labour and Social Development (MLSD), is the Nitaqat programme. All Saudi companies (whether owned by Saudis or non-Saudis) with at least 10 employees are required to comply with the Nitaqat programme.

The Saudi Labour Law provides that Saudi nationals must comprise at least 75% of an employer’s workforce, although the MLSD has the authority to change this percentage, based on business requirements and the availability of Saudi nationals. The Saudi Labour Law requires that the initial employees of the Saudi joint venture company, or any limited liability company for that matter, be Saudi nationals. Only after the appointment of a Saudi national, can work visas and then Iqamas (Saudi Arabian residence permits) be issued to non-Saudis.

Under the programme, companies are categorised in accordance with a basic colour scheme: red, yellow, green and premium as per the levels of compliance. Eligibility of benefits and applications of sanctions will be linked to the level of compliance. LAND/REAL ESTATE: Real estate in Saudi Arabia recognises the two principal interests in land, namely legal ownership and leasehold interests. Until recently, ownership of real estate by non-Saudi companies was restricted. However, these rules have been relaxed recently. Ownership of real estate is traditionally evidenced by title deeds which are held and administered by designated notaries. However, the Realty in Kind Registration Law established the legal framework for a central land registry; though, in practice, much real estate is still evidenced by title deeds.

The Registered Real Estate Mortgage Law provides the legal framework for the creation and registration of real estate mortgages along with provisions regarding the rights of parties and other matters such as ranking assignment and termination. If a property is registered, any mortgage thereupon must also be registered. If a mortgage is unregistered, the interest is endorsed on the title deeds and the associated registry by the relevant court or notary.

The Real Estate Ownership and Investment by Non-Saudis Law allows non-Saudis to own real estate required for the conduct of their licensed professional, technical or economic activities, subject to obtaining the approval of the licensing authority. This includes real estate for their private residences or the housing of their employees. However, non-Saudis are not permitted to own real estate in the holy cities of Makkah or Medina, except through inheritance or endowment.

The law also permits non-Saudis to invest in real estate as long as the total cost of any real estate investment project, both land and construction, is not less than SR30m ($8m) in each instance. The restrictions on non-Saudis do not affect privileges granted to GCC nationals, who have broader rights of real estate ownership in Saudi Arabia.

Courts And Judicial Committees

There are a number of courts and judicial committees in Saudi Arabia that have jurisdiction in relation to certain types of claims. The following is a brief description of the main courts and judicial committees in Saudi Arabia.

General Courts

Criminal, civil and commercial cases that are not specifically assigned to any other court or judicial committee and disputes relating to land are generally heard before general courts. Appeals against decisions of the general courts may be made to the Court of Appeal. Where a sentence of capital punishment is issued, this is automatically referred to the Supreme Court for review.

The Grievances Board

The Grievances Board is the main administrative court in Saudi Arabia, with exclusive jurisdiction to hear – among other things – claims against the Saudi Government bodies/entities and to supervise insolvency/bankruptcy proceedings. Appeals against decisions of the Grievances Board may be made to the Court of Appeal and decisions of the Grievances Board on certain issues are subject to automatic appeal.

Sama Committee

Disputes of a banking nature involving Saudi Arabian or foreign banks are usually resolved before the Banking Disputes Committee under the administrative supervision of the Saudi Arabian Monetary Authority (SAMA) Committee.

CRSD

The Committee for Resolution of Securities Disputes (CRSD) examines disputes in public and private rights and has jurisdiction over all cases that fall within the scope of the Capital Market Law and its implementing regulations, as well as the regulations of the CMA and Tadawul, in addition to their rules and instructions in terms of public and private rights.

Precedent And Interpretation Of Legislation

There is no concept of judicial precedent in Saudi Arabia, which means that the decisions of a court or a judicial committee will have no binding authority in respect of another case. There is also no system of court reporting. However, there is a drive to increase transparency, and it has been widely reported that the Board of Grievances and the CRSD now publish judgments online. It is not always possible to reach a conclusive interpretation on Saudi Arabian law and how a Saudi Arabian court or committee would view a particular transaction.

The Saudi Government enacted the Sharia Court Procedure Law, which sets out the rules and procedures as to how cases are adjudicated by the Islamic law courts. The Sharia Court Procedure Law offers certainty as to who can initiate a claim and how this is to be done. It also details the evidential requirements, in accordance with Islamic law principles, and provides a clear procedure for processing cases before Saudi Arabia’s Islamic law courts, ensuring the reliability, fairness and integrity of the legal process.

Arbitration

The Implementing Regulations of the Arbitration Law were approved by the Council of Ministers in May 2017 and came into force in June 2017. Parties to a contract in Saudi Arabia may agree to resort to arbitration pursuant to the Saudi Arbitration Law 2012 (save that Saudi Government bodies may only do so upon approval from the president of the Council of Ministers or if authorised by law). The new law is based on the UN Commission on International Trade Law Model Law. The new law can be applied to Saudi and international arbitration and recognises the right of the parties to choose the language of proceedings, the applicable law, the seat of the arbitration (whether inside or outside Saudi Arabia), the arbitrators, the use of temporary and precautionary measures, and the procedural rules that they want to use in the arbitration, provided that Islamic law as enforced in Saudi Arabia is not violated.

To provide easier and more cost-effective access to dispute resolution, the Saudi Centre for Commercial Arbitration (SCCA) was established by Cabinet Decree in March 2014. SCCA administers arbitration procedures in civil and commercial disputes subject to parties agreeing to refer their disputes to SCCA arbitration.

Subject to invalidation, an arbitral award once issued is final, not appealable and enforceable, but the successful party must obtain an enforcement order from the courts, which may, among other things, of their own volition, declare that the award is incompatible with Islamic law as enforced in Saudi Arabia. ENFORCEMENT OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS: In principle, judgments issued by courts outside of Saudi Arabia can be enforced in Saudi Arabia. An application to enforce a foreign judgment will be assessed on two main bases:

• Reciprocity: the jurisdiction that issued the foreign judgment must reciprocally enforce judgments of Saudi courts; and

• Consistencies with Islamic law as enforced in Saudi Arabia. Consistency with Islamic law is a requirement that foreign judgments frequently cannot meet. Many commercial practices upheld in common law and civil law jurisdictions, such as conventional insurance and the charging of interest, are generally unenforceable under Islamic law as applied in Saudi Arabia.

In relation to the enforcement of arbitral awards, Saudi Arabia has acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, when it did so it invoked a “reciprocity reservation” so as to limit its recognition of awards made in foreign jurisdictions. A “competent authority” (Saudi court) has the power to hear an application to invalidate the arbitral award.

In summary, it is possible to enforce a foreign judgment or arbitral award in Saudi Arabia, and the courts are gradually becoming more and more willing to do so.