The Companies Law issued by Royal Decree No. M/132 dated 1/12/1443H has materially rewritten the rules for structuring mergers and acquisitions in the Kingdom. The new law, which replaced the Companies Law issued by Royal Decree No. M/3 dated 28/1/1437H and took effect one hundred and eighty days after its publication in the Official Gazette, sets out for the first time a complete and detailed framework for mergers: two clear forms, a defined procedural track from the merger proposal to the effective date of the merger decision, advance protection for creditors, exit rights for shareholders, and standalone provisions on holding and subsidiary companies that open an alternative to full merger. This article explains, from our office in Kuwait and in cooperation with our partners in Saudi Arabia, what the new law changes in practice for deal structuring, and what an investor or company should review before signing.
The two merger forms under the new law: absorption and combination
Article 225 of the Companies Law settles the forms of merger in two, and only two. The first is merger by absorption, in which one or more companies are merged into an existing company that survives as the merging company. The second is merger by combination, in which two or more companies combine to establish a new company arising from the merger. The choice between the two is not cosmetic: in an absorption the merging company's legal personality continues and the assets and liabilities of the merged company pass to it by universal succession, while a combination extinguishes the personalities of all the merged companies and creates a new entity that succeeds them.
One significant development is that the law permits a company to merge even while in liquidation, in accordance with its provisions, and whether it merges into a company of the same form or of a different form. This allows merger to be used as a tool for resolving the affairs of distressed groups, or for moving the business of a company in liquidation into a going concern, a question that was debated under the previous law.
The merger consideration is quotas or shares
The law requires that a merger is not valid unless the assets of every company party to it have been valued, and it makes the merger consideration quotas or shares in the merging company or the company arising from the merger. The competent authority may set controls for a cash consideration in two defined cases: buying out fractional quotas or shares, and compensating a partner or shareholder who objected to the merger decision. Special controls also govern the vote of a partner or shareholder whose interest in the transaction conflicts with his interest in his capacity as partner or shareholder.
Merger within a single group
Article 226 addresses the merger of one or more companies into a company that owns them wholly, or the merger of two or more companies wholly owned by the same partners or shareholders, and allows the regulations to organise this case and exempt it from some of the provisions of the merger chapter. In practice this is a deliberate facilitation for intra-group restructurings, where the ultimate economic ownership does not change.
Choosing between absorption and combination in practice
Absorption is usually chosen when one of the two companies is operationally stronger or holds the more valuable licences and assets, because continuing its personality reduces the registrations, licences and contracts that must be updated. Combination suits transactions between equals who want a new entity with a new identity, with the consequences that follow: a new entry in the Commercial Register and a transfer of assets and licences to it by universal succession. In both cases the valuation of each party's assets remains a condition of validity, and the statement of ability to pay debts remains a core element of the merger proposal.
The transaction steps: from merger proposal to an effective decision
The track begins with preparing the merger proposal and presenting it for approval by each company party to it, in the manner prescribed for amending its memorandum or articles of association. The proposal sets out the terms of the merger, states the nature and value of the consideration, including the number of quotas or shares allocated to the merged company in the capital of the merging or resulting company, and includes a statement of each party's ability to pay its debts. That statement is a substantive obligation and must be treated as a disclosure for which the signatories can be held accountable, not as boilerplate.
Before the vote on the proposal, each company party to the merger must announce it at least thirty days before the date set for taking and voting on the merger decision. The announcement period is not a formality: it opens the creditor objection window described in the next section.
Effectiveness is tied to Commercial Register recording
A merger decision does not take effect on signature or on the vote. Under Article 228, the decision takes effect from the date the merged company's particulars are recorded in the merging company's register at the Commercial Register and, in a combination, from the date the resulting company is registered. On effectiveness, all rights, obligations, assets and contracts of the merged company or companies pass to the merging or resulting company, which becomes its successor. This universal succession means that contracts, licences and obligations transfer by operation of law, without separate assignment agreements for each obligation, though contracts requiring the counterparty's consent to a change of the contracting party or its control must still be reviewed.
Voting governance and conflicts of interest
The regulations, under the mandate in Article 225, prescribe special controls for the vote of a partner or shareholder whose interest in the transaction conflicts with his interest in his capacity as partner or shareholder. In practice, these persons must be identified early and their participation in the vote on the merger proposal managed under those controls, because a challenge to the validity of the decision for an unmanaged conflict can threaten the transaction after closing. The merger proposal is approved by each company party to it in the manner prescribed for amending its memorandum or articles of association, which are reinforced majorities that vary with the company's form and its own documents, and they must be verified before the announcement is scheduled.
Protecting creditors and shareholders
The creditors' right to object
The law gives the creditors of the merged company strict procedural protection. Any creditor may object to the merger by registered letter to the company, or by any other means the announcement specifies, within fifteen days of the announcement date. The company must then pay the objecting creditor's debt if it is due, or provide sufficient security for it if it is deferred.
If the company neither pays the due debt nor provides sufficient security for the deferred debt, the objecting creditor may apply to the competent judicial authority no later than ten days before the date set for the merger decision. The authority may order payment of the debt or the provision of security, and may order the merger suspended or postponed if it considers that the merger would cause the creditor serious harm without the merged or merging company being able to pay or provide security, provided it decides before the merger decision takes effect. Even if the merger takes effect before the objection is decided, the court may award the creditor compensation for the harm suffered if the claim proves well founded. The practical message for a buyer: the map of current and deferred creditors is not a decorative item in due diligence, but a factor capable of stopping or delaying the transaction.
Protecting the minority: sell-out and squeeze-out at the ninety percent threshold
Article 230 introduces a dual mechanism in joint stock companies. If one person, or several persons acting in concert, comes to own, directly or indirectly, ninety percent or more of the shares carrying voting rights, or agrees unconditionally to acquire that percentage, this must be disclosed to the company's shareholders, and any shareholder may, within ninety days of the disclosure, require the owner of that percentage or the purchaser to make an offer to buy his shares, and the owner or purchaser must make the offer to whoever applies. In the opposite direction, the owner of the ninety percent, or the person who has unconditionally agreed to acquire it, may apply to the competent authority within sixty days for approval of a mandatory offer to buy the remaining shareholders' shares.
Any shareholder may, within sixty days of the purchase offer or the mandatory offer being made, apply to the judicial authority to object to the purchase price, and the mandatory offer is stayed only by a decision of the competent authority; the mandatory offer is settled within seven days of the end of the objection period unless the judicial authority orders otherwise. The provisions of the Capital Market Law and its implementing regulations continue to apply to listed companies.
The holding and subsidiary structure as an alternative to merger
Not every acquisition requires a full merger. The Companies Law devotes a separate chapter to holding and subsidiary companies and defines a holding company as a joint stock company, a simplified joint stock company or a limited liability company that establishes companies, or owns quotas or shares in existing companies, that become its subsidiaries. A company is a subsidiary in four cases: the holding company owns quotas or shares giving it a majority of voting rights; it alone controls the appointment of the manager or a majority of the board of directors, or their removal; it alone controls a majority of voting rights under an agreement with the other partners or shareholders; or the company is subordinate to another subsidiary of the holding company.
The law prohibits cross-ownership within the group: a subsidiary may not own quotas or shares in its holding company, and any disposition that would transfer ownership from the holding company to the subsidiary is void. If a subsidiary owned quotas in the holding company before becoming a subsidiary, it has no voting right in the holding company and must dispose of those quotas within twelve months of becoming a subsidiary, a period the competent authority may extend. Persons licensed under the Capital Market Law acting within the ordinary scope of their business are excepted.
When a holding structure beats a merger
The holding structure preserves the separate legal personality, licences and contracts of each subsidiary and limits the movement of liabilities between entities, while a full merger achieves a single entity and universal succession and retires the surplus personalities. The choice between them is a tax, regulatory and operational decision before it is a legal one, and it is built on a map of the target's licences, contracts and existing obligations.
Conversion to another form before the deal
A merger may be preceded by the company's conversion into one of the other forms listed in Article 4, namely the general partnership, the limited partnership, the joint stock company, the simplified joint stock company and the limited liability company, by a decision taken in the manner prescribed for amending the memorandum or articles of association and after satisfying the conditions of the new form. Partners or shareholders who object to the conversion decision may withdraw from the company by written request within fifteen days of the decision, with the value of their holdings paid according to the agreed value or a report by an accredited valuer stating the fair value at the conversion date. Conversion does not create a new legal person: the company retains its rights and remains liable for its prior obligations, a significant advantage where continuity of contracts and licences matters.
Valuation of quotas and in-kind contributions in the transaction
Valuation under the new Companies Law is not a negotiating option but a condition of validity: a merger is not valid unless the assets of every company party to it have been valued. Above that general rule, the law regulates the valuation of in-kind contributions differently according to the company's form.
In a joint stock company, Article 66 requires that in-kind contributions made on incorporation or on a capital increase be valued by one or more accredited valuers, who prepare a report stating their fair value to be presented to the founders or the extraordinary general assembly for deliberation; the contributors of the in-kind quotas do not vote on the report resolution, and if the consideration fixed for the quotas is reduced, the contributors' consent is required. In a limited liability company, valuation by an accredited valuer is not mandatory unless the total value of the in-kind quotas exceeds half the company's capital or the founders agree otherwise; above that threshold valuation is required with the same safeguards.
The accredited valuer also appears in the protection of objectors: the partner objecting to a conversion is entitled to the value of his holding under a report by an accredited valuer stating fair value at the conversion date, and the regulations permit a cash consideration for fractional quotas and for compensating the merger objector. In practice, the valuer's accreditation and the validity period of the report must be checked early, because the regulations limit the time between issuing the report and issuing shares against in-kind quotas.
What we review before signing a Saudi merger or acquisition
From our office in Kuwait and in cooperation with our partners in Saudi Arabia, we review before signing any transaction governed by the new Companies Law: the chain of ownership of the quotas or shares and its documents; the statement of each party's ability to pay its debts prepared for the merger proposal; the map of current and deferred creditors and their ability to activate the objection right; the approvals of competent authorities and sector regulators required for the transaction according to the target's activity; the material contracts that require consent to a change of control or of the contracting party; the progress of Commercial Register recording on which effectiveness depends; the voting governance of any partner with a personal interest in the transaction; the accredited valuers' reports and their validity; and any cross-ownership within the group that must be corrected before closing.
If you are considering a merger, acquisition or group restructuring in Saudi Arabia, the team at Hind Bin Al Sheikh & Partners can help, from our office in Kuwait and in cooperation with our partners in Saudi Arabia, with choosing the right structure, preparing the merger proposal and its documents, and accompanying the transaction through to registration and effectiveness.
See also: our M&A advisory services in Saudi Arabia, company formation in Saudi Arabia for foreign investors and our corporate and commercial law services in Saudi Arabia.
Frequently asked questions
May a company merge while it is in liquidation?
Yes. Article 225 permits a company, even in the course of liquidation in accordance with the law's provisions, to merge into another company of the same or a different form, subject to related legislation.
When does a merger decision become effective?
The merger decision takes effect from the date the merged company's particulars are recorded in the merging company's register at the Commercial Register and, in a merger by combination, from the date the resulting company is registered. Signature and the vote alone do not produce effectiveness.
Can a creditor stop a merger?
Yes, within conditions. The creditor objects within fifteen days of the merger announcement; if the company neither pays his due debt nor provides sufficient security for a deferred debt, he may apply to the competent judicial authority at least ten days before the decision date, and the authority may order payment, security, suspension or postponement of the merger, and compensation after effectiveness if the claim proves well founded.
What happens to the merged company's contracts and obligations?
On effectiveness, all rights, obligations, assets and contracts of the merged company pass by operation of law to the merging or resulting company, which becomes its successor. It remains prudent to review contracts that require the counterparty's consent to a change of the contracting party or its control.
Can minority shareholders be forced to sell their shares?
In joint stock companies, if a person or persons acting in concert reach ninety percent or more of the voting shares, or agree unconditionally to acquire them, they may apply to the competent authority within sixty days for approval of a mandatory offer for the remainder, with any shareholder entitled to object to the price before the courts within sixty days. The minority holds the mirror right to require an offer for their shares within ninety days of disclosure.
Is an accredited valuer always required for in-kind contributions?
In a joint stock company, yes, on incorporation and on any capital increase. In a limited liability company, only if the in-kind quotas exceed half the capital or the founders agree to it. And in all cases a merger is not valid unless the assets of every company party to it have been valued.