A 2021 report from Saudi Venture Capital showed the venture capital ecosystem had 88 deals, all of which were valued at $152 million. Another report from financial markets data firm Refinitiv highlighted the growth of mergers and acquisitions (M&A) in the Middle East and North Africa. The report showed that Saudi Arabia dominates mergers and acquisitions, with deals hitting an all-time high compared to previous years.
The increase in M&A activity is attributed to an influx of foreign investment, but these transactions are sensitive and require rigorous legal due diligence. They also tend to attract the attention of the General Competition Authority, trying to avoid monopolistic and oligopolistic practices.
What is legal due diligence?
Legal due diligence involves reviewing a company’s documentation to identify any potential legal exposure and non-compliance issues. Legal due diligence is performed when a company wishes to acquire or merge with a target company.
Legal due diligence includes different subcategories, including:
- Intellectual property
Due diligence aims to learn more about the company:
- Prosecutions (pending or potential)
- Distribution agreements
The company wishing to get involved in a merger-acquisition will request the following documents from the target company:
The buyer must take note of all the material and the commitments of the seller. Contracts that should be reviewed include:
- Guarantees and credit agreements
- Indemnification agreements
- Employment contract
- Customer and supplier contracts
- Partnership or joint venture agreements
- Settlement agreements
- agreements on past acquisitions
- Equipment rental
- Government contracts
- Any other relevant contract in which the company is involved
Employee and management issues
The buyer should also try to understand any issues affecting the employee and management. This documentation includes:
- Policies or allegations of sexual harassment
- Sexual misconduct allegations
- Any labor dispute
- Relevant information regarding a past, current or imminent work stoppage, work slowdown, or other similar work activity.
- Any key company employee and officer involved in criminal proceedings or civil litigation
A review of any pending, threatened or settled litigation or arbitration in which Seller is involved. Some documents to review include:
- Letters from lawyers addressed to the auditors
- lawsuits filed against the company
Government regulations, filings and legal compliance
The buyer would like to know if the seller was involved in any regulatory requirements by reviewing the following documents and citations.
- Any pending or pending government proceedings
- Citations or notices from government agencies given to the seller
- Certification of compliance against the company’s regulatory standard
- Any canceled or terminated business license or permit.
Once all information has been reviewed and relevant data collected, a business can make informed decisions.
Why is legal due diligence necessary?
Due diligence offers the following benefits, all of which are crucial in an M&A transaction:
1. An opportunity to understand the target business.
During the legal due diligence, all relevant documents regarding any current or potential legal exposure are collected. All of these documents help buyers better understand the target.
2. Understand the fair price of the target
Having financial information about the business, including legal proceedings, can help draw a conclusion about the value of the business. Information gives each party some negotiating room, especially in an M&A transaction.
3. Identify possible future risks
Some risks that a business faces can become a big deal after an M&A deal. Identifying all risks early can help a business be better prepared to manage them. Identifying risks early can also help a buyer decide whether to proceed with the M&A transaction.
4. Help prepare a merger and acquisition agreement
Legal due diligence helps identify existing issues that may prevent the transaction from proceeding. When all parties are aware of these issues, they can discuss solutions that will ensure the transaction goes smoothly.
Significant M&A transactions in Saudi Arabia
Saudi Aramco has reached a US$12.4 billion deal that involved selling a 49% stake in Aramco Gas Pipeline to a consortium of international investors. Investors included Keppel Infrastructure Trust, Silk Road Fund, China Merchants Capital and Hassana Investment. The deal is part of Saudi Arabia’s ongoing efforts to sell assets and use the proceeds to find other industries and increase oil and gas production.
The private equity industry has also seen an increase in M&A activity in recent years. In the first half of 2020, venture capital closed 45 deals valued at $95 million. In the same year, the Public Investment Fund allocated US$1 billion to develop the private equity and venture capital ecosystem.
When it comes to leading industries in Saudi Arabia, the e-commerce industry is still the most targeted industry for the second consecutive year. Along with the fintech industry, the e-commerce industry accounts for 30% of all M&A deals.
Choose who to manage the due diligence process
Choosing who will lead and manage the due diligence process is critical. They must be able to communicate the due diligence process, what is covered by the review, and what is commercially important to the buyer.
Due diligence in the oil and gas sector is different from the construction industry. A buyer should choose a legal advisor who is experienced and knowledgeable in matters relating to mergers and acquisitions.
Additionally, reviewing all documents as part of the legal due diligence process is difficult for a person, which is why a buyer should choose a law firm for the job.
For a smooth M&A transaction, the relevant people must be involved to undertake all the necessary legal and due diligence work. Having an experienced legal firm overseeing the entire process will ensure that potential risks are flagged and addressed early on.