What Do You Know About Mergers as a Way to Prevent a Company from Going Bankrupt?

While the world is currently experiencing a severe financial crisis whose first signs manifested as turmoil in the global financial sector, the repercussions of this crisis have compelled all global institutions to seek an effective solution to protect these institutions and shareholders’ funds from the consequences of bankruptcy.

There is no doubt that mergers among struggling companies have become one of the most prominent solutions on the global and regional stage to address these repercussions, which now threaten many economic entities with the risk of bankruptcy and liquidation.

Since mergers are considered transactions that attract legal attention when the interests of these companies align to reduce production and service costs, increase financial capacity, and enhance commercial competition across various economic sectors, companies seeking to merge aim to increase their financial returns and strengthen their economic positions, and to serve as a lifeline against bankruptcy, as well as a solution to address financial distress (1). Consequently, legal systems and legislation worldwide have paid close attention to regulating merger rules. Similarly, the Saudi regulator has established merger rules within the Saudi Companies Law, issued by Royal Decree No. (M/132) dated 1/2/1443 AH, in Book X, Chapter II, Articles 225–230. Given the great importance of mergers, the Mergers and Acquisitions Regulations were issued pursuant to Decision No. 1-50-2007 dated 21/9/1428 AH, corresponding to 3/10/2007, and based on the Capital Market Law issued by Royal Decree No. (M/30) dated 2/6/1424 AH.

Undoubtedly, the implementation of an advanced system of laws and regulations governing merger operations in line with the objectives of the Kingdom’s Vision 2030 — which focuses on developing the national economy and promoting diversification of income sources — has contributed to creating a more competitive and attractive investment environment for both local and foreign investors by enhancing transparency, facilitating economic consolidation procedures, and enabling the private sector to play a greater role in the economy.

Recognizing mergers as a means to prevent the bankruptcy of a struggling company raises the following questions: What is meant by a merger? What are its types? What is the difference between a merger and an acquisition? What is the legal framework for mergers? And how does a merger become a means to prevent bankruptcy?

First: What is meant by a merger

A merger is defined as a legal process involving the union of two or more companies to form a new company comprising both existing companies, or the incorporation of one or more companies into an existing company such that the legal personality of the incorporated company ceases to exist and is absorbed into the acquiring company, and all rights and obligations of the merged companies, as well as their shareholders or partners, are transferred to the acquiring or new company (2). Others have defined it as “the dissolution of two or more companies and the establishment of a new company to which the financial liabilities of the dissolved companies are transferred” (3).

From these definitions, an important point becomes clear: a merger requires the transfer of all assets and liabilities of the merged company — including both positive and negative elements — to the acquiring or new company, and this transfer is considered one of the most prominent characteristics of a merger (4).

Second: The difference between an acquisition and a merger

The terms “acquisition” and “merger” are often used interchangeably and convey the same meaning in many studies, as both are means of forming large companies and economic entities, and they are also tools for capitalizing on the expansion of the company’s core business by concentrating production, increasing investment, and expanding reach. The similarity between a merger and an acquisition increases when the acquisition is complete (5). However, they differ: a merger typically occurs between two companies of approximately the same business size to form a single company with a single class of stock. A merger agreement is drawn up between the merging companies, and the merger results in complete amalgamation, as occurred when Daimler-Benz merged with Chrysler to become a single company under the name DaimlerChrysler. An acquisition, on the other hand, involves one company gaining financial and managerial control over another company’s operations by purchasing all or a portion of the company’s shares, as occurred when Aramco acquired 70% of SABIC’s shares (6).

An acquisition results in the target company continuing to exist after another company purchases its shares, unlike a merger, which results in the dissolution of the target company and the creation of a new company, or the dissolution of the target company and its incorporation into another company (7).

Third: Types of Mergers

According to Article (225/1) of the Saudi Companies Law: “A merger shall be effected by incorporating one or more companies into an existing company, or by combining two or more companies to establish a new company.”

From the foregoing, it is clear that there are two types of mergers: merger by absorption and merger by amalgamation. We will explain these two types below:

A. Merger by absorption

A merger by absorption occurs when a company is absorbed into an existing company, such that the absorbed company ceases to exist permanently, and the absorbing company remains the sole entity with legal personality. If the absorbed company is separated from the absorbing company, it regains its legal personality independent of the absorbing company and becomes the party entitled to represent its rights before the courts (8).

Article (49/1-a) of the Mergers and Acquisitions Regulations (9) permits the merged company to merge with another entity through absorption by the absorbing company, whether the absorbing company is a publicly traded company or a non-publicly traded company.

B. Merger by amalgamation

In this method, the merger is effected by combining several existing companies to form a new company with the aggregate capital of the merging companies. In this method, a new legal entity is created that is distinct from the legal personality of each of the merging companies prior to the merger.

A merger by amalgamation differs from a merger by absorption in that in the latter the legal personality of the absorbing company remains as it was prior to the absorption of the merged company, whereas in a merger by amalgamation the new legal entity becomes liable for all the debts and obligations of the two companies that constitute the new entity (10).

Article (49/2b) of the Mergers and Acquisitions Regulations stipulates that:

1. If the merger is effected by establishing a new legal entity into which the merging company and another company are merged into this new legal entity, the new legal entity must make a tender offer to purchase all shares of the shareholders of the merging company in accordance with the provisions of Chapter Two of these Regulations, and shares in the new legal entity must be issued to the shareholders of the merging company and the other company merging with it into this entity, in accordance with the provisions of the Law, the Companies Law, and their implementing regulations.
2. Upon the successful completion of the offers referred to in subparagraph (1) of paragraph (b) of this Article and the completion of the merger transaction, the assets of the merging company and the other company merging with it shall be transferred to the new legal entity, and the merging company and the other company merging with it shall cease to exist, and the listing of the merging company’s shares on the market shall be delisted in accordance with the provisions of the Law and its implementing regulations.
3. The new legal entity wishing to list its shares on the market must submit a new application for the listing of the new entity’s shares to the Authority in accordance with the provisions of the Law, its implementing regulations, and the market rules.

Article 50: Regulations Governing Merger Transactions — the provisions set forth in Chapter Two of Part Two of these Regulations — which apply to offers for the purpose of control — shall apply to merger transactions, with the necessary modifications.

Fourth: Legal Regulation of Mergers

Articles (225, 226, 227, 228, 229) of the Companies Law clarify the legal framework for mergers as follows:

First, Article 225(3) of the Companies Law permits a company, even if it is in liquidation pursuant to the provisions of the Law, to merge with another company of the same or a different legal form.

The same article also requires that “the merger proposal be prepared for approval by each company involved in accordance with the procedures established for amending its articles of incorporation or bylaws. The merger proposal shall specify its terms and conditions, describe the nature and value of the consideration, including the number of shares or equity interests belonging to the merging company in the capital of the acquiring company or the company resulting from the merger, and a statement regarding the ability of each company party to the merger to discharge its debts” (11).

The same article also stipulates that, for the merger to be valid, the assets of each company party to it must be valued (12).

The same article further provides that: “The consideration in the merger shall be shares in the merging company or the company resulting from the merger” (13), provided that the competent authority shall determine the rules and procedures for implementing the provisions of this article, including the cash consideration for the purchase of fractional shares or stocks, or for compensating a partner or shareholder who objects to the merger decision, and the voting rules for a partner or shareholder in the event that they have an interest other than their interest as a partner or shareholder in the company (14).

Article (226) of the Companies Law provides that “the regulations shall specify the rules governing the merger of one or more companies into a company that wholly owns them, or the merger of two or more companies wholly owned by the same partners or shareholders, and may exempt such cases from certain provisions contained in this chapter.”

Article (227/1) of the Companies Law further requires that “every company party to the merger must announce it at least thirty (30) days prior to the date set for adopting and voting on the merger proposal.”

Article (227/2,3) of the Companies Law also clarifies the procedure for objecting to the merger resolution.

The merger resolution shall take effect from the date of registration of the merged company’s details in the register of the acquiring company with the Commercial Registry; otherwise, the merger resolution shall take effect from the date of registration of the resulting company with the Commercial Registry (15).

Upon the merger decision taking effect, all rights, obligations, assets, and contracts of the merged company or companies are transferred to the acquiring company or the company resulting from the merger. The acquiring company or the company resulting from the merger is considered the successor to the merged company or companies (16).

Fifth: Merger as a Means to Avoid Bankruptcy

First, we clarify that what is meant by bankruptcy in this context is the company’s failure to pay its commercial debts when due, provided that such failure indicates a collapse of its credit (17), and not the issuance of a bankruptcy judgment.

Based on the concept of universal succession set forth in Article 229 of the Companies Law, the merging company or the company resulting from the merger shall assume and be liable for all obligations, whether pertaining to itself or to the merged company prior to the merger, since, as of the date and month of the merger, the merged company transfers all its rights and obligations to the merging company, and the latter’s financial liability — after adding the financial liability of the merged company — becomes the guarantor of all debts, and it alone becomes the party entitled to litigate (18).

In this regard, the repayment of its debts is achieved through legal and economic reorganization via the merger.

What are the conditions required by the Saudi Companies Law for a merger proposal to be valid and approved?

The Saudi Companies Law, specifically in Article (225) and related articles, sets forth several essential conditions and controls for a merger proposal to be valid and approved, as follows:

• Formal Approval: The merger proposal must be prepared for approval by each company party to the merger, in accordance with the procedures and mechanisms established for amending the company’s articles of incorporation or bylaws.
• Specification of Consideration: The proposal must clearly specify the terms of the merger and describe the nature and value of the consideration, including the number of shares to be allocated to the merging company in the capital of the acquiring company or the company resulting from the merger.
• Financial Capacity: The merger proposal must include a statement confirming the ability of each company involved in the process to meet its debts and obligations.
• Asset Valuation: For the merger to be legally valid, the regulations require the valuation of the assets of each company participating in the merger.
• Nature of Consideration: The consideration in the merger must consist of shares in the merging or newly formed company, with the possibility of cash consideration in specific cases, such as the purchase of fractional shares or compensation for objecting shareholders, in accordance with the regulations of the competent authority.
• Prior Notice: The Law requires each company involved in the merger to announce it at least 30 days prior to the date set for deciding on and voting on the proposal.

It is also worth noting that the law permits even companies in liquidation to merge with other companies, whether of the same legal form or a different one.

How does a merger contribute to strengthening companies’ financial capabilities and reducing production costs?

Mergers have contributed to strengthening companies’ financial capabilities and reducing their production costs through several strategic and legal mechanisms, which the sources explained as follows:

1. Strengthening financial capabilities and improving the economic position

• Increasing returns and strengthening the financial position: Through mergers, companies seek to increase their financial returns and strengthen their economic positions, making it a “lifeline” that protects them from bankruptcy.
• Consolidation of Financial Liabilities: A merger results in the transfer of all assets and liabilities of the merging companies (including both positive and negative items) to the acquiring or new company. Consequently, the new company’s financial liabilities — after incorporating those of the merging companies — serve as collateral for all debts, thereby creating a stronger and more stable financial entity.
• Increased Investment and Market Reach: Mergers are an effective tool for capitalizing on increased investment and market reach, thereby enhancing the competitiveness of the new entity.

2. Reduction of production and service costs

• Production Concentration: Mergers contribute to the concentration of production and the expansion of the company’s core business, which is legally and economically known as the ability to reduce expenses by increasing the scale of operations.
• Convergence of Common Interests: The legal and economic interest in mergers is highlighted when the interests of companies converge with the aim of reducing production and service costs, allowing the merged entity to offer its products more efficiently and at a lower cost compared to the companies prior to the merger.

Based on the foregoing, a merger represents a means of reorganizing companies from a legal and economic standpoint, ensuring their financial sustainability and protecting shareholders’ funds by creating large economic entities capable of weathering crises.

Summary

This article addresses mergers as an effective strategic and legal option for protecting companies from the risk of bankruptcy and financial collapse, particularly in the context of global economic crises. The author clarifies the fundamental differences between mergers and acquisitions, outlining the types of mergers — which include absorption and consolidation — and the resulting full transfer of rights and obligations. It also highlights the regulatory environment in the Kingdom of Saudi Arabia, noting that these procedures align with the new Companies Law and the objectives of Vision 2030 to promote investment. The text concludes by emphasizing that this transformation serves as a lifeline for restructuring struggling entities and ensuring their financial continuity through a unified and robust financial liability. The explanation also focuses on the procedural requirements necessary for a valid merger, such as asset valuation and the preparation of formal proposals to safeguard the rights of all shareholders.

Sources

1. Dr. Sami Muhammad Al-Kharabsheh, “The Regulatory Aspects of the Merger of Closed Joint-Stock Companies: A Comparative Study of the Saudi Companies Law and the Jordanian Companies Law,” a research paper published in the Journal of Sharia and Law, Tafahna Al-Ashraf – Dakahlia, p. 4122.
2. Dr. Hosni Al-Masri, Mergers and Divisions of Companies, Hassan Press, Cairo, 1986, p. 36; Dr. Husam al-Din Abd al-Ghani al-Saghir, The Legal System for Corporate Mergers, 1986 edition, Cairo, p. 25 ff.
3. Dr. Mohsen Shafiq, A Summary of Commercial Law, Part One, Dar al-Nahda al-Arabiya, 1986, p. 493.
4. Dr. Husam al-Din Abd al-Ghani al-Saghir, The Legal System for Corporate Mergers, 1986 edition, Cairo, p. 25 ff.
5. Dr. Muhammad Khalifa Rashid Muhammad Al-Shahoumi, The Legal System for the Acquisition of Shares in Joint-Stock Companies (A Comparative Study), PhD dissertation, Cairo University, 2017, p. 31.
6. Mohammed Saeed Abdul-Maqsoud, Mandatory Takeover Offer under Saudi Regulations, research paper published online, accessed February 9, 2026, at 6:00 p.m.
7. Saleh Al-Suhaibani, Abdulazim Musa, Mergers and Acquisitions, Al-Rajhi Financial Services Company, Investment Research, Kingdom of Saudi Arabia, Riyadh, 2008, p. 4.
8. Dr. Samiha Al-Qalioubi, Commercial Companies, Dar Al-Nahda Al-Arabiya, 2008 edition, pp. 164, 165.
9. Mergers and Acquisitions Regulations issued by the Capital Market Authority Council pursuant to Resolution No. 1-50-2007 dated 21/9/1428 AH, corresponding to 3/10/2007 AD, as amended by Capital Market Authority Board Resolution No. 8-5-2023 dated 25/6/1444 AH, corresponding to 18/1/2023 AD.
10. Dr. Samiha Al-Qalioubi, Commercial Companies, op. cit., p. 166.
11. Article 225/2 of the Saudi Companies Law issued by Royal Decree No. (M/132) dated 1/2/1443 AH.
12. Article 225/4 of the same Law.
13. Article 225/5 of the same Law.
14. Article 225/6 of the same Law.
15. Article 228 of the same Law.
16. Article 229 of the same Law.
17. Dr. Ali Jamal al-Din Awad, Bankruptcy in the New Commercial Code, Dar al-Nahda al-Arabiya, undated, p. 5; Dr. Musaad Saud al-Rashidi, Preventive Settlement in the Saudi Bankruptcy Law, 1st ed., 1447 AH – 2025 AD, p. 244 ff.
18. Dr. Samiha Al-Qalioubi, Commercial Companies, op. cit., p. 190.