The merger or division of commercial companies within the Kingdom of Saudi Arabia gains importance by supporting the ability of these companies to compete and maximally benefit from the volume of national or foreign investments to economically restructure these companies. This is in addition to creating new products, modernizing production, and increasing the revenues of these companies. (1)<\/p>\n
A question comes to mind regarding the definition of a merger and its forms. What are the stages of a merger, how to object to it, and when does the merger decision take effect? What is the effect of the merger if the merger is into a company that owns the merged company, or the effect of the merger on the rights and contracts of the merged company? What is meant by the division of companies and its forms? What about the proposed company division decision, the rules of division, and the commencement of its enforcement? And what about the debts and obligations of the divided company (the company subject to division)?<\/p>\n
These questions can be answered as follows:<\/strong><\/p>\n A merger is defined as “a contract between two or more companies, whereby their financial liabilities are unified so that all partners gather in one company, through the dissolution of the merged companies and their replacement by a new company, or by one company absorbing the other companies.” (2)<\/p>\n The regulator specified the forms of merger by stating: “A merger takes place by absorbing one or more companies into another existing company, or by combining two or more companies to establish a new company” (3), which are the same forms adopted by the regulator regarding companies listed on the financial market, in accordance with the Mergers and Acquisitions Regulations.<\/p>\n (A) Stages of merger:<\/strong><\/p>\n A merger proposal must be prepared for approval by each party company; this shall be in accordance with the procedures followed when amending its articles of association or bylaws. This proposal shall specify the terms of the merger and indicate the nature and value of the consideration, including the number of shares or equities pertaining to the merged company in the capital of the merging company or the company resulting from the merger, and a statement on the ability of each party company in the merger to pay its debts. A company, even if it is in the liquidation phase according to the Companies Law, may merge into another company of the same or a different form. (4)<\/p>\n Furthermore, a merger is not valid – as a general rule – except after evaluating the assets of each party company, and the consideration in the merger shall be equities or shares in the merging company or the company resulting from the merger.<\/p>\n These procedures fall under the rules of merger stages at the Capital Market Authority (CMA) and under its supervision if the merger process involves companies listed with it (5). Otherwise, the Ministry of Commerce undertakes this, especially regarding the compensation of the partner or shareholder objecting to the merger decision, and the voting rules of the partner or shareholder in the event they have an interest other than their interest as a partner or shareholder in the company. (6)<\/p>\n (B) How to object to the merger decision:<\/strong><\/p>\n Each party company in the merger must announce it no less than (thirty) days – at least – prior to the date set for making a decision on the merger proposal and voting on it.<\/p>\n Any creditor of the merged company may object to this merger by a registered letter to the company or by any other means specified in the aforementioned announcement, within (15) days from the date of the announcement. The company must pay the debt of the objecting creditor if it is immediately due, or provide a sufficient guarantee to fulfill it if it is deferred. (7)<\/p>\n Also, the creditor who notified the company of their objection to the merger – as previously mentioned – and the company did not pay the debt if it was due, or did not provide a sufficient guarantee to fulfill it if it was deferred, may apply to the competent judicial authority within a period of no less than ten days before the date set for adopting the merger decision. This judicial authority may order the payment of the debt or the provision of a guarantee for its payment, as the case may be. If it deems that this merger will result in serious damage to the objecting creditor without the merged company or the merging company being able to pay this debt or provide the guarantee, the judicial authority may order the suspension or postponement of the merger, provided that its decision is issued before the merger decision takes effect. If this competent judicial authority does not decide on the creditor’s objection before the merger decision takes effect, and later determines the validity of the objecting creditor’s claim, it may issue a decision to compensate them for the damages incurred as a result of this merger. (8)<\/p>\n (C) Enforcement (Effective Date) of the Merger Decision:<\/strong><\/p>\n The merger decision shall be valid and effective from the date of registering the data of the merged company in the commercial register of the merging company (merger by absorption), or from the date of registering the company resulting from the merger in the commercial register (merger by combination\/consolidation). (9)<\/p>\n The merger of one or more companies into another company that wholly owns them shall be by a decision issued by the merging company, without the need for a merger decision to be issued by the merged company or companies.<\/p>\n Each manager in the company or its board of directors shall prepare a solvency statement for each party company in the merger, indicating the merging company’s ability to settle the debts and obligations related to the merged company or companies upon the enforcement of the merger. In this case, there is no need for the requirement of a merger proposal and the evaluation of the assets of each party company in it. (10)<\/p>\n The merger of two or more companies owned by the exact same partners or shareholders shall be by a decision issued by each party company in it, and the aforementioned merger provisions apply – in this case – except for the evaluation of the assets of each party company in the merger. (11)<\/p>\n During its existence, the merged company is bound by contracts with others, and among the most important of these are: employment contracts concluded by the company with its workers and employees, and lease agreements where this company is a lessor or lessee, as the case may be, and the merged company may also be a party to an arbitration agreement. (12)<\/p>\n Furthermore, the fate of the rights of the merged company’s creditors is determined according to what is stated in the merger contract. It may stipulate that they transfer to the merging or new company by paying its debts first, then the net financial liability is transferred to the merging company, or it may stipulate the transfer of the merged company’s rights and obligations to the merging or new company, and thus the latter becomes obligated to pay all the debts of the merged company. (13)<\/p>\n The Saudi regulator affirmed this by stating: “Upon the enforcement of the merger decision, all rights, obligations, assets, and contracts of the merged company or companies are transferred to the merging company or the company resulting from the merger, as it is considered a successor to the merged company or companies.” (14)<\/p>\n Division is defined as: “The splitting of the financial liability of a single company into two or more parts, upon each of which a new company is established. The legal personality of the divided company ceases to exist, and its shareholders become shareholders in the new companies, which shall not be less than two.” (15)<\/p>\n A company may be divided into two or more companies, even if it is in the liquidation phase, and the company or companies resulting from the division may take any of the corporate forms mentioned in Article Four of the Companies Law. (16)<\/p>\n (A) Proposed company division decision:<\/strong><\/p>\n The decision to divide the company is issued in accordance with the procedures established for amending its articles of association or bylaws. The division decision must include a statement of the number of partners or shareholders, and the share of each of them in the company or companies resulting from the division and the divided company, the rights and obligations of these companies, and how assets, rights, and obligations are distributed among them. (17)<\/p>\n If the divided company is a joint-stock company listed on the financial market, it may be divided into two or more companies, provided that the following is observed:<\/p>\n The manager or the board of directors of the company subject to division prepares the division proposal, including – at a minimum – the following:<\/p>\n (B) Rules for company division:<\/strong><\/p>\n The Companies Law indicated that the regulations shall specify the rules related to the company’s division, including the procedures, conditions, and requirements that must be met for the division, according to the legal form of the company. (20)<\/p>\n In turn, the Executive Regulations of the Companies Law clarified these rules as follows:<\/strong><\/p>\n The manager or board of directors of the company subject to division must provide the partners or shareholders with a copy of the division proposal, through modern technological means or any other means stipulated in the company’s articles of association or bylaws, at least (twenty-one days) before the date scheduled for the partners’, general assembly’s, or shareholders’ meeting to vote on the division decision. (22)<\/p>\n (C) Enforcement of the Division Decision:<\/strong><\/p>\n The division decision takes effect and becomes valid from the date of registering the amendment of the articles of association or bylaws of the divided company with the Commercial Register, and registering the company resulting from it with the Commercial Register. (23)<\/p>\n The company resulting from the division shall be a successor to the divided company, within the limits of what devolved to it, according to the division decision.<\/p>\n However, the creditors of the divided company have the right to claim the payment of the debts and obligations incurred by the divided company from the two companies or the companies resulting from the division, and the two companies or the companies shall be jointly and severally liable for the payment of those debts and obligations. This is except in cases where an agreement is reached with the creditors regarding the transfer of their rights to claim to the company resulting from the division to which the debts and obligations have devolved. (24)<\/p>\n This text addressed the legal and regulatory framework for the merger and division of companies in the Kingdom of Saudi Arabia, highlighting the role of these processes in enhancing economic competitiveness. The source clarifies the forms of merger, which occur either by absorbing one company into another or combining them to establish a new entity, detailing the procedural stages, the rules for protecting creditors’ rights, and judicial objection. The text also explains the concept of division, which leads to the branching of the company into multiple entities, outlining the necessary conditions for preparing and approving division proposals. The presentation focuses on the enforcement of decisions through commercial registration, and how obligations and assets are transferred to the resulting entities. The text highlights the legal impact of these transformations on existing contracts and ensuring the solvency of companies to pay their debts.<\/p>\n What is the concept of company merger and what are its forms in the Saudi system?<\/strong><\/p>\n In the Saudi system, the merger of companies is defined as a contract between two or more companies whereby their financial liabilities are unified so that all partners gather in one company. This merger is achieved either by the dissolution of the merged company and its replacement by a new company, or by a specific company absorbing the other companies into it.<\/p>\n As for the forms of merger in the Saudi system, the regulator specified them in two main forms:<\/strong><\/p>\n It is worth noting that these forms are the same as those adopted by the Saudi regulator for companies listed on the financial market according to the Mergers and Acquisitions Regulations.<\/p>\n What is meant by company division and what are its forms?<\/strong><\/p>\n According to the sources, the division of companies means the splitting of the financial liability of a single company into two or more parts, such that a new company is established on each part. This division leads to the cessation of the legal personality of the divided company, and its shareholders become shareholders in the new resulting companies, which shall not be less than two in number.<\/p>\n As for the forms of company division and their rules in the Saudi system, the sources included the following:<\/strong><\/p>\n (1) Prof. Hosni Al-Masri, “Merger and Division of Companies – A Comparative Study between French and Egyptian Law,” First Edition (1406 AH – 1986 AD), without publisher, Cairo, p. 7.<\/p>\n (2) Prof. Hossam El-Din Abdel Ghani Al-Sagheer, “The Legal System of Company Mergers,” PhD thesis for the year 1986, Faculty of Law – Cairo University, pp. 24, 25.<\/p>\n (3) Article No. (225\/1) of the Companies Law issued by Royal Decree No. (M\/132) dated 1\/12\/1443 AH corresponding to 30\/6\/2022 AD, published on 23\/12\/1443 AH corresponding to 22\/7\/2022 AD, effective as of 19\/1\/2023 AD.<\/p>\n (4) Article No. (225\/ 2,3) of the same Law.<\/p>\n (5) Article No. (49) of the Mergers and Acquisitions Regulations issued by the Board of the Capital Market Authority, pursuant to Resolution No. (1-5-2007) dated 21\/9\/1428 AH corresponding to 3\/10\/2007 AD, based on the Capital Market Law issued by Royal Decree No. (M\/30) dated 2\/6\/1424 AH, amended by the CMA Board Resolution No. (8-5-2023) dated 25\/6\/1444 AH, corresponding to 18\/1\/2023 AD.<\/p>\n (6) Article No. (225\/ 4, 5, 6) of the current Companies Law.<\/p>\n (7) Article No. (227\/ 1, 2) of the same Law.<\/p>\n (8) Article No. (227\/ 3) of the new Companies Law.<\/p>\n (9) Article No. (228) of the same Law.<\/p>\n (10) Article No. (87\/ 1, 2) of the Executive Regulations of the Companies Law issued pursuant to Ministerial Resolution – Minister of Commerce – No. (284) dated 23\/6\/1444 AH.<\/p>\n (11) Article No. (87\/ 3) of the same Regulations.<\/p>\n (12) Dr. Khalid Hamad Ayed Al-Azmi, “The Legal Effects of Company Mergers on the Rights of Partners and Creditors,” PhD thesis in Law, Cairo, undated, pp. 361, 362.<\/p>\n (13) Prof. Abdel-Fadil Muhammad Ahmad, “Merger of Companies under the Saudi Companies Law,” research in the Journal of Legal and Economic Research – Faculty of Law, Mansoura University, Issue (14), October 1993, p. 254.<\/p>\n (14) Article No. (229) of the current Companies Law.<\/p>\n (15) Prof. Hosni Al-Masri, “Previous Reference”, pp. 48, 49.<\/p>\n (16) Article No. (231) of the same Law.<\/p>\n (17) Article No. (232) of the current Companies Law.<\/p>\n (18) Article No. (68) of the Executive Regulations of the Companies Law specific to Listed Joint-Stock Companies issued by the Board of the Capital Market Authority, pursuant to Resolution No. (8-127-2016) dated 16\/1\/1438 AH corresponding to 17\/10\/2016 AD, based on the Companies Law issued by Royal Decree No. (M\/3) dated 28\/1\/1437 AH, amended by the CMA Board Resolution No. (2-26-2023) dated 5\/9\/1444 AH corresponding to 27\/3\/2023 AD, based on the Companies Law issued by Royal Decree No. (M\/132) dated 1\/12\/1443 AH.<\/p>\n (19) Article No. (90) of the Executive Regulations of the Companies Law dated 23\/6\/1444 AH.<\/p>\n (20) Article No. (234) of the current Companies Law.<\/p>\n (21) Article No. (89) of the same Executive Regulations.<\/p>\n (22) Article No. (91) of the Executive Regulations of the Companies Law.<\/p>\n (23) Article No. (93) of the same Regulations.<\/p>\n (24) Article No. (233) of the Companies Law.<\/p>\n","protected":false},"excerpt":{"rendered":" The merger or division of commercial companies within the Kingdom of Saudi Arabia gains importance by supporting the ability of these companies to compete and maximally benefit from the volume of national or foreign investments to economically restructure these companies. 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Second: Stages of company merger, how to object to it, and its enforcement<\/strong><\/h2>\n
Third: The effect of the merger if the merger is into a company that owns the merged company<\/strong><\/h2>\n
Fourth: The effect of the merger on the rights and contracts of the merged company<\/strong><\/h2>\n
Fifth: Definition and forms of company division<\/strong><\/h2>\n
Sixth: Proposed decision for company division, rules of division, and its enforcement<\/strong><\/h2>\n
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Seventh: Debts and obligations of the divided company<\/strong><\/h2>\n
Summary<\/strong><\/h2>\n
Questions<\/strong><\/h3>\n
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References<\/strong><\/h3>\n