One of the instrumental rights corporate statutes bestow upon shareholders is the appraisal right. This right allows dissenting shareholders of a target company in a corporate control transaction (i.e. mergers and acquisitions) to receive better value for their shares as it is determined by the judiciary. The Saudi Arabian Companies Law of 2015 (CL), nonetheless, did not prescribe such a remedy, nor did any other implementing regulations stipulate this right for shareholders. This provokes the question as to how Saudi laws protect minority shareholders dissenting from a merger or acquisition transaction, given the notable improvements the country has carried out to its shareholder protection.

In a brief background on the protection of minority investors in the Kingdom, since the launching of the Saudi 2030 Vision, the country has remarkably experienced a high volume of laws and regulations that are essential to advance its transformative Vision and achieve its social and economic goals. An important one of which is to improve its business environment and attract more foreign direct investments. This involves that related-investment laws and regulations are protective of investors and able to gain their confidence in the country’s resilience and potential. Such enactments include the CL, the Corporate Governance Regulation (CGR) and Merger and Acquisition Regulation (MAR) for listed joint-stock companies. As evidence, this legislative zeal, accompanied by fruitful endeavors on the executive level alongside its unwavering commitment to the Vision, has mirrored on several quantitative indicators and areas the Doing Business Report by the World Bank Group examines. According to the 2018 Report,[1] Saudi Arabia ranked 10th globally in protecting minority investors, a meaningful gain over its prior ranking of 36th in the 2016 Report. Moreover, the Report highlighted the existence of strong conflict of interest regulation, which exceeded the regional average.[2]

In the context of a corporate control transaction, while dissenters are not afforded the option to eschew the unfavorable conditions of the deal that are thought to be inadequate or undervaluing their shareholdings, some laws and regulations (i.e., the CL and MAR) have stipulated a number of mandatory rules that altogether can offer protection for dissenting shareholders in M&A deals. For instance, there is the shareholder’s approval requirement for corporate control transactions. The statutory protection of this requirement stems from the fact that the Law sets a high percentage for shareholder meetings’ quorums and decision passing. There are significant super-majority requirements for numerous corporate acts, including for dissolution of the corporation. Higher required quorum and decision-making percentages provide for greater investor control by empowering a minority shareholder with a smaller percentage of shares to help shape and decide on the corporation’s affairs, including M&A transactions, share issuance and dissolution of the company.  In addition, the CL deprive shareholders who own shares in both the merging and emerged company of voting their shares when deciding on a merger. Instead, they are allowed to vote on the merger only in either company. This rule helps prevent dominant shareholders from using the merger process to squeeze out minority.

Yet another source of statutory protection flows from the CL mandating two sources for corporate auditing, internal and external, for all companies, public and private. They are of the foremost tools employed to keep shareholders in the loop about corporate matters, assist them in making well-versed decisions, ensure corporate fiduciaries’ compliance with the Law alongside corporate bylaws, and detect corporate malfeasance (if any). The Law sets forth rigorous rules governing the powers and tasks of the internal audit committee and external auditor and holds them to a high standard of accountability.

Whether these rules offer adequate alternatives to the appraisal right is an empirical question that may remain unanswered for a while due to the newness of the Law, and the absence of this remedy’s effects on real cases, yet. Nonetheless, minority shareholders are free to include ex ante in the corporate bylaws and charter provisions that ex post entitle them to fair value for their shares in case of a merger, such as a predetermined appraising method.  Whether requiring appraisal rights in the corporate bylaws is practical for a minority shareholder will depend on bargaining power, however.

With the continuing absence of the appraisal right as a statutory remedy alongside the practical difficulty of contracting for such a right ex ante, one may question the role played by the judiciary in protecting minority shareholders in merger transactions of close corporations¾since appraisal rights in public corporations are rarely invoked. The CL stays silent about the boundaries of the competent court, so it is unclear whether the court has standing and leeway to assess whether a dissenting shareholder can seek its valuation based on equity and fairness principles. In general, there have been several cases where courts intervene to ensure the fair value for complaining partners and shareholders, these cases are not merger-related ones, however. This adds another layer of ambiguity and generates unpredictability and uncertainty for market participants.

Finally, it is worth noting that during 2015 and 2016, four out of six GCC countries[3] (namely Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait) updated their corporate laws. The dissenter’s right to seek judicial intervention in corporate control transactions is enshrined in both Kuwaiti and Emirati company laws,[4] yet both laws did not stipulate the appraisal rule as adopted by the MBCA in §13.02(a) (2) or §262 of the Delaware General Corporation Law.[5] Whether appraisal rights will come to the Kingdom in the future is yet to be seen.

*RKS thanks Dr. Abdulrahman N. Alsaleh, Professor of Business Law, King Saud University, for his contribution to this blog.

[1] See The World Bank, Doing Business 2018: Reforming to Create Jobs, Country Tables, p. 190 (15ed. Oct. 2017).

[2] Id. the World Bank Group report of 2017 found that Saudi Arabia scored 7 points out of 10 in the conflict of interest regulation index. By comparison, this was higher than the regional average, 4.9 points, and the average of OECD high-income economies, which was 6.4 points.

[3] The GCC is the Gulf Cooperation Council, an Arab regional organization of six neighboring countries; the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, Kuwait, and Oman. It was founded in 1981, and its headquarters are in Riyadh, the capital of Saudi Arabia. These countries are the most productive oil countries in the Middle East Plus, articles that make up the laws of most GCC countries are oftentimes identical. These countries share many cultural, social, and ideological similarities.

[4] Article 220 of the 2016 Kuwaiti Company Law asserts for the court the power to adjudicate disputes concerning minority shareholders opposing resolutions of the extraordinary general meeting (e.g., merger resolution). By the same token, Article 285 (2.B) of the Emirati Federal Law No. 2 of 2015 entitles shareholders objecting to a merger deal to appeal the deal before the Competent Court within 30 days from the date of approval of the merger contract by the general assembly or any other similar body.

[5] According to the Kuwaiti Company Law, when a disputed resolution is presented to the court, the court has the option to either uphold, modify, or repeal the resolution or postpone its execution until an appropriate settlement for the purchase of the shares of the dissenting parties is reached, provided that such shares shall not be purchased from the company’s capital. The Emirati Law, on the other hand, stays silent about the actions available to the Competent Court.