Explore Investment in Saudi Arabia: Competition Law

Introduction  

As part of our Explore Investment in Saudi Arabia series, in this article we focus on the Competition Law (issued by Royal Decree No. M/75 on 6 March 2019) (the “Competition Law”) and share insights that we have gained from assisting our clients with Competition Law related queries in the Kingdom of Saudi Arabia (“KSA”).

Purpose of the Competition Law

The Competition Law aims to protect and encourage fair competition, and to combat and prevent monopolistic practices that affect lawful competition or consumer interest, thereby improving the market environment and promoting economic development. This is further explained in the Implementing Regulations issued by the Board of Directors of the General Authority for Competition (“GAC”) via Resolution No. (337) dated 24 September 2019, which mention that the Competition Law intends to:

• Protect and encourage fair competition;
• Combat and prevent monopolistic practices affecting competition;
• Promote the availability of commodities with high quality and varied prices; and
• Stimulate innovation and investment to support economic growth.

Who does the law apply to?

The Competition Law applies to all entities in the KSA, as well as practices taking place outside the KSA which have an adverse effect on fair competition within the KSA.^[1]

The law does not apply to public establishments and state-owned companies if such establishments or companies are granted exclusive rights by the Government to provide goods or services in a certain field.^[2]

For behaviours and practices offering outside the KSA, GAC will:

• Assess the impact on competition with the KSA considering whether the impact is existent or potential; and
• Take necessary measures to stop or mitigate the impact of practices occurring outside the KSA that have an adverse effect on competition within the KSA.

Anti-Competitive Practices

The general principle is that the price of goods and services should be in accordance with market rules and free competition (other than those determined by law, such as, for example, the price of medicines).^[3]

It is likely that a practice shall contravene the Competition Law if it deliberately or inadvertently prejudices competition.^[4] This can include written, verbal, explicit or implicit agreements between entities. The law provides the following examples of prohibited practices which are non-exhaustive:

• Fixing prices, fees, and terms of sale: This includes agreements on production quantities, service performance, or market allocation.
• Limiting market access: This covers restricting the flow of goods and services, preventing new entrants, or excluding competitors.
• Denying access to goods and services: This prohibits specific entities from obtaining available market offerings.
• Market allocation: This involves dividing markets by region, customer type, or other criteria.
• Stifling innovation and investment: This includes actions that limit production, development, distribution, marketing, or investment activities.
• Bid rigging: This refers to colluding on bids or offers in government tenders or auctions.

These anti-competitive practices outline the tension between free market principles and the need to prevent anti-competitive practices. Entities are encouraged to set their own prices, and the role of the law is to intervene when competition is deliberately or unintentionally harmed. The GAC will generally apply a nuanced approach to competition law enforcement, looking for both explicit agreements and the broader impact of business practices. In recent times we have seen the GAC is increasingly taking measures to investigate and prosecute breaches of the Competition Law.

Market Dominance 

The general principle is that any entity which has a dominant market position shall be prohibited from exploiting such a position to prejudice or limit competition.^[5]

i. Market Dominance

A firm or group of firms acting together (referred to as a "collective") achieves market dominance by meeting one of the following conditions:^[6]

1. High Market Share: The collective holds at least 40% of the relevant market. This share can be from a single firm or combined if the firms act as a single unit in affecting the market.
2. Market Influence: The collective has the power to significantly impact the relevant market, such as by controlling prices, production levels, or demand. This ability can come from a single firm or a group acting together.

To assess market dominance under the second criterion, the authorities (GAC) may consider various factors, including:

• Market Share: This includes both the collective's share and the shares of competitors.
• Competition: This considers existing and potential competition in the market.
• Market Dynamics: This examines how supply and demand for the product are changing.
• Barriers to Entry: This analyses factors that make it difficult for new competitors to enter or stay in the market.
• Buyer Power: This assesses the strength of customer bargaining power, including their purchasing influence.
• Resource Availability: This considers access to production inputs for all firms.
• Financial Strength: This compares the financial and non-financial resources of the collective and its competitors.
• Economies of Scale: This evaluates the cost advantages a firm may have due to its size.
• Product Differentiation: This examines how unique the product or service is compared to alternatives.

ii. Prohibited Practices

Companies with a dominant market position are prohibited from abusing that power to harm or limit competition. This includes the following actions^[7]:

• Predatory Pricing: Selling goods or services below their cost to drive competitors out of business or deter new entrants.
• Resale Price Maintenance: Setting or controlling the prices at which resellers can sell your products.
• Market Manipulation: Artificially controlling product availability to create price swings or shortages.
• Unfair Price Discrimination: Offering different prices or terms to similar customers without justification.
• Refusal to Deal: Denying business dealings with another company without a legitimate reason, hindering their market entry.
• Hindering Downstream Competition: Forcing a company to not do business with your competitors.
• Tying Arrangements: Requiring the purchase of unrelated goods or services as a condition of buying something else.

The above list of examples highlights the wide scope of potential infringements. While practices like predatory pricing or resale price maintenance have clear anti-competitive intent, others, like tying arrangement or manipulating product availability, can appear more innocuous on the surface. It is therefore crucial to be vigilant in identifying subtle, yet potentially damaging arrangements, when doing business.

N.B. Exclusivity Arrangements. In practice we are seeing greater attention from clients regarding exclusivity in commercial arrangements. These must be structured in form and substance in line with the Competition Law and should not have the effect of stifling competition. Our team on the ground is well placed to advise on the nuances of these exclusivity rights.

Economic Concentration

i. General Principle and definition

Entities seeking to join an economic concentration transaction must notify the Authority at least 90 days prior to the completion of such transaction if the total value of the entities' annual sales exceeds the thresholds below.^[8]

"Economic Concentration" is defined as the transfer of shares, assets, or rights from one entity to another that results in a change of control or decisive influence over the target entity, or the establishment of joint control over a full-function joint venture, are required to obtain GAC clearance if their turnover exceeds the threshold.

ii. M&A Thresholds

At first, any merger or acquisition involving companies with a combined revenue exceeding 100 million Saudi Riyals (roughly $26.6 million) needed to be reported. However, experience in the initial years showed this threshold was too low for the Saudi Arabian market. Too many transactions, even those with little impact on competition, were being caught by this rule.

The GAC issued new thresholds on 1 November 2023. The effect of the higher thresholds is to limit the number of filings to those impactful on the local economy. Under the new thresholds, a filing is required only if all the following cumulative conditions are met:

• Worldwide turnover of the parties: the total combined annual turnover of the parties exceeds 200 million Saudi Riyals (US$ 53.3 million);
• Worldwide turnover of the target: the total annual turnover of the target entities exceeds 40 million Saudi Riyals (US$ 10.6 million); and
• Domestic turnover of the parties: the total annual turnover of the parties in Saudi Arabia exceeds 40 million Saudi Riyals (US$ 10.6 million).

The new filing rules are a positive step for the system. They raise the thresholds for mandatory filings by considering two additional factors:

1. Local Activity: The target entity must now have some level of business presence in Saudi Arabia.
2. Minimum Sales: The target entity's sales in Saudi Arabia must meet a minimum threshold.

While it's still possible for some foreign acquisitions to trigger a filing requirement, these additional conditions are expected to significantly reduce unnecessary filings. This will allow the GAC to focus its resources on reviewing mergers and acquisitions that are more likely to impact competition within Saudi Arabia.

iii. Joint Venture Thresholds

For the creation of new joint ventures, the previous filing threshold remains in place. This means a filing is still required if:

The combined global revenue of the parties involved exceeds 200 million Saudi Riyals (roughly US$53.3 million).

The joint venture will have:

• Joint control by the parties involved.
• Full functionality (meaning it can operate independently).
• Long-term existence (not a temporary arrangement).

Penalties

Breaking the law by violating Articles 5 (Unfair Competition), 6 (Dominant Business Practices), 7 (Economic Concentration), or 11 (Failing to Notify GAC) of the Competition Law can result in fines.^[9]

• Fine based on sales: The fine can be up to 10% of the company's annual sales.
• Maximum fine: If sales are difficult to determine, the maximum fine is 10 million Saudi Riyals (roughly US$2.67 million).
• Profit-based fine: The committee may choose a fine up to three times the violator's profit from the offense.

Repeat offenders face harsher penalties. If a company commits the same violation within three years of the first offense, the fine can be doubled.

Decisions on violations are made public. The committee's decision will be published in a local newspaper or other suitable media outlet, at the violator's expense. This happens only after the decision becomes final.

Next Steps

The Competition Law provides a comprehensive framework for regulating competition in the KSA. In summary, the key Competition Law considerations for companies undertaking business activities in the KSA to be aware of are:

• Competition Law Compliance: Ensure your business activities comply with the Competition Law to avoid potential penalties. This includes avoiding arrangements that restrict market access, control pricing, or limit new entrants.
• Dominant Position: If your company has a dominant market share, be extra vigilant. The law prohibits actions that leverage your position to unfairly disadvantage competitors, such as predatory pricing or tying arrangements.
• Economic Concentration Thresholds: It is important to understand the notification requirements for transactions which fall within the scope of the definition of Economic Concentrations (which is not just limited to M&A but can include other types of transactions including without limitation, joint ventures and distribution arrangements). Recent changes have raised the filing thresholds for M&A transactions, focusing on transactions with a more significant impact on the Saudi market. However, consult with legal counsel to determine if GAC notification/approval is required.

By understanding and adhering to the Competition Law, you can minimise the legal risk to your business. Feel free to contact us if you have any questions. The contact details for our team on the ground – Rizwan Osman (Head of Corporate (Saudi Arabia)), Harry Taylor (Associate), and Reem Alsmail (Associate), are included in this article. 
 

^[1] Article 3(1) of the Competition Law

^[2] Article 3(2) of the Competition Law

^[3] Article 4 of the Competition Law

^[4] Article 5 of the Competition Law

^[5] Article 6 of the Competition Law and Article 9 of the Implementing Regulations

^[6] Article 10 of the Implementing Regulations

^[7] Article 6 of the Competition Law

^[8] Article 7 of the Competition Law

^[9] Article 19 of the Competition Law