The Cartels and Leniency Review: Saudi Arabia
Enforcement policies and guidance
The Kingdom of Saudi Arabia is the largest market in the Cooperation Council for the Arab States of the Gulf (GCC) in terms of population and gross domestic product. As part of the growing economy, Saudi Arabia's legal and regulatory framework has evolved to accommodate new needs and it can be said that doors are now open for many more businesses to enter the market. Saudi Arabia acknowledged that the existence of cartels can be very harmful for consumers, businesses and the economy in general. Saudi Arabia's first Competition Law was introduced in 20042 with the aim of controlling competition in the market and ensuring consumer protection. This first Competition Law was replaced in 2019 with a new law and regulations (the New Law and the Competition Regulations respectively)3 to develop the economy's effectiveness, encourage fair competition, reduce adversarial effects on the economic and social body, create an appealing competitive environment for investors (especially foreign investors) and provide consistent and balanced progress through economic growth, in addition to giving the private sector the tools to engage in numerous commercial undertakings. The regulatory authority that governs and enforces the Competition Regulations in Saudi Arabia is the General Authority for Competition (GAC) (formerly the Competition Council). GAC is led by a governor, a Council of Directors and the chair for the Council of Directors. GAC is responsible for the supervision and implementation of the new competition regime, with objectives to (1) enhance, protect and generally encourage fair competition overall; (2) closely observe and forbid all competition practices that will disturb the fair competition environment and the Saudi consumers' rights; (3) boost and strengthen the competition and trade market in Saudi Arabia and ensure all commercial practices are supervised, monitored and regulated; (4) protect small to medium business owners to ensure the consistency of their commercial activity in the market; and (5) increase the flow of the market and trade and yield the market with fairly priced and quality products and commodities.
i New competition law regime
The enforcement of the New Law saw the introduction of a new regime. While the New Law has mostly maintained the approach of the previous law, it has also introduced some substantial procedural changes, including a change in the merger notification system, new penalties for obstructing an investigation, and leniency and settlement systems. Nonetheless, despite these improvements, the New Law has some grey areas and ambiguities to be clarified in due course and its most significant problems presently remain unadressed. There is therefore room for improvement to meet international standards. Post-pandemic, the New Law is expected to result in higher enforcement costs for the enforcement agency and entail significant compliance costs for companies, in turn acting as a deterrent to investment by domestic and foreign companies.
The New Law applies to (1) all entities4 within the country;5 and (2) practices occurring outside the country that have an adverse effect on fair competition within the country.6 Therefore, any natural or legal persons or any entity conducting economic activity in the country is within the scope of application of the New Law; however, public establishments and state-owned companies authorised by the government to provide goods or services are excluded from its scope of application. Although governmental entities, set up by royal decree, can benefit from this exception (while also enjoying the advantageous effects of the competition law provisions), this exception does not apply to semi-governmental entities that are partially owned by governmental entities.
The exemption system has been one of the most problematic areas of Saudi competition laws. The New Law extends exemption to other practices in addition to agreements. However, a mandatory notification system (which was abandoned by the EU) may decrease efficiencies, prevent firms from making agreements that may be beneficial to customers and the economy, and increase compliance costs and GAC's workload. In addition, the approach of the New Law to some important concepts, such as the 'market', 'dominance' and 'abuse of dominant position', is quite problematic from an economics perspective and not aligned with established international practices. With the New Law, the risk of false assessment7 is likely to increase, thus a non-dominant firm may be penalised while dominant firms are not. In terms of economic concentrations, replacing a market share-based notification threshold with a turnover-based notification threshold is welcomed. However, if turnover thresholds are not adjusted carefully, they may cause an excessive number of notifications, imposing unnecessary costs for firms and for competition authorities. Similarly, the definition of an economic concentration8 does not make any reference to a 'change of control', hence intra-group restructuring or daily transactions in stock markets will need to be notified, resulting in an unnecessary increase in GAC's workload and adding to the legal costs and bureaucracy for the firms operating in or serving Saudi markets.
ii Key concepts and prohibitions
Wide prohibitions on unfair practices were set out by the provisions of the competition law. The New Law sets a complete list of situations that are considered anticompetitive and includes: (1) setting the price of services and goods, or its production volume or weights; (2) dividing market goods or services on the basis of certain criteria; (3) controlling distribution, manufacture, development and marketing operations in the market; (4) arranging for, or engaging in, collusive bidding or tendering in public tenders or in other anticompetitive practices; (5) restricting entities from entry into the market and from their right to access goods or services in the market; (6) restricting, partially or totally, the flow of goods and services into or out of the market; and (7) colluding or coordinating in bids or offers in government tenders, auctions, etc., in a manner that interferes with competition.
The New Law removes the distinction between horizontal and vertical relationships between entities and provides that all restrictive practices will be regarded as a violation regardless of the nature of the relationship between the parties involved or whether they are regarded as potential or actual competitors. The removal of these limitations placed many entities under investigation and forced them to reconsider their practices in the Saudi market. However, although the law implemented a wider definition of anticompetitive practice and therefore targeted more practices in the country, it has introduced a new provision allowing certain qualifying anticompetitive businesses to be conducted in the country where this provides certain benefits, subject to an assessment conducted by a technical committee (see Section III.iii).
The New Law defines an economic concentration as '[a]ny act that results in the total or partial transfer of ownership of assets, rights, equity, shares, or obligations of an entity to another, or the joining of two or more administrations in a joint administration, in accordance with the rules and standards set by the Regulations'. Entities seeking to participate in an economic concentration transaction must inform GAC at least 90 days before completion if the total annual sales value of the entities seeking to participate in the economic concentration exceeds the amount determined by the Competition Regulations.9 In response, GAC will issue a resolution either approving (or subject to conditional approval) or refusing the transaction.10 These entities may not complete the procedures of economic concentration unless (1) notified of the approval by GAC in writing; and (2) 90 days have elapsed from the date of the notice without being notified of either the approval by GAC or the refusal of the Board, in writing.
GAC may, upon examining anticompetitive practices (whether explicitly or implicitly), consider one or more of the following:
- the percentage and market shares of vendors or purchases affected by the practice;
- the period during which the practice occurred;
- the price or volume deviation in the commodity compared with the expected levels in the absence of the practice;
- the impact of the practice on the prices, quantities, output, quality, diversity or innovation of commodities compared with the expected levels in the absence of the practice;
- impact on consumer interests;
- impact on freedom of import and export; and
- the extent to which the practice is consistent with the normal competitive behaviour of firms in normal conditions of competition.11
A firm, or group of firms, shall be deemed dominant in a relevant market if it meets either or both of the following criteria:
- a market share of 40 per cent or more of the relevant market. This shall include entities and firms collectively acting with a common will in committing the violation or causing the effect; or
- the ability to influence a relevant market such as controlling prices, production or demand. This shall include entities and firms collectively acting with a common will in committing the violation or causing the effect.
GAC may, when adopting this criterion, examine one or more of the assessment factors, including: (1) the market share of a firm – or group of firms – and the market shares of competitors; (2) the actual or potential competition in the relevant market; (3) the growth in the supply and demand for the commodity in the relevant market; (4) the obstacles that limit or prevent competitors from entering the market or continuing or increasing their business therein; (5) the bargaining power of the client, including purchasing power; (6) the accessibility of production inputs; and (7) the financial and non-financial resources of the firm and its competitors.12 Entities that are dominant in the market or an important part of it are not allowed to exploit their position to conduct any activities explicitly prohibited by the laws.
Cooperation with other jurisdictions
The first GCC country to issue a competition law was Saudi Arabia, in 2004. The most recent GCC country to pass a stand-alone competition law was Bahrain, in 2018. Saudi Arabia, Qatar and Kuwait were the first three GCC countries to pass specific competition laws, between 2004 and 2007, and, following on the heels of this group, the United Arab Emirates and Oman passed laws in 2012 and 2014 respectively. Despite this, as yet there is no GCC-wide protocol or competition council. Because of the recent expansion of the GCC market, and remarkable foreign investment by international businesses, the enforcement of competition law should become a more common event. Although most international businesses entering the region will be well acquainted with competition law concepts and have systems and internal processes that align with these, many GCC regional businesses are not used to these concepts or do not account for competition law enforcement in their day-to-day dealings. As the region's economic landscape changes and as businesses both move into and expand out of the region, competition law will continue to evolve, and possibly quite rapidly, as regional governments and policymakers strive to develop markets that both foreign investors and regional businesses can rely on as openly competitive. Moreover, although the law encourages the companies to implement internal competition policies and train their employees to cooperate with GAC's agents during investigations, the law is silent as to whether there are any international leniency programmes that may be applicable in Saudi Arabia. As such, currently there is no GCC treaty on the regional enforcement of competition laws nor any leniency programme.
Jurisdictional limitations, affirmative defences and exemptions
i Jurisdictional limitations
The application of the New Law is limited to (1) all Saudi Arabian entities engaged in economic activities; (2) an individual engaged in economic activity whether or not he or she is licensed to do business in the country; (3) all forms of entities and groups when engaged in economic activities; (4) electronic platforms and applications, whether or not they are licensed to practise the activity; and (5) behaviours and practices occurring outside the country when they have impact on domestic competition. The New Law has introduced a new provision allowing qualifying anticompetitive businesses to be carried out in Saudi Arabia where this provides certain benefits (see Section III.iii).
The New Law does not apply to public establishments or state-owned companies if they are authorised by the Saudi government to provide particular goods or services exclusively. Such an exemption must be granted by a royal decree or a resolution of the Council of Ministers authorising the relevant public establishment or state-owned company to be the sole provider of goods or services in that particular field. However, the New Law applies to state-owned companies in fields other than those in which they are exclusively authorised by the Saudi government to provide goods or services.
As noted in Section I, the Competition Regulations are enforced in Saudi Arabia by GAC, its Council of Directors and the chair for the Council of Directors.
ii Affirmative defences
This category of defence is not applicable to cartel conduct in Saudi Arabia.
Although the New Law implemented a wider definition of anticompetitive practice and, therefore, targeted more practices in the country, it has introduced a new provision whereby certain anticompetitive businesses may be conducted in the country only if the business succeeds in proving that its presence generates and improves the level of quality in certain businesses, creativity and technology, subject to an assessment conducted by a technical committee. GAC's board of directors (the Board) may approve the request of the entity to be exempt from certain provisions of the New Law, including the general prohibited anticompetitive practices, the practices specific to entities in a dominant position and the reporting requirements of an economic concentration activity. To gain exemption, it must also be shown that the benefit of the exemption to the consumer should outweigh the effects of restricting the freedom of competition.
The absence of a leniency programme13 and guidelines was one of the major grey areas of the old competition law. Therefore, leniency and settlement rules have been introduced under the New Law, and leniency may be requested by only one applicant (i.e., the first entity to apply for leniency), which must proactively provide evidence relating to its partners violating the law. The New Law clarifies that an application for leniency or settlement may be requested before or after a decision to investigate and collect evidence has been issued, but not after a decision has been taken to institute criminal proceedings against the alleged violator. An application for leniency may be requested only before the stage where the decision is taken to institute criminal proceedings. If the Board decides to approve an application for leniency or settlement, no proceedings shall be instituted before the committee for the resolution of violations of the New Law against the entity that was granted leniency or settlement. The Board may, however, take other measures in accordance with the provisions of the New Law. If an entity accepts a settlement, it shall pay the settlement amount determined by the Board, as well as any compensation amount to the affected parties as may be determined by the Board. GAC must notify the applicant of the Board's decision on a leniency or settlement application within 120 days of the date of submission of the complete request. The Board may withdraw the settlement decision if the firm fails to provide proof of its commitment to indemnify the aggrieved parties or to implement the conditions, pledges, obligations, etc., as required by the settlement decision.
The New Law imposed fines not exceeding 5 per cent of annual turnover (capped at 5 million riyals) for violations of certain provisions of the New Law concerning preventing investigators or officers from performing their duties. A fine not exceeding 10 million riyals applies for breaches concerning abuses of dominant position, competition arrangements and economic concentrations. In addition, a fine not exceeding 2 million riyals for breaches of various provisions of the New Law was introduced. The New Law also gave the authorities the right to increase the fine in certain situations, subject to certain limitations, especially where the offending party commits repeated violations.
The New Law applies to businesses outside the kingdom responsible for producing anticompetitive effects in the kingdom in relation to both goods and services. It is not clear whether it also extends to the relationship between the parties and contracts entered into between entities and persons and whose effect is produced directly or indirectly in the kingdom (i.e., contracts with production companies and artists limiting the artists' performance in the market). It will be interesting to see how the courts will view anticompetitive contracts entered into with artists outside the kingdom, restricting or limiting their performance in the kingdom. While these are relatively recent developments, these circumstances may occur more often in the GCC market, particularly in view of the recent media and artistic revolution in the kingdom.
'Day one' response
Because of the severe penalties for non-cooperation with the investigation officer, it is recommended to be cooperative and provide all information requested by the official. Where an employee believes, in good faith, there is a violation of applicable competition laws and regulations, he or she should report the matter promptly to management, his or her line manager, the legal department or the compliance officer (if any). Pursuant to the New Law, the law enforcement officer is empowered to: (1) enter and search the premises, offices and branches of firms as well as their affiliated warehouses and storerooms, etc., during normal working hours; (2) access books, records, papers and documents of the firm as well as any hardware, equipment, tools, databases, software or electronic applications, and take copies thereof, whether confidential or not; (3) document the recorded, confiscated or seized items in minutes to be signed by the law enforcement officer and an affiliate of the firm present at the time of recording the violation (if he or she refuses to sign, the refusal shall be noted in the minutes); and (4) seek the assistance of competent agencies, when needed and subject to the procedures of the competent authorities, including security agencies, to support them in carrying out the tasks assigned to him or her.
It is recommended that companies form an internal competition compliance department to monitor compliance regularly and implement a compliance programme for staff. Common aspects of a competition compliance strategy must include:
- policy – companies should have an overreaching policy providing commitments, rules and disciplinary measures;
- procedure – companies should adopt a clear framework of business procedures and responsibilities; and
- personnel – companies should regularly conduct competition compliance training to raise staff awareness.
This category of enforcement is not applicable to cartel conduct in Saudi Arabia.
Current developments can be seen in the implementation of transparency of procedures by GAC to pursue its role in protecting and promoting fair competition, and fighting monopolistic practices to secure lawful competition. Implementing transparency is one of the most significant developments that will preserve public rights and protect the rights of aggrieved complainants. A notable example published by GAC stated that, since March 2016, it had received many complaints from citizens and subscribers about beIN Sports, for violating the country's competition rules. After collecting evidence and conducting the necessary investigations, GAC announced that beIN Sports had abused its dominant position by various monopolistic practices. In this case, GAC announced penalties against many entities, including imposing a fine of 10 million riyals on beIN Sports and revoking its licence. beIN Sports was also ordered to return all the profits obtained because of its abuse of dominant position in forcing customers to subscribe to a package that included non-sports channels as a condition for subscribing to its sports channel packages. It had also required subscribers to renew packages for additional periods as a condition of access to other sports tournaments.
In addition, two companies operating in the bottling and selling of soft drinks were fined 10 million riyals each for failing to inform GAC and obtain its approval before completing an acquisition, in addition to agreeing and coordinating the geographical division of the concluded contract between the two facilities.
A company providing information technology services was also fined 1 million riyals for withholding information and not allowing law enforcement officers to view all records, files and documents, and preventing them from carrying out their duties.
In another development, GAC has released guidelines for economic concentration filings entitled the 'Merger Control Guidelines' (the Guidelines)14 laying out the framework for economic concentrations and further explaining and clarifying the provisions of the New Law pertaining to competition practices and procedures. The Guidelines were published with the purpose of attracting investments by promoting transparency and a competitive business environment to support business growth through development and innovation.
Furthermore, it provides guidance to the parties and their consultants in relation to procedures and the assessment of economic concentrations adapted by GAC for competition filings. The Guidelines further elaborate on the nexus, and range of impact, of concentrations with effects in the Saudi Arabian market that would require a filing, which was previously open to different possible interpretations. The previous criteria were potentially ambiguous, particularly for foreign entities that had little or no impact on the Saudi market. The guidelines provide another clarification in relation to the single economic entity15 concept that GAC relies on in calculating the funds of the parties involved in a concentration to determine whether the threshold16 for filing has been met. Notifying parties had expressed certain concerns regarding the single economic entity concept as it did not provide a clear view of GAC's jurisdiction over the parties and their affiliates, including but not limited to subsidiaries and holding companies and the extent of GAC's jurisdiction when assessing an economic concentration. The Guidelines were published not long before GAC updated its portal and the associated processes.17 The updated portal for economic concentration notifications provides for submission of a single application regarding a transaction and the parties involved. This contrasts with the system previously adopted, which required a two-step application process: (1) an initial application regarding the whole transaction; and (2) two further applications, each specific to a party (merging and merged, or acquiring and acquired, or buyer and seller) and specific to the type of transaction. One particularly significant improvement of the portal following the update is the organisation and layout of information, which better assists the notifying parties in setting out the details of the transaction. It has also automated the decision issuance process and provides a progress tracker for the transaction, through which the case reviewer and the filing attorney or individual can monitor the process.
1 Belal Hashmi is a partner at Hammad & Al-Mehdar.
2 Royal Decree No. (M/25) dated 22 June 2004.
3 The Competition Regulations are composed of the following three pieces of legislation: (1) the New Competition Law promulgated by Royal Decree No. (M/75) dated 29/06/1440 AH (corresponding to 07/03/2019 G), which replaced the previous Competition Law No. (M/25) dated 04/05/1425 AH (corresponding to 21/06/2004 G) and amended by Royal Decree No. (M/24) dated 11/04/1435 AH (corresponding to 11/02/2014 G) (the New Law); (2) the Implementing Regulations of the Competition Law promulgated by Competition Council Resolution No. (337) dated 25/01/1441 AH (corresponding to 25/09/2019 G) (the Implementing Regulations); and (3) the General Authority for Competition Statute promulgated by the Council of Ministers Resolution No. (55) Dated 20/01/1439 AH, which approved the change in name of the Competition Council to the General Authority for Competition (corresponding to the GAC Statute).
4 Entity is defined as '[a]ny natural or corporate person engaged in an economic activity'. This activity includes: business, agricultural, industrial and service activities as well as purchase and sale of goods and services (note that this applies even to those engaged in unlicensed economic activity).
5 Article 3 of the Competition Regulations.
6 Article 3 of the New Law.
7 Finding a non-dominant firm in a dominant position or vice versa.
8 According to Article (2) of the Implementing Regulations of the Competition Law, an economic concentration is defined as: 'any act resulting in full or partial transfer of ownership rights or usufruct of an entity's properties, rights, stocks, shares or obligations to another entity that puts an entity or a group of entities in a position of domination of an entity or a group of entities, by way of merger, takeover, acquisition, or combining two or more managements into one joint management or any other means which leads to having a market share of 40 per cent of the total sales of a commodity in the market'.
9 Article 7 of the New Law.
10 Article 10 of the New Law.
11 Article 11 of the Competition Regulations.
12 Article 10 of the Competition Regulations.
13 Leniency has been defined as an application whereby – if accepted by the Board – criminal proceedings shall not be initiated before the Committee, in a specified case, against the violating firm if the firm hands over evidence that reveals, or could reveal, its partners in committing the violation, as prescribed by the Regulations, and approved by the Board.
14 Saudi General Authority of Competition's Merger Review Guidelines released on 06/08/1441 AH corresponding to 30 March 2020.
15 GAC Merger Review Guidelines, Section 5, p. 8 ('Control and single economic entity doctrine').
16 Article 12(1) of the Implementing Regulations of the Competition Law states that the threshold for filing an economic concentration is 100 million riyals.