New rules for offering and listing securities in Saudi Arabia approved by Saudi CMA
The Capital Market Authority (the CMA) of the Kingdom of Saudi Arabia (KSA) approved new rules entitled the Rules of Offering Securities and Continuing Obligations on 27 December 2017 (the New Rules), together with consequential changes to the glossary of defined terms.
This decision is part of the CMA’s ongoing efforts to develop and deepen the capital markets in the Kingdom, and noted that that the New Rules will replace and supersede the existing Offers of Securities Regulations, Listing Rules and Parallel Market Listing Rules. The change will take place with effect from 1 April 2018, which is the date on which most of the provisions of the New Rules come into effect.
Law firm, King & Spalding Middle East & Islamic Finance Practice Group, has set out some of the key changes that will be introduced through the New Rules:
· The New Rules introduce a new definition for “offering securities” (in respect of which the New Rules will apply) as follows:
- “issuing securities;
- inviting the public to subscribe in securities or the direct or indirect marketing of securities; or
- any statement, announcement or communication that has the effect of selling, issuing or offering securities.”
· The definition of “securities” has notably not changed and will continue to include shares, debt instruments, warrants, certificates, units, options, futures, contracts for difference, long term insurance contracts and any right to, or interest in, the foregoing. Other interests which traditionally have fallen outside the scope of this definition from the CMA’s perspective such as, for example, interests in a limited liability company, will continue to fall outside the scope of CMA regulations. The New Rules clarify that its provisions do not apply to units in investment funds, including REITs. The offering of most investment funds will, therefore, continue to be governed by the Investment Funds Regulations, while the offering of public real estate funds will continue to be governed by the Real Estate Investment Funds Regulations and REITs by the Real Estate Investment Traded Funds Instructions.
· Whilst the current Offers of Securities Regulations envisage only public offers, private placements, offers in connection with a Parallel Market Listing, limited exempt offers by the government of the KSA and other limited persons, the New Rules substantially broaden the “exempt offers” category. The list of offers which fall within this category include (as was the case previously) offers of securities by the government of the KSA, but also now, for example, offers of securities by an unlisted issuer in connection with a debt conversion and offers of securities to sophisticated investors of less than SAR10 million (provided that such offer is not made more than once by a particular issuer in any twelve-month period).
· Under the existing rules, private placements of Saudi or foreign securities can only be offered through a CMA “authorised person” holding an arranging licence. With the exception of an exempt offer (which is subject to CMA notification), all offerings of securities must be registered with and approved by the CMA (generally a review period of 10 business days). There are currently two types of private placements: limited offers and offers to sophisticated investors. For limited offers, the time period for the offering is limited to one year and the minimum investment amount is SAR 1 million (unless the total offering is less than SAR5 million). This general framework is retained, albeit that for an offer to fall within the “limited offer” category, it must be offered to no more 100 investors (increased from 60 under the existing Offers of Securities Regulations).
· In the public offer context:
- an issuer must, under the New Rules, appoint a director and a senior executive to act as point persons with the CMA in connection with the relevant issuer’s compliance with the Capital Market Law and applicable rules;
- an issuer must appoint both a financial advisor and a legal advisor, and a new form of negative; assurance confirmation is required to be given by the legal advisor to the CMA in connection with, amongst other things, the prospectus;
- the 30 per cent free float requirement and liquidity requirement of at least 200 public shareholders in the existing Listing Rules have not been set out in the New Rules;
- public offers of debt and convertible debt instruments are not required to be underwritten;
- a market study in connection with the industry in which the issuer operates is no longer required;
- in the context of a debt issuance programme, new filing requirements have been included after the issuance of each relevant series;
- in relation to the prospectus, while the prospectus disclosure requirements have not been materially changed, separate disclosure requirements have been included for different types of public offer, including those in connection with a rights issue and convertible debt offerings. Where the issuer three of five already has securities listed on Tadawul, the prospectus disclosure requirements have been minimised in a number of respects;
- the CMA has clarified that a prospectus is not required relating to shares issued as a result of a capital increase by conversion of debt or for the purposes of acquiring a company or asset, albeit that a shareholder circular would be required in such circumstances;
- where a supplementary prospectus has been submitted to the CMA, it must approve it after being comfortable that it is complete and fulfils applicable requirements; where the CMA considers that the offer proceeding would not be in the interests of investors or would result in a breach of applicable laws, it may require that the offer is terminated; and
- new provisions have been included which effectively allow for a “pilot-fishing” exercise to be undertake prior to the approval of the offer, provided this does not result in a “binding undertaking to subscribe”.
· Provision has been made for a new category of capital increase, namely a capital increase through a debt conversion, to which new rules apply.
· The CMA has clarified that a shareholders’ circular (with specific content requirements) will be required in the context of a capital reduction.
· The specific list of events which would require announcement by a public company, irrespective of materiality, has been expanded extensively, to include matters such as a change in the company’s auditors and any changes in the company’s articles of association.
· Currently, an issuer’s annual audited financial statements are required to be disclosed not less than 15 calendar days before the issuer’ annual general assembly and within three months of its financial year end, whereas the New Rules have removed the latter requirement.
· The board of directors’ report is required to be disclosed within three months of financial year end, rather than75 calendar days.
· Disclosures of changes in shareholdings of more than five per cent or more, which currently have to be disclosed by the end of the current trading day, now have to be disclosed by the end of the third trading day. Any such disclosure now must also include a list of all entities which the relevant shareholder, through the holding of shares and/or convertible instruments, owns or controls (with a requirement to disclose any changes which occur to such list).
· The current requirement that any movement of one per cent or more in the stake held by significant shareholders has been removed. The current requirement that any significant shareholder holding a 10 per cent or more stake in a public company not disposing of such stake without the CMA’s consent has been removed. The current requirement that a 50 per cent or more stake in an issuer by any of its directors or senior executives be disclosed has been removed. This has been replaced with a requirement that no director, senior executive, member of the audit committee, nor any of their associates, may deal in the issuer’s shares (a) during the 15 calendar days preceding the end of each financial quarter and until the interim financials are disclosed or (b) during the 30 calendar days preceding the end of each financial year and until the annual financials are disclosed.
· While previously only a Saudi joint stock company or GCC incorporated joint stock company majority owned by GCC shareholders was eligible to list on the Parallel Market, any joint stock company is now eligible to be listed on the Parallel Market.
· “Non-resident foreigners” have been added to the list of “Qualified Investors” permitted to invest on the Parallel Market, in accordance with the “Guidance Note for the investment of Non-Resident Foreigners in the Parallel Market” issued by the CMA, with effect from 1 January 2018. Broadly, the following categories of persons will fall into the definition of “Non-resident foreigners”: (a) natural persons provided they comply with certain minimum investment and other criteria, and (b) legal persons if they are allowed to open an investment account in KSA and an account at the Securities Depositary Centre of Tadawul and, in each case, such natural/legal person holds nationality or was incorporated/licenced (as the case may be) in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the CMA or acceptable to it in accordance with the list of jurisdictions issued by the CMA. Certain investment restrictions also apply to such “Non-resident foreigners” investing in the Parallel Market.
· Moreover, whilst not entirely clear, it appears that the New Rules will also, with effect from 1 April 2018, no longer restrict direct investment in the Parallel Market to Qualified Investors. Whilst further clarification is required (given that the drafting of the New Rules is somewhat unclear on this point), this will potentially open up investment in the Parallel Market to a broader pool of prospective investors.
· If the period covered by the latest audited financial statements of the issuer ended six months prior to the date on which the offer is approved, the CMA may ask for financial statements covering any period it deems appropriate for such “stub” period.
· The 20 per cent free float and minimum liquidity requirements in the existing Parallel Market Listing Rules have not been set out in the New Rules.
· The provision enabling a “pilot-fishing” marketing exercise has been retained, albeit that this must not lead to a “binding undertaking to subscribe”.
· The requirement that a Parallel Market issuer be listed for two years prior to transitioning to the Main Market of Tadawul has been removed.
· The New Rules require Parallel Market investors to make disclosures of changes in interests of more than five per cent or more, and the other related disclosures described above.
Reverse takeover and demerger
· The New Rules have introduced provisions which are intended to regulate reverse takeover and demerger provisions. The New Rules introduce certain “class tests”, comprising “the assets test”, “the profits test”, “the revenues test” and “the consideration test”. Prior to undertaking a reverse takeover/demerger, an issuer must consider whether there is likely to be a material change in it as a result of such a transaction, by applying each of the relevant tests. If any of the percentage class tests exceed 50 per cent or more, shareholder approval will be required before entering into the relevant transaction.
· A shareholder circular will be required in connection with the proposed reverse takeover/demerger, and the New Rules sets out prescribed content requirements in relation to the same.
Financing transactions for special purpose entities
· In conjunction with the Rules for Special Purpose Entities, also approved by the CMA on 27 December 2017, the New Rules also set out the requirements and process for the approval of an offer by a special purpose entity.
With certain exceptions, the changes that will be introduced through the New Rules are broadly consistent with best practices in more mature markets. Issuers, financial advisors and other market participants will be well advised to become familiar with the requirements of the New Rules to ensure a smooth transition when such rules come into force on 1 April 2018. The proposed changes to the Parallel Market listing requirements are of particular interest, as this is the friendliest regime in the region and can present an exit opportunity not only to Saudi private equity investors and shareholders, but also to other regional companies, and presents a significant incentive for investors to domicile in the GCC.