Distressed M&A in Saudi Arabia: Creditor Consent, Execution Certainty, and Value Preservation

6 min 21 sec

Written by

Mohammed Negm

Partner

m.negm@tamimi.com View LinkedIn Profile

Distress changes who controls the timetable of an M&A transaction and what a buyer can safely acquire. In Saudi Arabia, a viable transaction may sit outside bankruptcy, within a financial restructuring procedure, or in liquidation. Each route requires close attention to creditor rights, security, valuation, approvals, and the practical continuity of the business.

Most distressed M&A transactions begin before they are called distressed. In the files that reach me, payments have already slowed, covenants have been breached, suppliers have shortened terms, and management is seeking capital or an urgent sale. By the time a formal procedure begins, the options for preserving the business may have narrowed.

Distressed M&A in Saudi Arabia is the acquisition or transfer of shares, a business, assets, or control where financial distress or a bankruptcy procedure materially shapes price, structure, approvals, and risk. It may be:

• a pre-insolvency sale, rescue investment, or debt-to-equity conversion;
• a transaction under a restructuring plan; or
• a liquidation sale.

It is not a defined statutory category. That distinction matters. A distressed acquisition is not ordinary M&A completed at a discount. The real issue is not simply whether the asset can be sold, but whether the transaction can withstand creditor scrutiny and deliver what the buyer believes it is buying.

What makes a distressed transaction different?

In a conventional sale, the parties focus on valuation, diligence, approvals, and negotiated risk. Distress brings additional decision makers and procedural controls into the transaction. Existing security may restrict the sale; financing documents may require lender consent. A formal procedure may engage creditor voting, a trustee, and the court, and expose an earlier transaction to challenge.

Timing is often decisive. Early action may protect customer relationships, employees, and working capital. A rushed process, without credible valuation or a settled consent path, may undermine execution certainty. A technically sound proposal may still fail if the creditors whose support it requires do not give it.

The structure should begin with what the transaction is intended to preserve. The route chosen determines the liability perimeter.

Where can a transaction sit under Saudi law?

Before a formal procedure, the ordinary corporate decision-making framework remains, but distress raises the scrutiny later applied to authority, process, and valuation. A hurried related-party transfer or undervalue sale cannot safely be treated as a purely private matter.

Three Saudi Bankruptcy Law procedures are most relevant: the preventive settlement procedure, the financial restructuring procedure, and the liquidation procedure. In a preventive settlement, the debtor remains in control while seeking agreement with creditors. Financial restructuring facilitates an agreement to reorganise the debtor’s activity under trustee supervision. Liquidation centres on realisation and distribution.

Can assets be sold during financial restructuring? Yes, but subject to controls. From opening until court ratification, Article 70 of the Bankruptcy Law requires the trustee’s written consent before the debtor transfers all or part of its business or assets outside the ordinary course. Article 85 applies a similar control during implementation. For an asset-secured debt, Article 82 provides a court-approved trustee sale under the plan at market prices, with net proceeds applied according to the secured creditor’s priority. Other legal, contractual, and regulatory requirements remain.

In a liquidation, the trustee takes control and may sell the bankruptcy assets at the best possible price, including in one lot and subject to the applicable creditor controls. A bulk sale may preserve an asset assemblage; it does not, by itself, transfer licences, contracts, employees, or operational permissions. Calling it a ‘going-concern sale’ does not make the business operational after completion.

Saudi law also permits post-opening finance on defined terms. Secured finance in financial restructuring requires court approval, an expert report, and necessity for continuation of the activity or preservation of bankruptcy assets. Rescue capital is possible, but priority, collateral, and secured-creditor protection must be resolved. Unsecured post-opening finance in those procedures does not require court approval.

Creditors do not give one consent

‘Creditor consent’ describes several decisions:

• a lender may waive a covenant;
• a secured creditor may release an asset or accept changes to security; and
• creditor classes may vote on a proposal before court ratification, while company or regulatory approvals remain outstanding.

Under Article 79 of the Bankruptcy Law, a class accepts when creditors representing two thirds of the value of voting claims in that class approve, provided that group includes creditors representing more than half the value of non-related-party debt (if any).

Article 80 permits ratification without every class accepting, but only where:

• at least one class has accepted;
• creditors representing at least 50% of the total value of voting claims across all classes have approved; and
• the court is satisfied that ratification serves the interests of the majority of creditors.

Neither rule replaces analysis of the security package and transaction documents. I have seen cash offers arrive for a plant central to a restructuring and subject to bank security. An attractive price may still solve nothing. The parties must identify the owner, secured claim and ranking, sale authority, treatment of proceeds, release mechanics, and effect on the plan. Certainty comes from aligning those elements, not signing faster.

Asset deal or share deal?

From a buyer’s perspective, an asset acquisition may limit exposure to parts of the seller’s history. Yet assets rarely operate alone. Contracts may restrict assignment or change of control; licences may be entity specific. Employees, intellectual property, data, leases, and suppliers require separate analysis. Security and competing ownership claims may obstruct title.

A share acquisition preserves the entity and may support continuity, subject to change of control provisions and regulatory approval. It also brings the company’s legal, financial, and disputes history into the spotlight. Neither structure is inherently safer. The better route depends on which continuity risks matter and which historical risks can be identified, priced, and controlled.

The legal question is only part of the problem. A buyer may acquire factory equipment but not its permit, essential maintenance contract, or specialist workforce. Buying the shares to preserve those relationships may also preserve unknown claims. Transaction scope and day-one operability must be tested together.

The risks ordinary due diligence can miss

Distressed diligence begins with ownership and control: what the seller owns, what is encumbered, who can approve the sale, and what enforcement may interrupt it. The review should map creditors, security, disputes, related-party dealings, material contracts, licences, employees, tax, intellectual property, and cash needs through completion.

Valuation deserves special attention. Under Articles 210 to 212, specified transactions made in the 12 months before a bankruptcy procedure — or 24 months for a related party — may be challenged. Categories include transactions without consideration or below fair value, certain unfair or early debt settlements, security for a debt not yet established, and transfers or relinquishments of assets, rights, or security. The court may annul the transaction and order restorative relief.

A challenge is itself inadmissible more than 24 months after the procedure is opened. Article 211 contains a limited exception where the transaction served the debtor’s interests and the debtor was neither distressed nor bankrupt when it was made. Article 212 separately protects qualifying rights acquired by a good-faith third party who was not itself a party to the transaction.

From a disputes perspective, a transaction is easier to defend when valuation, authority, and creditor impact are evidenced contemporaneously, rather than reconstructed after the event. Ordinary warranties and indemnities offer limited comfort when the seller is distressed. Stronger protections are often structural:

• verified title;
• a precisely defined transaction;
• effective release and payment mechanics;
• court, trustee, and regulatory approvals before completion;
• tailored representations;
• escrow or holdback where available; and
• a credible implementation plan.

A claim against an empty seller is not buyer protection.