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Key Controls of Economic Concentration Transactions in Accordance with the Competition Law

Out of its belief in the effective role of a free economic model in achieving economic and social growth, KSA is keen on developing an economic policy aiming to ensure real competition within the economy, in order to push companies to improve themselves to be able to perform their essential role in achieving development. Accordingly, since adoption of free competition without controls leads to adverse results, especially that practices prove that traders frequently resort to illegal means to compete with their market competitors or to carry out methods aiming to introduce or prevent competition. Therefore, the Kingdom had to intervene to regulate competition by determining its controls.

The Competition Law was promulgated by Royal Decree No. (M/25), dated 04/05/1425H and its Implementing Regulations were issued by Competition Council Resolution No. (126), dated 04/09/1435H in order to control the market and ensure fair competition.

Due to the risks raised by economic concentration transactions on competition, the Competition Law sought to establish a mechanism to monitor these transactions.

Accordingly, in the following sections we introduce the concept of economic concentration and its transactions as well as its conditions and impacts. We also explain the mechanisms of reviewing economic concentration transactions and discuss the penalties and measures prescribed to deter violations of economic concentration transactions, as set forth in the Law.

Concept of Economic Concentration

Article (2) of the Implementing Regulations of the Competition Law defines economic concentration 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% of the total sales of a commodity in the market.”

We conclude from this definition that concentration is an transaction that aims to expand the limits of ownership of a firm (or group of firms), so that its market share of the total supply of a commodity within the market reach 40% or more, through legal mechanisms; notably merger or purchase of other firms, or parts of other firms.

Thus, according to this definition, the concentration transaction may bring about a firm of a dominant position, which will be subject to the various prohibitions set out in the Competition Law and its Implementing Regulations.

Conditions and Impacts of Economic Concentration

First: conditions:

The Competition Law gave GAC the power to review economic concentration transactions if they exceed a specified limit of the market share of the firm engaged in the transaction. Some concentration transactions are neither important nor economically significant to fear their impact on the controls of competition within the market. Meanwhile, other transactions are so significant in size that they might develop into monopolies that negatively affect competition in the market.

According to the Competition Law and its Implementing Regulations, economic concentration transactions must be controlled by a principal condition, namely that the all firms, parties to the contract, which constitute the subject-matter of the contract or are economically related to it must have contributed 40% or more of the total supplies of a commodity in the market.

Second: impacts

Within markets of strong economic concentration, dominant companies may misuse their market power by excluding competitors or exploiting consumers through preventing offers, conditional sale or dumping to remove competitors, or through resorting to exaggerated or excessive pricing.
Economic concentration transactions that are not appropriately reviewed lead to creating a monopolistic environment and eliminating small and medium-sized enterprises, which cannot face such major entities dominating the market. Such small companies have a significant contribution to the national economy, and in such case, the State will miss out an opportunity to increase public income and reduce unemployment.
 
It is difficult to control prices among a growing number of understudied economic concentration transactions. Studies conducted by the United Nations Conference on Trade and Development (UNCTAD) demonstrated that the rise of prices of commodities and services in most parts of the world is caused by concentration of capital in the hands of a few powerful business groups, which dominate the market and raise prices, creating a non-competitive market and leading to monopolistic practices.

Economic concentration transactions may cause significant harmful impacts on the market in case they are not based on systematic grounds and assessment studies of the position of such transactions and their harmful impacts on the market.

Advantages of Concentration:

Needless to say, economic concentration transactions can bring about some benefits, especially if they are made between a group of small and medium-sized enterprises in order to increase their competitiveness and contribution to the development process, particularly with regard to the following:

• Reducing costs (production, management, marketing, and distribution) by taking advantage of economies of scale;
• Increasing their negotiating ability with suppliers and distributors;
• Increasing their ability to invest in fields of research and development, and raising the efficiency of national labor;
• Enhancing the interests of consumers with regard to quality and price;
• Increasing exports and decreasing imports of the relevant commodity/service.

In case of any violation of the terms and conditions of economic concentration transactions, the violator will be punished according to the provisions of Article (12) of the Competition Law, which provides that “]w[ithout prejudice to any harsher punishment provided by any other law, and without prejudice to the provisions of Article (13) hereof, each violation of the provisions of this Law shall be punishable by a fine not exceeding 10% of the total turnover or not exceeding ten million Saudi Riyals.
In case of recurrence, the fine shall be multiplied. If the violation is being continued after the issuance of the resolution or the judgment, the Committee may suspend the activity of the firm tentatively for a period not exceeding one month or revoke the license permanently.
The judgment shall be published at the expense of the violator and in all cases the violator, subject to Article (18) of this Law, shall reimburse all profits achieved as a result of the violation."