Saudi Arabia – desert kingdom

Saudi Arabia is hardly a new legal market – but even so there is a buzz of activity among international law firms in the largest Gulf state.

Some firms are entering the market for the first time, some are returning and some are simply expanding their footprint. All this, despite headline political instability in the Middle East and the damaging effects of plunging oil prices on the world’s largest oil exporter’s economy.

There is new interest in Saudi’s G20 economy as it seeks to reduce its dependence on hydrocarbons through economic reforms. Airports are being privatised, the stock market opened up to foreign investors and the labour market overhauled. The Kingdom of Saudi Arabia (KSA) also wants to tap international debt markets to finance large infrastructure and development projects which will in turn bolster its private sector. All these developments translate into varied work for law firms seeking to have a physical presence in the kingdom.  

As Marwan Elaraby, Middle East managing partner of Shearman & Sterling, puts it: ‘The region has evolved. There is much more going on than just outbound and oil and gas work.’ Last year, the New York-headquartered firm launched in KSA, through an affiliation with local firm Abdulaziz Alassaf & Partners, and in Dubai.

With an office in Abu Dhabi since 1965, Shearman is positioning itself geographically to capture the expected ‘flow’ of instructions in capital markets, regional M&A and private equity, and arbitration. ‘We are diversifying in line with the economy and also in order to have more stable revenue streams,’ Elaraby says, echoing the approach of other Saudi-based foreign firms.

English and US firms are hardly new to KSA. They have been advising clients in the kingdom for decades, from their bases in London and New York, or from elsewhere in the Middle East.

Stephen Denyer, head of City and international at the Law Society, says: ‘A bigger part of the Saudi-related legal work is conducted outside [the country]. In the Gulf, every firm that has operations in Abu Dhabi or Dubai would almost inevitably be doing a lot of Saudi work.’

Many English firms such as Slaughter and May, Macfarlanes and Trowers & Hamlins do a lot of business connected with KSA, but have no offices there, Denyer notes. That is now changing: ‘There are more foreign firms coming here,’ Riyadh-based Clyde & Co partner Ben Cowling says. ‘There is quite a lot of potential in the market at its most basic level. Clients have less choice [in KSA] than they do in [many jurisdictions].’

Saudi law makes a distinction between practising lawyers, a title reserved to Saudi citizens, and legal consultants, who can be of any nationality. For foreign law firms seeking a base in KSA there are two options: they can either form an association with a Saudi lawyer or set up a ‘professional company’ (akin to a partnership) in which the Saudi lawyer must hold at least 25% of the share capital.

Associations have been the most popular route. Only two firms, Clyde & Co and Clifford Chance, have formed a joint Saudi and international owned partnership.

Other foreign firms have since sought to replicate this model, but have been unable to obtain approval. This is because of an ongoing challenge in Saudi courts by a number of Saudi lawyers who contend that these partnerships should be approved by the Ministry of Justice, according to a legal source familiar with the situation. It is understood that the challenge was dismissed in the first instance, but subsequently the appellate tribunal of the Saudi Board of Grievances decided to reopen the case and have the Board of Grievances retry it.

Professional companies are, strictly speaking, not recognised as law firms. They must register with and are overseen by the Ministry of Commerce and Industry rather than the Ministry of Justice, which is the regulatory body for the legal profession.

So what are their advantages? In September 2014 Clyde & Co turned its association with Abdulaziz Al-Bosaily Law Office, dating back to 2009, into a professional company ‘to facilitate a more integrated and coordinated approach’ to its Riyadh office, Cowling says.

‘Part of the motivation for the new company was that we could integrate the Saudi office into the broader administrative function [of the firm],’ he adds. By contrast, in the classic association model the Saudi lawyer is solely responsible for the management and administration of the office.

‘Now that we have a corporate entity through which we can trade, a number of people can assist with that process and [Abdulaziz] can get on with being a lawyer,’ Cowling says.

Three partners are now based in Riyadh: Abdulaziz Al-Bosaily, who is general manager of the joint company and also a partner of Clyde & Co; Cowling himself, who assists Al-Bosaily with office management; and Alain Sfeir.

Professional partnerships also circumvent the risks of associations which, by their nature, are ‘very personality-driven’; and because the foreign firm makes an investment rather than a contractual agreement they provide a more stable business model, Cowling contends. At Clyde & Co, all 17 fee-earners, 75% of whom are Saudi nationals, have the same career opportunities as anyone else at the firm, he says.

Other foreign firms, while sticking to associations, are also changing their approach to the role and status of Saudi lawyers in their firms.

In November, Herbert Smith Freehills returned to Riyadh through an ‘exclusive’ association with the Law Office of Nasser Al-Hamdan, two years after terminating an association with another local firm. Middle East partner Zubair Mir says: ‘Saudi Arabia is an extremely important market where our clients have been doing transactions for a great number of years, and not having a presence there would have put us at a disadvantage.

‘The difference is that in the previous model the association that we had was not with someone who was a partner of HSF,’ Mir explains. ‘But in this model, Nasser is a partner of our firm and we just happened to form an association with his firm. That actually makes our Saudi structure very credible.’

DLA Piper established in Riyadh in 2006, and has been in association with Dr Eyad Reda since 2009 following two previous failed tie-ups. In a sign of the firm’s growing confidence in the market and its Saudi sponsor, in 2015 DLA Piper expanded its Saudi footprint by opening offices in Jeddah and Al Khobar. ‘The really important point is to make sure that you integrate properly,’ Middle East regional managing partner Peter Somekh says.

Dr Reda is a partner of the Anglo-American firm and all fee-earners across the three offices have ‘100% the same opportunities’ as everyone else in the group, Somekh says. ‘We show the commitment and it is reciprocated,’ he adds, pointing to the recent promotion to partner of Amer Al Amr, a Saudi national in the litigation team.

By closely integrating the Saudi offices into their business, firms are also responding to client demand. ‘Our clients want to see senior-level deployment on the ground and that’s one of the reasons we are so happy with the team because we provide that in spades,’ Elaraby says. Shearman has appointed Brendan Hundt, a member of its project finance and development practice, as counsel in the Saudi Arabian offices, next to Saudi partners Sanjarbek Abdukhalilov and Dr Sultan Almasoud.

If there are risks in international firms associating with local outfits, there are plenty of advantages too. First, foreign firms can tap in situ resources; second, they can harness local law expertise.

Abdulaziz Alassaf & Partners brings Shearman a team of 11 lawyers (plus two trainees) across three offices in Riyadh, Jeddah and Al Khobar – six are Saudis and the rest are expats who were already in the country. ‘The beauty of setting up this office is that we [already] had people on the ground. I didn’t have to persuade people to move to Saudi,’ Elaraby says.

Simmons & Simmons Riyadh partner Ahmed Butt explains the challenge of luring western lawyers to the conservative kingdom: ‘With Saudi Arabia offering a more restrictive lifestyle than some of the neighbouring Middle East states, we find that a lot of international lawyers prefer to be based in Abu Dhabi, Dubai or Doha and, if they are going to cover Saudi Arabia, they do it from a distance.

‘That is why we think it is better to ally with an established, relatively large firm with bodies on the ground already, because recruitment in Saudi is always going to be difficult,’ he adds.

Simmons & Simmons launched in KSA in alliance with Jeddah-based Hammad & Al-Mehdar law firm in 2011, expanding into the capital in late 2014. There are 29 lawyers and all but a handful are Saudi nationals. ‘There is a very Saudi-heavy workforce and that is because we have tied up with a law firm that already had Saudi lawyers on the ground,’ Butt says. ‘We have a very local flavour which gives us the local and domestic expertise that clients are looking for.’

Instructions

The sharp fall in oil prices since June 2014 has hit the government budget, as the petroleum sector accounts for about 85% of export earnings. This is having an impact on law firms.

‘The dynamic of practice has been affected, but we don’t necessarily see that as a bad thing as lawyers who have been in the region for a long time,’ Butt says, referring to the Dubai debt crisis of 2009 and the global financial crisis of 2007/08. ‘We had to adapt from being transactional lawyers to restructuring, insolvency and disputes lawyers, and we will use this opportunity to do the same here in Saudi Arabia.’

Saudi Arabia’s construction market is the biggest in the Gulf Cooperation Council (GCC) and the second-largest sector of the economy after hydrocarbons. A number of large-scale construction projects spanning transport, education and healthcare are either planned or under way, reportedly worth $800bn. Among them are the Riyadh Metro, Jubail-Dammam Rail and the Makkah Mass Rail Transit project.

But the government, which accounts for about two-thirds of construction investment, may delay or cut some projects due to budgetary constraints. ‘Although the government is saying that social infrastructure projects will continue, inevitably there is a delay and a slowdown,’ Butt says. ‘We are going to focus more on restructuring existing financings [of clients] and on disputes that might arise out of these delays in providing financing [for projects].’  

Infrastructure investment responds to the needs of a rapidly expanding population of 31 million, the largest in the GCC. ‘The country has a huge requirement for major infrastructure spend and those projects, even with the falling oil price, will continue,’ Mir says. ‘The government has the ability to go out to the capital markets to borrow, but equally it has huge reserves that it has accumulated over the years.’  

HSF is banking on this and has appointed two projects partners: Anthony Ellis in Dubai, and Euan Pinkerton, who will be based in Riyadh alongside corporate partner Nasser Al-Hamdan. Recent work highlights include advising Al-Shoula Consortium, which includes a group of Spanish rail and construction companies, on its successful bid for phase two of the Haramain High Speed Rail Project, connecting the two Holy cities of Makkah and Madinah via Jeddah.

Furthermore, while there is a certain caution surrounding the largest projects, Cowling says ‘second-tier’ contractors from countries such as China, Korea and Spain are coming into the market to build smaller-scale power projects, including renewables. ‘There is still a flow of clients coming in here. They are just looking for slightly different opportunities,’ he says.  

To maintain capital spending levels the government, led by King Salman bin Abdulaziz Al Saud since January 2015, is encouraging foreign investment. DLA Piper is advising the Ports Development Company (PDC), owner and developer of the King Abdullah Port at the King Abdullah Economic City, on the project financing of the first privately owned port in Saudi. A SAR (Saudi Arabian Riyal) 1bn (£177m) bridge financing facility with Arab National Bank and Saudi British Bank was signed in May. PDC is a joint venture between construction conglomerate Saudi Binladin Group and Dubai developer Emaar.

‘Every country in the Gulf is currently running a budget deficit and Saudi Arabia is no different,’ Elaraby says. ‘[The kingdom] is looking for different ways to finance projects and investments, including sovereign bonds.’

Saudi Arabia could start selling its first bonds in the international market this year to reduce its public deficit; last July, the government began to issue its first domestic bonds since 2007.

While there are opportunities in debt capital markets to advise on the issuance of bonds, including sukuk (sharia-compliant bonds), there is now also scope on the equity side.

In June, the Saudi stock exchange (Tadawul) officially opened to foreign investors, albeit with a number of restrictions. With a capitalisation of about $570bn, Tadawul is the largest bourse in the Middle East – bigger than Russia and Mexico, according to the World Federation of Exchanges.

Al-Hamdan says: ‘The volume of trading is still low because foreign investors want to see how regulation develops, but from what we are seeing [the market] is moving in the right direction and that should have an impact in the near future.’

The Capital Market Authority has been cracking down on insider trading, and recently issued guidance on the country’s Capital Market Law and regulations which follow international best practice. This is generating new instructions for lawyers to advise on internal investigations, Mir notes.

Recent updates of the Saudi Companies Law, due to come into effect this year, bring KSA in line with global trends in corporate law and governance. One notable change is that a limited liability company can now be formed with a single shareholder, as opposed to the previous minimum requirement of two. Al-Hamdan believes the changes will have ‘a positive impact’ on law firms’ transactional business and the support they provide for investment into KSA.

The country is already seeing significant M&A activity, Mir says: ‘There are huge opportunities, particularly given the size of the market, for private equity players to come in and acquire assets.’ HSF recently advised Investcorp Corporate Investments – MENA on the acquisition of a majority stake in Riyadh-based L’Azurde, one of the world’s largest gold and jewellery manufacturers.

To diversify its income sources, Saudi Arabia will begin to privatise airports and related services in 2016, but M&A activity is also expected in other sectors. ‘We are told by banks that telecoms and healthcare are hot areas for [inbound] investment,’ Butt says.

There is plenty of outbound business too. The squeeze in oil revenues is driving Saudi family-owned groups to look beyond KSA for growth. Elaraby says: ‘They are coming to the conclusion that they need to grow and invest overseas. They are going to need advisers to take them to Europe, the US or Asia.’

Outbound investment is also fuelled by political instability in the region. ‘Western Europe seems to be the place where many sovereign wealth funds and the wealthy family offices in the Middle East want to ship their money at the moment,’ Butt says.

Simmons & Simmons recently advised 90 North Real Estate Partners (which buys real estate on behalf of Middle East investors) on a sharia-complaint acquisition of properties in Europe. Simmons & Simmons is also advising Jeddah-based Islamic investment firm Sedco Capital, which is investing £100m in UK real estate over the next 12 months.

The changing economic climate has led to an increase in litigation and arbitration over the past year, particularly in the construction sector.  

Cowling, who heads Clyde & Co’s projects and construction group in KSA, says: ‘When I came to Saudi in 2012, I expected it very much to be a transactional market, but as it happened, it has turned into more of a disputes market from a construction perspective.’

Arbitration is generally not permitted if one of the parties is a Saudi government authority, and cases will be heard by the Board of Grievances (which hears most administrative and commercial disputes).

But Saudi-seated arbitrations are on the increase, Cowling notes, pointing to the standard form contract of Saudi Aramco, the national oil and gas company, which contains a Saudi arbitration clause. The rise in Saudi arbitrations is the result of a new arbitration law enacted in July 2012 and its implementing regulations have sought to bring the protection of international investors up to global standards.

Clyde & Co has run the only Saudi arbitration concerning a construction dispute that has proceeded from commencement through to award, Cowling says, adding that the value of disputes handled from the Riyadh office at present totals many billions of dollars.

There has also been some progress on the enforcement of foreign arbitral awards over the past year, lawyers suggest. Despite the country being a signatory to the New York Convention, the International Bar Association said in a 2014 report that foreign arbitral awards ‘are still notoriously difficult to enforce in KSA’.

Shearman, too, has seen an increase in contentious instructions. Elaraby says: ‘One of the things that drew us to our Saudi partner is that they have a litigation team which includes former judges. We think it is a very exciting proposition to marry our international arbitration practice with our new Saudi litigation capabilities.’

Similarly, through its local and international litigation team, DLA Piper is acting on a number of commercial and construction disputes in KSA – advising, for example, an international contractor regarding losses from significant variations on the contract for the design of a $3bn plant. DLA Piper is harnessing the expertise of its newest partner, Amer Al Amr, who has rights of appearance in all the KSA courts, including the Board of Grievances.

Despite the shifting sands of the economy, foreign law firms are sanguine about prospects in the country. ‘We see tremendous opportunity in Saudi Arabia,’ Somekh says. ‘It is reflective of the amount of business that is available and that clearly needs good lawyers.’

Good lawyers, others confirm, that are both foreign and Saudi.

Marialuisa Taddia is a freelance journalist