Parties purchasing Middle East-based companies operating in the retail and wholesale food and beverage sector with a focus on companies in Saudi Arabia and the United Arab Emirates (“UAE”) are facing some common issues.

1. Distribution agreements and franchise agreements should be in writing, long-term, and exclusive. For many wholesale and retail food & beverage businesses a large extent of their value is derived from, as applicable, their key distribution or franchising agreements. If a business relies on one or more key distribution or franchising agreements, a purchaser should ensure that such agreements are long-term in nature, and provide for an exclusive territory (e.g. one or more countries, provinces or Emirates).
   
   Such agreements will likely grant the principal, who provides the goods to be distributed or the franchise system to be rolled out, broad termination rights or the right to revoke exclusivity if certain agreed-upon sales milestones or store roll-out targets are not achieved. That being said, a purchaser’s commercial team should consider which targets are achievable and work with counsel to ensure that termination rights and/or revocation of exclusivity are limited in scope and that such key agreements are amended to reflect the purchaser’s commercial projections. If milestones in a long-standing agreement have not been historically achieved, a purchaser should consider amending such agreement to take the commercial reality into consideration.
2. Registering your distribution or franchise agreement has certain advantages. In most Gulf Cooperation Council (“GCC”) jurisdictions, the nationals of such jurisdictions (and GCC nationals in general) are granted certain advantages under local legislation, including the ability to register their distribution agreements and/or franchising agreements in their home jurisdiction. In the UAE, registration is carried out at the Ministry of Economy and in Saudi Arabia, registration is carried out at the Ministry of Commerce & Industry. In order to register such agreements with the relevant ministry in, as applicable, the UAE or Saudi Arabia, a purchaser would need to be 100% owned by UAE nationals for UAE registrations and 100% owned by Saudi nationals for Saudi registrations at all levels of its equity structure. The advantages that registration provides vary widely from jurisdiction to jurisdiction in the GCC, but generally include: (i) a more challenging process to terminate the registered agreement; (ii) a mechanism to compensate the distributor/retailer upon termination of the registered agreement even if no compensation is provided for in such agreement; (iii) the ability to participate in government tenders for goods; and (iv) a process to block gray-market goods from entering the agreed territory. We note the protections for registered agents are much more extensive in the UAE in comparison with Saudi Arabia.
   
   In Saudi Arabia, a recent Ministerial Resolution promulgated by the Ministry of Commerce & Industry requires all commercial agents and sub-distributors to register agency and sub-distribution arrangements. It’s not entirely clear what the implication of the Ministerial Resolution will be on entities that are not owned by Saudi nationals, such as 100% non-Saudi GCC-owned entities that are licensed to engage in the retail and wholesale trade of products in Saudi Arabia.
   
   In any event, purchasers should ask for and review the registered agreement and, if it contains terms which vary from a longer-form unregistered agreement, should consider the registered agreement to be the controlling document. To the extent an agreement is registered, purchasers, who do not qualify to register their commercial agencies based on their nationality should consider (i) structuring alternatives that can enable them to qualify for registration; and/or (ii) the implications of deregistration on the target company.
3. Nationality of ownership in entities carrying out wholesale and retail trade is restricted. While the UAE generally requires most on-shore entities to have at least a 51% UAE national shareholder or to otherwise be held 100% by GCC nationals (including entities carrying out wholesale and retail trade in the food & beverage sector), in Saudi Arabia non-GCC nationals are permitted to own up to 75% of the share capital of an entity undertaking wholesale and retail trade with a requirement that such non-GCC national make a minimum contribution of SAR 20 million (approximately USD 5.3 million) towards the share capital of such entity. While it is quite common for non-GCC national parties to enter into nominee arrangements with GCC nationals in order to circumvent nationality requirements, such arrangements typically run afoul of local anti-fronting legislation which, if reported, can lead to civil and criminal penalties and should generally be avoided. Purchasers who are not 100% owned by GCC nationals at all levels of their equity structure but are seeking to acquire 100% of the share capital of an entity carrying out wholesale or retail trade should consider structuring alternatives which enable them to achieve their commercial objectives while complying with local anti-fronting legislation.
4. Real estate is key for many food & beverage businesses and, to the extent applicable, title deeds and leases should be carefully reviewed. Whether the target business is a distributor with a network of warehouses or a retailer with outlets spread throughout a territory, the real estate used by the business is a key driver of value in most food & beverage businesses. Purchasers should review title deeds and leases to ensure that the target, as applicable, owns or is the lessor of the relevant real estate and that such real estate isn’t owned or leased by a related party or a third party. In addition, the standard form lease agreements for many of the large landlords in the UAE and Saudi Arabia will contain provisions requiring either notice or, more likely, consent, before a sale (i.e. a change of control) of the target company is completed. Finally, if the target company leases its real estate, the purchaser should ensure that the remaining tenure of the lease is satisfactory. If key lease agreements are nearing their expiration, a purchaser should consider requesting that such leases be renewed, on terms satisfactory to it, prior to closing.
5. Labeling, content and expiration guidelines for food & beverage products sold in, respectively, Saudi Arabia and the UAE must comply with Saudi Food and Drug Administration (“SFDA”) requirements and the requirements of each emirate (e.g. the Food Control Department at the Dubai Municipality). In Saudi Arabia, food & beverage labeling and content requirements and expiration guidelines are regulated by the SFDA, a proactive and consumer-oriented regulator. Such regulations set out a clear process for parties to apply for label and content approvals with each product approved for sale in Saudi Arabia receiving a certificate from the SFDA (including the extent to which labels, instructions and brochures are to be in Arabic). In addition, the SFDA regularly inspects the premises of food & beverage businesses to ensure that industry participants comply with health and safety requirements. Purchasers of target companies with Saudi operations should request copies of and review SFDA certificates in respect of food & beverage products being distributed by a target company. In addition, purchasers should request copies of and review SFDA certificates confirming compliance with health and safety requirements for food & beverage retail outlets. Moreover, we understand the SFDA at times has different standards for entities wishing to export products outside Saudi Arabia.
   
   In the UAE, the regulation of food & beverage importation and labeling has been devolved to the individual Emirates, though the UAE Cabinet and the Federal National Council have approved a tough new federal food safety bill. For example, in Dubai the Food Control Department at the Dubai Municipality is responsible for labeling and content (as well as restaurant health & safety), and in Abu Dhabi the Abu Dhabi Food Control Authority serves the same function. Purchasers should ensure that any food & beverage items sold in the UAE comply with the requirements of the relevant Emirates.
6. For transactions in Saudi Arabia, the Ministry of Labor’s Saudization program adds complexity and, if ignored, can lead to significant issues. Since the launch of Saudi Arabia’s Nitiqat Saudization program, labor intensive businesses, such as food & beverage retail and distribution businesses, have faced challenges complying with the program without significantly increasing their overheads. In general, the program categorizes all businesses as either “red,” “yellow,” “green” or “platinum” depending on the number of Saudi nationals employed by such company and the activity/job description of such employees with a certificate being issued by the Saudi Ministry of Labor setting out each company’s current status.
   
   Depending on the color-coding of a target company, the Ministry of Labor will provide certain incentives or penalties (e.g. residency visa processing and renewals are quicker for “platinum” companies, while such services are not permitted for “red” companies). To confirm that the status of a company, as set out in its Nitiqat certificate, is accurate, purchasers should review headcount figures set out in the figure per activity as compared with a target company’s payroll and consider (i) whether all employees are on the target company’s payroll; (ii) to the extent applicable, whether the color-coded categorization of the target company will be affected if off-payroll employees are brought on the payroll; (iii) whether all employees are registered under the correct activity; and (iv) whether additional Saudi nationals will need to be employed in order to continue/maintain incentives with the Ministry of Labor.
   
   Finally, as mentioned earlier, while some Saudi entities employ parties not under the sponsorship of such entity, pursuant to the Saudi Labor Regulations non-GCC national employees who are sponsored by a company, and whose residency permit (iqama) is issued under such company’s name, may not work for another company (whether on a full-time or part-time basis). The Saudi Ministry of Labor can penalize violators with monetary fines or by suspending the employment visa renewal, transfer and issuance of such violators.
7. Competition approvals may be required for your transaction. While this isn’t a food & beverage-specific deal point, purchasers should be aware that while competition approvals have been a long-standing feature of M&A transactions in many jurisdictions, the competition approval processes in most regional jurisdictions are relatively new and untested. That being said, both Saudi Arabia and the UAE have competition authorities to which certain transactions must be submitted and approved as a condition to closing. Such approvals are particularly relevant when a target has exclusivity to distribute a product with a dominant market position. A purchaser should ensure that counsel carefully analyzes the requirement for competition filings and, to the extent such filings are required, that the share purchase agreement contains a condition that competition approvals are received prior to closing and on terms satisfactory to it.