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Saudi Construction Case Study

Saudi Construction Case Study

The subject is companies law

Case 1

Saudi Construction Case Study

Asad and three business associates have decided to start a business: Saudi Construction. They will do work for oil companies in Saudi Arabia at first, but he hopes the firm will grow within two or three years to gain heavy construction contracts throughout the Middle East. Asad wonders whether he should form a corporation, a partnership, or maybe a limited liability company under Saudi Companies Law.

Asad believes they will initially need about $10 million in capital to run the business and have sufficient financial reserves to do large-scale projects. After two years, they will need an additional $20 million in capital.

Asad will be in charge of business operations. He realizes they need a business plan that will address how to value the corporation in order to raise the necessary capital in two years. It also needs to address how Saudi Construction can legally protect its assets in an industry where lawsuits are a common hazard.

Meanwhile, his associates have pressured Asad to kick-start the business by signing a couple of lucrative contracts right away; they tell him he shouldn’t worry about the administrative paperwork. They say that nobody ever looks at the paperwork once a business is formed and it’s no big deal.

Action Items

  • In at least a two-page paper, fully respond to the following:
    • Asad has hired you as his business consultant to help him make good decisions. Give him advice on his questions:
      • What are the advantages and disadvantages of forming the business as:
        • a corporation?
        • a partnership?
        • a limited liability company?
        • What is his potential liability as an individual and what can he do to limit his risk?
        • What issues might arise from following his business associates’ advice?
        • What other factors should he take under consideration?
      • In helping Asad with the business plan, explain:
        • How he can value his business
        • What the business can do to reduce its risk
        • How the owners can limit their liability
        • What the business should (and should not!) do to protect against lawsuits
        • What factors he must consider on how to raise capital
        • What mix of capital the business should have

Case 2

Saudi Construction Case Study

Asad decided to establish Saudi Construction Inc. as a corporation. He did so mainly to reduce his and his associates’ personal liability. After three years of operation, he and his partners took the company public to raise capital to support their aggressive growth plans.

Now, Asad is trying to understand the governance model in corporations and the roles and responsibilities of shareholders, directors, and officers. Saudi Construction Inc. has shareholders all over the world and the lawyers keep telling him that communication is critical to avoid trouble. Operations need to be much more formal and they need to have regular Board of Directors meetings.

Asad has heard the lawyers talk about proxies and proxy fights and he wants to understand what all that means. His operations team has identified a number of key strategic merger and acquisition candidates, yet this is all new to him and he wants to understand what the options are for handling mergers, who has to approve them, what happens after companies merge, and so forth. His operations team is screaming at him they need to buy a company in the next quarter to meet their growth objectives, so he needs to learn the basics fast.

He worries about lawsuits. The officers of the corporation are out making deals all the time and some suppliers questioning whether the officers have the authority to sign and bind contracts for the company. The directors want him to clarify what authority different officers have over the corporation.

Furthermore, a couple of difficult shareholders want to second guess and challenge every decision the officers and the Board make, and Asad thinks it’s only a matter of time before someone take legal action. He doesn’t understand what standards (or test) a judge would use to figure out whether the shareholders have a valid claim and whether they are entitled to damages.

Asad is feeling a lot of stress. Part of his frustration is because he thinks judges don’t know business and shouldn’t be in a position to tell him and his associates what to do. But he’s also frustrated because he has the feeling he should slow down and do things by the book … but slowing down means missing out on very good business deals. Plenty of the directors and officers have said they will make the deals themselves if Saudi Construction cannot.

Asad really likes the money he is making, but his frustration and the pressure he’s under to make his deadlines are becoming overwhelming. Meanwhile, his business associates are telling him to ignore all the shareholders and administrative issues.

(You may refer back to 10-2: Case Study Scenario #1 as needed.)

Action Items

  • In at least a two-page paper, fully respond to the following:
    • Asad has once again hired you as his business consultant to help him make good decisions. He needs to understand the corporate model of governance and the roles and responsibilities of the shareholders, directors and officers in a publicly traded corporation. He wants to make sure he understands who has authority in his company.
    • He urgently needs to understand how to do mergers and acquisitions; the deals are coming together fast. Who must approve the deals, and what is the best way to do them in certain circumstances?
    • Since the shareholders never seem happy, Asad wants to understand what responsibilities the directors and officers have to shareholders so he can educate himself and the company leadership. What are all these fiduciary duties (duty of care, duty of loyalty, good faith) and how do judges test whether the directors are meeting them?
    • The deals the officers and directors are pursuing are fantastic and they are ready to do them on their own (or with other corporations they control) if Saudi Construction can’t follow through due to money, timing, or strategic reasons. The Board of Directors has an important meeting late next week. Asad is looking for your advice and report by the beginning of the week.

Case 3

Saudi Construction Case Study

Asad is very happy to report that Saudi Construction Inc. has grown significantly in the last three years through mergers and acquisitions. His family is so proud of him; he is a rich man. However, the problems of managing the business continue, but in different ways. Now, in the 5th of the business, there are still some minority shareholders from some of their acquisitions who make life difficult.

Asad’s industry friends tell him that the best thing to do is get rid of his problems by buying the minority shareholders out. Asad really likes that idea; it would make his life easier now and allow the majority shareholders (whom he controls) to make all the decisions without interference.

Some of Asad’s fellow corporate officers have been secretly talking at lunch about another idea. Why don’t the officers get together and do a management buyout (MBO)? Asad of course is interested because this would make him wealthy beyond all expectations. Of course, the officers will need to borrow a lot of money to do the buyout, but Asad hears there are ways to do it.

Yet trouble is always at the door. A number of the shareholders want to take control of Saudi Construction Inc. away from Asad’s group; they are unhappy with some of the acquisitions and the direction the corporation is going in. The shareholders are threatening a hostile tender offer. They want to go around the board of directors and go directly to shareholders. How can they do that? Asad needs to understand all the tactics these shareholders will employ in a hostile tender offer. More importantly, Asad is a man of action. What can he do to prevent it? If the hostile shareholders want a fight, Asad is prepared to fight. He didn’t work this hard to lose control of Saudi Construction now!

Asad’s friends have told him if he really wants to fight, he must be ruthless. He must create a “poison pill” to make his company’s stock less attractive and thwart the hostile takeover.

(You may refer back to Case Study Scenarios #1 and #2 as needed.)

Action Items

  • In at least a two-page paper, fully respond to the following:
    • Your consulting business has done very well, particularly since you have successful clients like Saudi Construction, Inc. You are sitting at the pool when you receive an urgent call from Asad. He always has grand ideas he got from his friends, but he is smart enough to get your professional opinion before he takes action.
    • Asad wants to know right away about getting rid of the troublesome shareholders. Some of his friends have called it a “freezeout”. He is also very concerned about a threatening hostile tender offer, and needs to know how how he can stop it. He wants to know all the ways his enemies might make succeed with the hostile offer. Asad can be a brutal businessman, so he also wants to know all about a poison pill and is prepared to put plenty of poison in it if it will stop the hostile tender offer.
    • Asad hates to hear about all this legal stuff, but he wants you to tell him the ways the Board of Directors can handle things fairly (or fairly enough that the courts will approve). Are there ways to he can make sure it is “legal” to get rid of shareholders without losing a lawsuit? You have lawyers in your consulting team, so he wants to know his options, in reasonably simple terms.
    • But Asad also want to understand the management buyout (MBO). Secretly, of course; you are to tell no one about the plan. Asad knows you are on vacation, but he doesn’t care. He has made you rich. He wants answers now. You leave the pool and head up to your room. It’s time to get to work.