Saudi Companies’ Law | Revamped

On 28th of June 2022G, the revised KSA Companies’ Law was adopted by the Saudi Council of Ministers and on 4th of July, 2022G the law's final approved version was published in the official gazette (the “New Companies’ Law”). The New Companies’ Law will take effect on 31st of December, 2022G, 180 days after the date of its publication in the official gazette.

The long-awaited amendments targeted major changes from the previous Companies’ law issued pursuant to Royal Decree No. M3/1437H and the Royal Decree No. M17/1441H. Due to the recent increase in growth of the corporate, economic, and business environment in Saudi Arabia, the New Companies’ Law introduces major improvements that are crucial to ensuring conformity with the Kingdom's 2030 Vision.

We have outlined below the most significant amendments made to the New Companies’ Law:

A- General Amendments | All Companies

The New Companies’ Law includes new requirements for managers and directors of companies as well as new sections addressing key issues occurring under any corporate form.

  I. Directors’ Duties and Entitlements

Article 26 of the New Companies’ Law explicitly imposes a duty of loyalty and care on company managers and directors towards the business and the shareholders.

The New Companies’ Law imposes explicit duties on directors to ensure that they uphold a standard of care and a fiduciary duty that includes acting in the organization's best interest, acting impartially when adopting or casting votes on resolutions, carrying out their responsibilities with the usual and expected care, attention, and diligence, and avoiding a potential conflict of interest. Those changes, now applicable to all companies, goes is line with the Capital Market Authority's and Corporate Governance Regulations in relation to listed companies.

According to Article 31 of the New Companies’ Law, managers and directors are deemed to have upheld their obligations of loyalty and care (mandated by Article 26) if they:

a.  Possess no personal interest in the topic subject to discussion;

b. Are knowledgeable of the subject matter to a reasonable extent under the existing circumstances and have acted in their reasonable opinion; and

c. Reasonably believe that the decisions they have taken is in the company’s interest.

According to the New Companies’ Law, these guidelines are known as the "Rules for Evaluating Decisions."

Article 27 specifically forbids a director or manager from:

a. Having an interest, whether direct or indirect, in decisions made by the shareholders (either through written resolution or by decision of the general assembly) on contracts or activities carried out on the company's behalf;

b. Engaging in any activity that would put the company in competition, unless authorized by the shareholders (as indicated above); and

c. Utilizing (directly or indirectly) the company's resources, knowledge, or business possibilities for personal gains.

If managers or directors engage in any of the forbidden behaviors listed above, they may be held accountable to the company for any gains made as a result of their actions, as well as for the additional compensation as deemed appropriate.

Companies are specifically permitted, under Article 28(3), to acquire insurance to protect their managers and directors from any claims or liabilities resulting from the performance of their obligations.

  II. Distribution of Dividends

Joint Stock Companies (JSCs) and Limited Liability Companies LLCs are permitted to distribute yearly or interim dividends under Article 22, according to the terms and conditions outlined in the implementing regulations.

  III. Shareholders’ Disputes

Aggrieved shareholders have many legal options under Article 29 to take action against the company or its directors, including the following:

a.       Shareholders have the right to bring a lawsuit in their capacity to uphold their shareholder rights;

b.       Shareholders who own 5% of the company's capital may bring a lawsuit on the company's behalf to uphold a corporate right that influences the company (also known as "derivative actions"); and

c.        Additionally, shareholders have the option to take managers and directors to court on an individual basis for any losses they sustain as a result of their activities.

It should be noted that a director or manager can still be subject to a lawsuit even if the shareholders or the general assembly decide to release the management or director from responsibility. This should be noted by directors who seek to limit their liability retrospectively through shareholder/s’ approval.

  IV. Virtual Communications | Meetings |Decision-Making

In accordance with current business standards, and according to the New Companies’ Law virtual communications are officially permitted. Companies (joint stock and limited liability) can hold board meetings and make decisions using modern tools of communication.

  V. Corporate Social Responsibility

The New Companies’ Law aims to promote corporate social responsibility even though it doesn't yet offer granularity on the topic. Article 278 authorizes the Ministry of Commerce or/and the Capital Markets Authority for listed businesses to provide required guidelines and instructions for corporate social responsibility initiatives from businesses. Although there isn't any further guidance available in the New Companies Law on how to pursue corporate social responsibility initiatives yet implementing rules might offer further clarity.

  VI. Automatic Dissolution

According to the New Companies’ Law, automatic dissolution is eliminated by way of operation of law if a company experiences a loss of its share capital that equals or exceeds 50%, and there is no members' resolution to keep the business going.

This new provision will be beneficial in setting up new businesses or joint ventures and developing new business lines where there is frequently a large financial investment/ capital in the first years following a company’s formation and before it becomes generating revenue.  

  VII. Dispute Resolution

The New Companies’ Law currently permits, except for criminal proceedings all JSCs (Article 153) and LLCs (Article 173) to solve disputes through arbitration or other forms of alternate dispute settlement mechanism, assuming that this is allowed by the company’s Articles of Association.

 VIII. Shareholders’ Agreement | Family Companies

With Article 11 of the New Companies’ Law, which specifically addresses family-owned businesses, the New Companies’ Law now recognizes shareholders' agreements and establishes rules for family-owned businesses' ownership, management, and employment practices. A family charter and a shareholders' agreement would both be legally binding and might be included in the company's bylaws or articles of incorporation.

 IX. Profit Sharing

Article 23 of the New Companies’ Law emphasizes on the point that all Shareholders share profits and losses according to their shares in the company’s capital and in case it is decided to deprive any of the shareholders from the profits or limit his liability, these decisions shall be considered as if they do not exist. However, it may be agreed in the company’s articles of association on varied shareholders’ percentages in profits and losses; and

It may be agreed to exempt a Shareholder who has only his work from contributing to the loss, provided that he is not receiving any wage for his work.

B- Changes | Joint-Stock Companies (JSC)

  I. Share Capital

According to the New Companies' Law, the minimum capital of SAR 5 million for JSC companies is no longer required. Additionally, JSCs are now permitted to have both an authorized and issued share capital according to the JSC's bylaws.

  II. Lock-up Period and IPO

The New Companies Law no longer mandates the existence of a lockup period following the JSC incorporation or conversion to a JSC during which the founders' shares cannot be traded.

A JSC may, at various times, including during the incorporation stage, issue its shares to the public through an IPO, as permitted by Article 63. Both amendments ought to speed up the time it takes for businesses to reach the market, especially newer or startup businesses or organizations. These amendments might consequently increase the Saudi Stock Exchange's (Tadawul) appeal as a location for regional listings.

  III. JSC Board of Directors

The JSC board cannot have fewer than three members who must all be natural persons. The New Companies Law also eliminates the SAR 500,000 board remuneration cap, which ought to draw more talent and experience to potentially enhance the profile of Saudi corporations' boards in the Saudi public market in general.

 IV. New Classes of Shares

The New Companies Law allowed JSCs companies through Article 108 to issue ordinary shares, preferential shares, and redeemable shares.

Each share of a class shall be entitled to the same rights and powers, subject to any limitations on such rights and powers outlined in the bylaws. Subject to an extraordinary general assembly approval class of shares might also be granted "conversion rights" under Article 109. JSCs should be able to access bigger investors with the capital arrangement flexibility.

  V. Drag-along | Tag-along Rights

Shareholders of JSC are permitted according to Article 113 to put clauses in the bylaws that:  

a. Permit shareholders that own 90% of the share capital of the JSC to demand that the minority shareholders sell their shares to a third party's interest (a "drag right"); and

b. Allowing minorities to sell their shareholding to a third party seeking to acquire the majority shareholders' ownership (a "tag right").

 VI. Sale of Assets

Shareholder’s approval is required under Article 75 for the sale of all or subsequently all of JSC assets, which occurs when the assets in question are worth more than 50% of the total assets regardless of whether the sale occurs in one go or several transactions.

 VII. Squeeze-Outs

Article 230 permits one or more shareholders who hold 90% of the voting power in JSC to “squeeze out" the remaining minority shareholders and acquire complete ownership of the JSC.

C- Limited Liability Companies (LLC) | Amendments

The New Companies Law has offered LLC shareholders substitute flexibility to control LLC profits and shares.

  I. Single Shareholder LLCs

The New Companies Law eliminated the restriction on a single shareholder LLC possessing another single-shareholder LLC.

  II. Share Transfer Restrictions

Although the statutory right of first refusal is preserved by the New Companies Law, Article 178 grants shareholders the freedom to decide on share transfer restrictions that may be written into the articles of association, as the following:

a. Prior consent is necessary; thus, a shareholder must first have consent or approval from the other shareholder before transferring its ownership to a different party;

b. Purchase Option requires the shareholder to first propose its shares to the other shareholder;

c. First refusal rights, require a shareholder to present its shares to the other shareholder on the terms and at the price conditions supplied by a third party; and

d. Mandatory buy-sell commitments (for instance, in the event of deadlock or other stated conditions) require a shareholder to buy or sell its shares at a predetermined price.

To have an effect, a transfer of an interest in an LLC must be registered in the Commercial Register at the Ministry of Commerce, which in practice might need all shareholders' consent, including the transferring shareholder.

  III. Tradable Debt Instruments

Article 179 enables LLCs to issue Sukuk or tradeable debt instruments in compliance with the Capital Market Authority Law which the previous legislation forbade. This is a great improvement allowing LLC shareholders to have numerous ways to fund the operations of the LLC.

D- Other Points

  I. Simple Joint Stock Company

The Simple Joint Stock Company is a new business structure introduced by the New Companies Law that aims to serve the demands of business owners, private equity, and venture investors. Similar to JSCs, simplified joint stock companies issue their capital in shares that can be traded on the stock market. Unlike JSCs no minimum capital requirement exists for simplified JSCs.

Additionally, simplified joint stock companies have simpler requirements and management frameworks, and can be run by a board or one or more managers.

  II. Non-profit companies

Other kinds of companies, like professional and non-profit ones, are now governed by the New Companies’ Law. Non-profit companies are classified as Public and Private nonprofit companies according to the New Companies’ Law. Public non-profit organizations are required to be JSCs and their aim of helping society is their sole goal. While Private non-profit companies can be either JSC, LLC, or even simplified joint stock companies for any non-profit aim or purpose.

  III. Professional Companies

The New Companies Law's chapter eight organizes professional companies from their establishment to the management and liability of their partners. This chapter was created primarily to capture the provision of professional services.

These provisions of the Companies Law ought to be applicable along with and support the Professional Companies Law (issued according to Royal Decree M/17 of January 26, 1441H).

  IV. Statutory Reserve | Requirement

The minimum statutory reserve requirement of 30% has been eliminated by the New Companies’ Law, and companies now have the freedom to establish reserves as necessary.

  V. Companies’ Trade Names

Some of the limitations on company name selection have been lifted by the New Companies’ Law.

The name may now be originated from a language other than Arabic and can be derived from the business's goals, its current or former shareholders, or any other distinctive name.

  VI. External Auditor Requirement

Micro and small businesses are exempted from the requirement to appoint an external auditor under the New Companies Law. The Small & Medium Enterprises have not been defined in the New Companies’ Law and those will be defined in the Implementing regulations.

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