Saudi Arabia: The Impact Of The New KSA Companies Law On Existing Companies

The new KSA Companies Law (the New Law) will come into force tomorrow on 2 May 2016 (the Effective Date). The manager/directors of any company that is incorporated in the KSA should start to consider what changes may need to be made to the company's articles of association or bylaws (collectively, the Constitutional Documents). Since our communication last week on the New Law, we have been busy advising our clients on its implications for their businesses and corporate structures. We would be delighted to also assist you in this respect. Please contact Alain Sfeir or Nouf Aljoaid using the details below if you wish to have a discussion about this.

Further to our previous update regarding the highlights of the New Law, this article sets out some of the required next steps managers/directors need to take to ensure their companies' Constitutional Documents are in line with the New Law.

THE GRACE PERIOD

Article 224 of the New Law allows existing companies a 12 months grace period (the Grace Period) after the Effective Date in which the companies must adjust their positions. This means that existing companies need to amend any conflicting provisions in their current Constitutional Documents by the beginning of May 2017. The Grace Period does not include new companies that are established after the Effective Date. Additionally, violations and sanctions set out in the New Law will be enforceable on the Effective Date.

It is important to note that the Grace Period does not mean that existing companies should not comply with the New Law for a year. The New Law states that the Ministry of Commerce and Industry (MoCI) and the Capital Market Authority (CMA) board can exceptionally determine certain provisions of the New Law that will be effective on existing companies upon the Effective Date.

JOINT STOCK COMPANIES (JSC)

The MoCI and the CMA jointly issued a statement recently clarifying the implementation mechanism for the New Law in respect of JSCs and holding companies. The announcement specified some examples of provisions in the New Law that will fall under the Grace Period for existing companies and others that must be implemented upon the Effective Date.

Provisions that existing JSCs must abide by upon the Effective Date

  • Article 90: Shareholders' ordinary general assemblies (OGA) or extraordinary general assemblies (EGA) are held by notice from the JSC's board of directors in the manner prescribed in the JSC's bylaws. The Board must call for a general assembly meeting pursuant to a request by (i) the JSC's auditor; (ii) the audit committee; or (iii) a number of shareholders representing at least 5% of the share capital. However, the JSC's auditor may call for the meeting if the board of directors did not call for the same within 30 days from the auditor's request. The OGA can be held by virtue of a resolution issued by the MoCI/CMA in certain cases such as the occurrence of discrepancies between the New Law and the JSC's bylaws or there are flaws in the JSC's management. Additionally, a number of shareholders representing at least 2% of the JSC's capital can submit a request to the MoCI/CMA to call for the OGA if such case, or others mentioned in article 90.2, occur. In this case, the MoCI/CMA must call for the meeting within 30 days from the date of the shareholders' request, provided that the call must include the agenda of the meeting and the items to be approved by the shareholders.
  • Article 95: The JSC's bylaws must state the manner of voting at general assembly meetings whereby the accumulative voting method must be used in electing the board of directors to ensure that each share has only one vote. In addition, the board of directors cannot participate in voting for general assembly resolutions related to discharging such directors' liabilities from the management of the JSC or those related to a direct or indirect benefit to them.

Provisions that fall under the Grace Period

  • Article 68.1: The JSC must be managed by a board of directors whose number of members is specified in the JSC's bylaws provided that the board consists of at least 3 and not more than 11 directors.
  • Article 76: The JSC's bylaws must specify the manner of remunerating the members of the board of directors. Such remuneration may represent a specific amount, an attendance allowance, in-kind benefits or a certain percentage of the JSC's profits and two or more of these types of remunerations may be combined. If the remuneration is a share of the profits such share must not exceed 10% of the JSC's net profits after deducting the agreed reserves and distributing dividends to the shareholders of at least 5% of the paid up capital, provided that such remuneration is proportionate to the number of meetings the director attends. In all cases, the total remuneration a director receives must not exceed SAR 500,000 per year, be it in cash or in-kind. Additionally, the board of directors' report to the JSC's OGA must include a full statement of the remunerations received by the board of directors during the financial year, the number of board of directors' meetings and the number of those attended by each director as of the date of the last general assembly meeting. Furthermore, based on the board of directors' recommendation the general assembly may terminate the membership of a director who fails to attend 3 consecutive board meetings without a reasonable excuse.
  • Article 81.1: The board of directors must appoint from amongst its members a chairman and a vice chairman; and it may also appoint a managing director. A single director cannot hold the positions of a chairman and any executive position in the JSC simultaneously. In addition, the JSC's bylaws should specify the duties and authorities of the chairman and the managing director as well as the special benefits each receives over the board of director's prescribed remuneration.
  • Articles 101 to 104: These provisions address the formation of the JSC's audit committee and its mandate.
  • Article 150: If the losses of the JSC reach 50% of its paid up capital, the board of directors must send a notice within 15 days of being informed of the losses to hold an EGA meeting within 45 days of knowing of the losses to determine whether the JSC's capital should be increased or decreased or if the JSC should be dissolved. The JSC will be deemed dissolved by force of law if (i) the EGA is not convened within the prescribed period; (ii) the EGA is convened but fails to determine the matter; or (iii) the EGA decided that the capital should be increased and no subscription for increase of capital is made within 90 days from the date of issuing the resolution of increase.

While existing JSCs are granted a Grace Period to justify their position, it is important to note that they cannot take any new action contrary to the New Law after the Effective Date. For example, the MoCI/CMA announcement clarified that an existing JSC must adhere to article 68.1 mentioned above if it wishes to appoint a new board member. Article 101 to 104 must also be complied with in relation to the formation or reformation of the audit committee.

HOLDING COMPANIES

In addition to the announcement made by the MoCI and the CMA in respect of JSCs, the announcement also addressed the formation and regulation of holding companies. The announcement mentioned that the following provisions in the New Law fall under the Grace Period.

  • Article 182: The holding company can either be a JSC or a LLC aiming at controlling other JSCs or LLCs that will be called subsidiaries. This control occurs by owning more than 50% of the capital of such subsidiaries or controlling the formation of their board of directors.
  • Article 183: The objectives of a holding company include (i) managing the subsidiary or participating in the management of other companies in which it has shares and providing such companies with the required support; (ii) investing its funds in shares and other securities; (iii) owning properties and movables to conduct its business; (iv) submitting bids, bonds and finance to the subsidiaries; (v) owning industrial property rights, patents, trademarks, industrial marks, rights of concession and other moral rights; using and leasing the same to the subsidiary or third parties; and (vi) any other valid activity commensurate with the nature of the company.
  • Article 184: Subsidiaries cannot own shares or stocks in the holding company. Any act leading to the transfer of shares or stocks from the holding company to the subsidiary will be considered null and void.
  • Article 185: At the end of every financial year, the holding company must prepare consolidated financial statements including its financials and those of its subsidiaries.
  • Article 186: The holding company will be subject to the same rules and regulations of the type of company it falls under i.e. JSC or LLC.

AMENDMENTS TO THE ARTICLES OF ASSOCIATION OF A LIMITED LIABILITY COMPANY (LLC)

Within the Grace Period LLCs are expected to begin filing their applications to amend their articles of association (Articles) to comply with the provisions of the New Law. The MoCI has issued template Articles for LLCs to use as a guideline in drafting their own Articles. We highlight below a few of the changes in the template Articles for LLCs.

  • General assembly: The general assembly meeting must be convened within 4 months (used to be 6) following the end of the LLC's financial year.
  • Accounts and reporting: The LLC's managers are required to prepare the accounts and reports within 3 months (used to be 4) from the end of the financial year and share them with the MoCI within one month (used to be 2) of preparation.
  • Transfer of shares: If a shareholder wishes to transfer its shares to a third party, either with or without consideration, the shareholder must first notify the other shareholders of the transfer conditions through the LLC's manager. In this case, any interested shareholder can buy these shares at fair value within 30 days of being notified. However, the shareholders can agree on an alternative valuation method and duration in the LLC's Articles.
  • Statutory reserve: The LLC can decide to stop setting aside 10% of its net profit when the reserve reaches 30% of the capital (used to be 50%).
  • Losses: Where the losses of the LLC reach 50% of its capital the LLC's managers must record such incident with the Companies Commercial Registry and must serve a notice on the shareholders to a meeting in no later than 90 days from the date of knowing of such loss to consider whether the LLC should continue or be dissolved. The LLC will be dissolved by force of law if (i) the LLC's managers fail to send a notice to the shareholders; or (ii) the shareholders fail to pass a resolution on whether the LLC should continue or be dissolved.

NEXT STEPS

The managers / directors must check that their Constitutional Documents do not contradict any of the provisions of the New Law. As with many new, important pieces of legislation, it may take some time for the whole impact of the New Law and its interpretation to be understood by the market and to be fully reflected in practice. However, managers/directors are well advised to think about the changes which may need to be made, not only to the existing Constitutional Documents, but also with respect to how they conduct their corporate affairs. As mentioned at the start of this piece, we have been busy advising our clients on its implications for their businesses and corporate structures. We would be delighted to also assist you in this respect.

This article contains general statements in relation to the New Law and should not be construed in any way as legal advice. Formal legal advice should be sought on a case by case basis when interpreting the provisions of the New Law.

The authors would like to thank Sofanah Hakeem for her contribution to this article.

The impact of the new KSA Companies Law on existing companies

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nouf Aljoaid
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions