On 19 Rajab 1437 (26 April 2016)1, the Ministry of Commerce and Investment ("MoCI") and the Capital Market Authority ("CMA") published the draft Rules and Procedures issued pursuant to the Saudi Arabian Companies Law (the "Draft Rules").2 The MoCI and CMA invited the public to submit comments on the Draft Rules by 19 Shaban 1437 (26 May 2016).
2. Remuneration of Directors of Joint Stock Companies
The Draft Rules discuss the remuneration payable to directors of joint stock companies ("JSCs"). Amongst other things, the Draft Rules require that the remuneration:
- be proportionate to the directors' respective expertise and experience;
- be based on the recommendation of the Remuneration Committee;3 and that it
- takes into consideration the sector in which the Company operates.
It is required that the remuneration of independent directors be fixed (and not a percentage of the profits) in order to ensure the neutrality of their decisions.
3. The Use of Contemporary Technology at JSC Assembly Meetings
The Draft Rules expressly allow the use at JSC assembly meetings of contemporary technology for the review of meeting agendas, participation in deliberations, and voting on resolutions. In the event that such technology is utilized, the Draft Rules require that systems be established to verify the identity of participating shareholders.
4. Buy-Back of JSC Shares
According to the Draft Rules, buy-backs must cover only five percent of total shares and must be completed within one year from being approved by the shareholders. The Draft Rules allow buy-backs to be completed in one or more phases.
In case that the JSC is listed, the purchase price must not exceed five percent of the closing price on the day that precedes the buy-back or the highest sale price offer of shares (or the last transaction) on the Exchange. Moreover, the buy-back shall not be executed within:
- the last thirty minutes of the trading session;
- The fifteen days preceding the end of the company's financial quarter and until the date of the announcement of its reviewed interim financial statements; or
- The thirty days preceding the end of the company's financial year and until the date of the announcement of its reviewed interim financial statements or audited annual financial statements.
Listed companies must execute the buy-back through a portfolio held with a person authorized by the CMA. Buy-back executions must not exceed in one trading day 10% of the total approved for buy-back. Also the buy-back must be executed within ninety days from the first buy-back transaction.
Buy-backs may only be funded by distributable profits or external financing, provided that total distributable financing exceeds the total amount of external sources of financing.
The Draft Rules contain provisions concerning the holding, sale, and pledge of treasury shares (i.e. purchased shares which are retained by the Company).
5. Pledge of JSC Shares
The Draft Rules regulate the manner by which JSC shares are pledged. In respect of shares in listed companies, the pledge is created by way of a written or electronic pledge agreement which would be recorded, registered and released in accordance with the provisions of the Depository Centre Rules (as enacted by the CMA).
As for shares in closed JSCs, a pledge agreement needs to be put in place and a pledge application needs to be delivered to the company's chairman or whomever is responsible to maintain the shareholders' register. The pledge is then recorded on the register and a notation is made on the relevant share certificates.
6. Preferred Shares
The Draft Rules regulate the manner by which preferred shares may be issued or bought back and the manner by which ordinary shares may be converted into preferred shares (or vice versa). Amongst other things, the company's bylaws must allow the issuance of preferred shares and such issuance requires the approval of the extraordinary general assembly.
For what relates to listed companies, the Draft Rules propose to place a limit concerning:
- the proportion of preferred shares against total shares owned by the public; and
- the proportion of the value of the preferred shares against total share capital.
The Draft Rules have not specified any numerical values for the above-mentioned limits.
Preferred shares do not grant their holders the right to vote at general assemblies, except if the company fails to pay them the agreed percentage of net profits for more than three consecutive years.
7. Payment of the Full Value of the Shares
The Draft Rules specify that a non-listed company may sell shares by public auction, in accordance with the Enforcement Law4, if the owner of such shares fails to timely pay the remaining value thereof. If the sale proceeds are not sufficient to cover the due amount, the company may sue the shareholder for the balance. The Draft Rules should clarify that the possibility to resorting to a public auction is subject to any preemption rights stipulated in the company's bylaws.
As for listed companies, the full payment of the value of their shares is a prerequisite for their listing.
8. Interim Dividends
The Draft Rules allow companies to distribute interim dividends, if, amongst other things, they enjoy regular positive profitability and reasonable liquidity and if they are able to foresee the scale of their profit.
9. Rights Issues Resulting from Capital Increases
The Draft Rules contain a system and rules for the trading of rights issues. The Draft Rules mention that registered and non-registered shareholders may trade rights issues over a period of eight working days. It is unclear whether such period is prescriptive.
With respect of any shares which remain unsubscribed for (rump shares) and in respect of any fractional shares, the Draft Rules specify that these would be offered to the highest paying institutional investors (or proportionately between them if they offered the same price).
The subscription price of the rump shares shall not be lesser than the offer price. If the price of the rump shares is lesser than the offer price, the difference is distributed to the holders of rights issues, following the deduction of subscription monies and expenses.
The Draft Rules allow JSC shareholders to issue written proxies or powers of attorney to others, including non-shareholders, to attend and vote at assembly meetings on their behalf. Proxies may not be delivered to board members or employees of the company.
The original of the proxy letters need to be delivered to the company at least two days prior to the assembly meeting.
The Draft Rules should help fill a legal vacuum on the points covered therein. The Draft Rules fall within the numerous reforms which the Saudi Arabian Government is currently introducing to clarify the legal framework and improve the legal climate.
3. See the discussion on the Remuneration Committee in the following article: http://www.mondaq.com/article.asp?articleid=491962&friend=1
4. Enacted by Royal Decree No. M/53 dated 13 Shaban 1433 (3 July 2012).
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.