A BRIEF OVERVIEW OF THE MOST IMPORTANT CHANGES IN THE NEW SAUDI COMPANIES LAW
The New Law determines the types of companies that can practise commercial business in Saudi Arabia. As per Article 3 of the New Law, companies established in the Kingdom should be in one of the following five types:
- General Partnership.
- Limited Partnership.
- Joint Venture.
- Joint-Stock Company (JSC).
- Limited Liability Company (LLC).
Accordingly, the New Law eliminates other types of companies that have been practising business in the Kingdom; namely, the shares limited partnership company, the company with a changeable capital and the cooperative company.
With the exception of a joint venture, the New Law also emphasizes the requirement of documenting the company's articles of association and any amendment to them, and notarizing the same with the appropriate authorities. According to Article 12 of the New Law, a default of the documenting and notarizing requirement will lead to nullifying the agreement or the related amendments.
Moreover, with the exception of a joint venture, Article 13 of the New Law makes publicizing the company's articles of association and any amendments to them, through the Ministry of Commerce and Industry's website, a compulsory requirement. The New Law also grants legal validity, before third parties, to documents and data obtained from the Ministry's website and attested by the Ministry.
THE GENERAL PARTNERSHIP COMPANY
Addressing the General Partnership Company, the New Law introduces several changes. The most important among them are the following:
Article 17 of the New Law confers the description/capacity of a "tradesman" on any partner in a General Partnership Company.
Moreover, Article 20 of the New Law allows for an agreement among the partners to relieve a newly joining partner from the responsibility for the company's previous debts after publicizing the agreement as set forth in Article 13.
Item 2 of Article 20 also relieves any partner who was exited from the company by a court order, or chose to withdraw from the company, from the responsibility for the company's debts and commitments which are incurred after announcing his withdrawal or exit.
In addition, item 3 of Article 20 states that if a partner concedes his share of the company, then he will not be responsible, in front of the company's creditors, for the company's debts, unless the creditors object to this concession within 30 days from the date they are notified of it.
Article 23 of the New Law emphasizes that it is obligatory for all partners to sign the General Partnership Company's Articles of Association and to include their dates of birth, among other requirements, in the Articles of Association.
It is also worth mentioning that Article 24 of the New Law states that a partner may not, without the consent of other partners, engage, for his own interest or the interest of a third party, in an activity that is similar to that of the company. Moreover, he cannot be a partner, a director or a member of the Board of Directors of another rival company, nor can he own stocks or shares of significant effect in another company that practises a similar activity.
One of the privileges the New Law introduces is to grant the Director of a General Partnership Company under Article 29, and within the activities falling under the objectives of the General Partnership Company, the legal authority to represent the company before the judiciary system, arbitration tribunals and other third parties unless the company's Articles of Association explicitly limits this authority. Moreover, Article 30 of the New Law limits the prerogative of the Director from recourse to arbitration of any activities beyond the regular act of General Partnership Company, unless it is in accordance with a decision of the partners or is stated explicitly in the company's Articles of Association.
THE JOINT-STOCK COMPANY
Article 52 of the New Law does not mandate a minimum limit to the number of partners in a Joint-Stock Company (JSC). However, it states that the company will be solely responsible for the debts and commitments resulting from its activities.
On the other hand, Article 53 of the New Law clarifies the scope of naming a JSC. It stipulates that, basically, any JSC should have a name that reflects its purpose. However, it should not include a name of a natural person unless:
- The company's purpose is to invest in a patent that is registered in the name of such a person.
- The company acquired a commercial enterprise and used the name of that enterprise as its name.
- The name happens to be a name of a company transformed into a JSC and its name includes a name of a natural person.
Moreover, the New Law includes a change to the minimum capital of a JSC. In this regard, Article 54 stipulates that while the capital of the company must be sufficient to fulfil its purpose, it should not be less than 500,000 Saudi Arabian Riyal (SAR) with no less than one quarter of it paid at the time of incorporation, regardless of whether the company is a public or closed JSC. In comparison, the previous law required a minimum capital of 10-million SAR for initial public offerings (IPOs) and 2-million SAR in all other cases.
It is also worth mentioning that Article 60 of the New Law gives the Ministry of Commerce and Industry the authority to license the incorporation of a JSC. This includes JSC's that are established fully or partially by the State or any other public legal personalities. In comparison, the previous law required a Royal Decree based on the approval of the Council of Ministers, which, in turn, was based on a request from the Minister of Commerce and Industry that considers all related laws.
The New Law also states that if an application to license the incorporation of a JSC, which is fully or partially owned by the State or any other public legal personalities, requires exemptions from the New Law, then the application for the licence, along with the exemptions, must be put forth to the Council of Ministers for review and approval.
ESTABLISHING A JSC
Article 62 of the New Law differentiates between public JSCs and closed JSCs regarding the period of time within which the founders are committed to call all shareholders for a Founders/Constituents Assembly meeting. The aforementioned article commits the founders of a public JSC to call all shareholders for a Founders/Constituents Assembly meeting within 45 days from the closure of the IPO, provided that the interval between the call for the meeting and the actual meeting shall not be less than 10 days.
On the other hand, the article commits the founders of a closed JSC to call for a Founders/Constituents Assembly meeting within 45 days from the date of the Ministry's decision to license the incorporation of the JSC, provided that the interval between the call for the meeting and the actual meeting shall not be less than three days.
MANAGEMENT OF A JSC
Article 68 of the New Law places maximum and minimum limits on the number of members on a JSC's Board of Directors. Item 1 of the Article states that a JSC shall be managed by a Board of Directors and the number of its members shall be determined by the JSC's Articles of Association, provided that the number shall not be less than three and not more than eleven.
The New Law also introduces new provisions regarding electing a JSC Board of Directors in the case the General Assembly fails to elect one, or when the Chairman and members of the Board of Directors tender their resignation. In such cases, Article 69 of the New Law stipulates that the Minister, or the Board of Directors of the Saudi Capital Market Authority in the case of JSC's that are listed in the Saudi Capital Markets, must form an interim committee of the number deemed suitable of experts and specialized individuals, and appoint a chairman and a deputy for the committee from amongst the committee's members, to oversee the management of the company and call for a meeting of the General Assembly in a period that is not longer than three months, from the date of forming the said committee, for the purpose of electing a new Board of Directors for the company.
Moreover, Article 71 of the New Law states that any member of the Board of Directors should not have any direct or indirect interest in the transactions and contracts that are carried out for the account of the company, except with prior authorization from the Ordinary General Assembly. This article also states that if a member fails to disclose such an interest, then the company, or any interested person, can claim, before the competent judicial authority, the nullification of the contract or force the member to repay any profits or benefits gained from such interest.
In addition, the remuneration of members of the Board of Directors is covered in Article 76 of the New Law. The article allows the remuneration to be a pre-set amount, a fee for attending the meetings, in kind benefits, a pre-set percentage of the net profits or a combination of any of the aforementioned methods. This article also limits the members' eligibility for remuneration, in the case of the remuneration being a pre-set percentage of the net profits, by stating that the remuneration must be proportionate with the number of meetings attended by the member. In addition, item 3 of Article 76 limits the remuneration or financial or in kind privileges to a maximum of 500,000 SAR annually.
Moreover, item 5 of Article 76 gives the General Assembly the authority to terminate the membership of any board member who does not attend three consecutive meetings without a legitimate excuse.
Article 77 stresses the fact that the company is bound by all acts and dealings performed by the Board of Directors even if such acts and dealings are outside its jurisdiction, unless the interested person is of ill intentions or is aware that such acts are outside the board's jurisdiction.
Article 78 of the New Law amends the expiration period of any responsibility claim against members of the Board of Directors, as it states that no claim of responsibility will be heard after the lapse of three years from the date of disclosure of the harmful act. The article goes on to state that with the exception of cases of cheating and fraud, claims of responsibility shall not be heard, in all cases, after the lapse of five years from the end date of the fiscal year during which the harmful act occurred or three years from the termination of the membership of the related member of the Board of Directors, whichever is later.
Moreover, in a provision that is related to the Board of Directors, Article 81 states that it is not allowed for the Chairman of the Board to simultaneously hold any executive position in the company.
A new addition in Article 82 gives the Chairman of the Board of Directors the authority to represent the company before the judiciary system, arbitration tribunals as well as others. It also authorizes him to delegate some of his authorities to other members of the Board or any other person for the purpose of performing specific task(s).
Article 95 in the New Law makes it compulsory for the company to use the accumulative voting mechanism that allows a shareholder to distribute the votes associated with the shares he owns on more than one person at the time of voting. This enables the shareholder to divide the total number of votes available to him in any way he deems appropriate. Moreover, the accumulative voting mechanism will expand the Board of Directors elections circle and give minority shareholders the opportunity to participate in the decision-making process, including reviewing the Board of Directors performance or even becoming members of it.
Article 100, on the other hand, gives shareholders who represent no less than five per cent of the company's capital the right to request the competent judicial authority to order the inspection of the company, if it becomes apparent to them, from the actions of the members of the Board of Directors or the company auditor, that there is a suspicion-raising matter.
THE REVIEW COMMITTEE
The New Law, through Article 101, makes it compulsory to form a review committee by a decision from the Ordinary General Assembly. The article stipulates that the committee should be composed of not less than three or more than five members and membership of the committee cannot be from the executive members of the Board of Directors.
BONDS ISSUED BY A JSC
With reference to the nominal value of the shares, Article 105 determines that the nominal value of the shares of a JSC is set at 10 SAR for each share. The Article also gives the Minister the authority to adjust this value in agreement with the Chairman.
In Article 109, the New Law decides that trading in the shares of companies that are listed in the Capital Market shall be carried out in accordance with Capital Market bylaws.
Moreover, the New Law, as stated in Article 112, allows the company to purchase or mortgage its own shares in accordance with the guidelines set by the competent authority. However, shares purchased by the company shall have no votes in the company's shareholders' meetings.
One of the most prominent points adopted by the New Law is expressed in Article 122, which gives the company the right to issue debt instruments or negotiable financing bonds in accordance with the Capital Market bylaws.
THE FINANCIAL AFFAIRS OF A JSC
Article 129 of the New Law stipulates that 10 per cent of the company's net profits shall be set aside and dedicated to form the company's statutory reserve. The New Law authorizes the Ordinary General Assembly of a company to put this setting aside when the aforementioned reserve reaches 30 per cent of the company's paid capital, with no exception for any enterprise or company.
Furthermore, the New Law, as expressed in Article 133, makes it compulsory for the Ordinary General Assembly to appoint an auditor or more, from amongst the licensed ones, provided that the duration of his appointment shall not exceed five consecutive years. The New Law allows whoever completed such duration to be re-appointed after two years of its completion.
THE EXPIRATION OF A JSC
Article 149 of the New Law deals with the status of a JSC that all of its shares be transferred to one shareholder (who does not have the request conditions set forth in Article 55). The Article stipulates that the company remains solely responsible for its debts and commitments. Meanwhile, the shareholder shall rectify the status of the company or transform it into a one-person Limited Liability Company within one year, otherwise, the company will expire by the force of law.
In addition, Article 150 makes it an obligation of any officer or auditor of the company to inform the chairman of the Board of Directors once the losses of the company reach 50 per cent of its capital within a fiscal year. Within 15 days of the notification, the chairman of the Board of Directors shall call for a meeting of the Extraordinary General Assembly that should be held within 45 days from knowing of the losses. The Article adds that the company shall expire by the force of law if the Extraordinary General Assembly was unable to convene during the above mentioned period, or if it convened but was unable to pass any resolution, or if it decided to increase the company's capital, in accordance with the situation described in the article, yet the underwriting in the capital increase was not completed within a period of 90 days from making the aforementioned decision.
THE LIMITED LIABILITY COMPANY
The New Law includes changes to the provisions relate to the Limited Liability Company (LLC) as follows:
Article 151 of the New Law sets the maximum number of shareholders in an LLC at 50. Should the number of shareholders exceed 50, the company must change its status to a JSC within one year. If it fails to do so, then it will expire by force of law. The article also stipulates that an LLC is solely responsible for its debts and commitments.
Article 152 of the New Law clarifies the scope of naming an LLC. It stipulates that, basically, any LLC should have a name that reflects its purpose. However, it should not include a name of a natural person unless:
- The company's purpose is to invest in a patent that is registered in the name of such a person.
- The company acquired a commercial enterprise and used the name of that enterprise as its name.
- The name happens to be a name of a company transformed into an LLC and its name includes a name of a natural person.
CAPITAL AND SHARES
Article 160 of the New Law does not specify a minimum capitalization requirement for an LLC. It rather states that its capital should be sufficient for the purpose for which the company was incorporated and that the company's capital should be stated in its Articles of Association.
ADMINISTRATION OF AN LLC
The New Law reduces the percentage of LLC's statutory reserve. In Article 176 of the New Law, LLCs are required to set aside at least 10 per cent of net profits to establish a statutory reserve. Partners are allowed to put this setting aside when the reserve reaches 30 per cent of the company's capital.
EXPIRATION OF AN LLC
Similarly, the New Law reduces the percentage of losses, in relation to the expiration of an LLC. Article 181 states that if the losses of an LLC reach 50 per cent of its capital, a meeting of the shareholders must be called within 90 days to consider the continuation or dissolution of the company. If the shareholders are unable to reach a decision, the company will be considered expired by the force of law.
THE ONE PERSON COMPANY
One of the most significant changes introduced by the New Law is the One Person Company, which can be in the form of a JSC or LLC.
Article 55 allowed the following JSC entities to form One Person Companies:
- The State.
- Legal personalities.
- Companies that are fully owned by the State.
- Companies with a capital of no less than 5-million SAR.
In this respect, Article 53 states that if a JSC is owned by a single person then its name must include an indication that it is owned by a single person.
On the other hand, Article 154 allows for the establishment of an LLC that is owned by a single person who owns all of its shares. In this case this person's liability shall be limited up to the amount of the capital. This person will also have the powers and authorities of the company's Director, Board of Directors and General Assembly of the shareholders. Moreover, in all cases, a natural person may not establish or own one or more LLCs formed on a single person. Also, LLCs owned by a single person may not establish or own other LLCs owned by a single person.
In this respect, Article 152 states that if an LLC is owned by a single person then its name must include an indication that it is owned by a single person.
In Article 155, the New Law addresses the ill-intentioned malpractices of an LLC owner. It states that the owner of an LLC shall be personally responsible if he, with ill intentions, liquidates his company or ceases its activities before the end of its term or before fulfilling the objective for which it was incorporated, or if he does not separate the businesses of the company from his other private business, or if he conducts business transactions for the account of the company before it gained legal status.
THE HOLDING COMPANY
The New Law introduces a chapter specifically dedicated to the Holding Companies, which are considered a strong foundation for family businesses. The following is a brief review of this chapter's provisions:
The Holding Company is defined in Article 182 as a JSC or an LLC that aims at controlling other JSCs or LLCs (the affiliates) by owning more than half of such companies' capital or by controlling the formation of their Boards of Directors. The name of the company and its type must be accompanied by the term (holding).
PURPOSES OF THE HOLDING COMPANY
Article 183 of the New Law determines the purposes of the Holding Company as follows:
- Managing its affiliate companies or participating in the management of the companies it owns shares in and providing support to them.
- Investing its funds in stocks and other financial instruments.
- Acquiring real estate and other movable properties that are deemed necessary to performing its activities.
- Providing loans, guarantees and financing to its affiliate companies.
- Acquiring industrial property rights such as patents, industrial and commercial trademarks, concession and franchise rights as well as other intangible rights, and exploiting and leasing them to affiliate companies or others.
- Any other legitimate purpose that comply with the nature of this company.
Article 184 prohibits an affiliate company from owning shares in its holding company and considers any action that leads to transferring the ownership of stocks or shares from the holding company to the affiliate company null and void.
Moreover, according to Article 185, each Holding Company must prepare, at the end of every fiscal year, consolidated financial statements that include the company itself and its affiliates in accordance with generally accepted accounting standards.
Finally, as stated in Article 186, the Holding Company shall be subject to the provisions of the 7th Chapter of the New Law, as well as all the provisions stipulated in the law that do not contradict its status, in accordance with the company form it chooses.
We wish to acknowledge the contribution of Graham McLeod to this publication.
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.