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Saudi Arabia Issues New Commercial Companies Law

On 28 June 2022, the Saudi Council of Ministers approved the Kingdom’s new Commercial Companies Law. The new law and its Executive Regulations entered into force on 19 January 2023 replacing the previous Saudi corporate law regime.

On 28 June 2022, the Saudi Council of Ministers approved the Kingdom’s new Commercial Companies Law. The new law and its Executive Regulations entered into force on 19 January 2023 replacing the previous Saudi corporate law regime. With the new law the Saudi government sought to provide a more modern and robust legal framework for businesses in the Saudi Arabia. The most notable changes instituted by the new law are the introduction of new corporate vehicles—most importantly the Simplified Joint Stock Company—as well as provisions specifically addressing non-profit and professional enterprises. Furthermore, the legislator eased restraints for structuring and operating companies in Saudi Arabia and provided some much anticipated clarifications. 

New corporate vehicles

The new law introduced new forms of companies; most notably the Simplified Joint Stock Company (SJSC). The SJSC is envisaged to serve as a vehicle to allow entrepreneurs to take advantage of the benefits in attracting capital offered by listed companies while avoiding (some) of the more burdensome regulatory and administrative requirements of Joint Stock Companies (JSC). Furthermore, the legislator sought to create a vehicle attractive to  private equity firms and venture capitalists. Similar JSCs, the capital of a SJSC is issued in negotiable shares traded on the capital market. However, unlike for JSCs, there is no minimum capital requirement for SJSCs under Saudi law. Still, with the new law the minimum shareholders requirement for JSCs was also amended. JSCs (and SJSCs) can now have only a single shareholder. Single shareholder JSCs have reduced minimum share capital requirements. Under the old law any JSC had to have a minimum registered capital of SAR 5 million (approx. USD 1.33 million). This remains the same for JSCs with multiple shareholders. However, a single JSC only has to have a registered share capital of at least SAR 500,000 (approx. USD 133,000). Furthermore, SJSCs have simplified management structures compared to regular JSCs. They can either be managed by a board of directors or by one or more general managers.

Other forms of companies introduced with the new law are the non-profit and professional companies. The new law distinguishes between public and private non-profit companies. Public non-profit companies must take the form of a JSC. Their purpose is limited to serving general societal goals. Private non-profit companies on the other hand can be established as a JSC, SJSC or Limited Liability Company (LLC). They can be established for any purpose, provided that their purpose is not to generate profits. Professional companies are vehicles specifically introduced for professional service providers.

More flexible organization of companies

The new law eases restraint for the organization of companies. In particular, the new law explicitly recognizes supplementary agreements issued in addition to the official articles of association or bylaws such as shareholders’ agreements. Shareholders’ agreements or similar supplementary documents were very common in Saudi Arabia even before the new law came into effect. The official articles or bylaws had to be issued reflecting standard templates provided by the Saudi authorities. Hence, shareholders were not able to freely organize their rights and obligations within the company in the official articles or bylaws. This was an issue in companies that involved shareholders that were independent from each. These company typically require organization of shareholder rights and obligation that went beyond the provisions of the official articles and bylaws. Shareholders typically addressed issues not contemplated in the articles or bylaws or that they wished to regulate differently from the articles or bylaw in separate agreements. This practice will likely not change under the new corporate regime. However, unlike the old law, the new law now officially recognizes such side agreements. This change provides welcome clarity on what provisions would prevail in a shareholders’ dispute.

Furthermore, the new law gives shareholders the freedom to chose alternative means of dispute resolution for shareholder disputes. Hence, they can exclude the jurisdiction of Saudi courts and opt—for example—for arbitration. 

Under the amended Saudi corporate regime JSCs and SJSCs can now issue different classes of shares: (1) ordinary shares, (2) preferred shares, and (3) redeemable shares. The bylaws of JSCs or SJSCs can assign different rights and obligations to the different classes of shares, provided that the shareholders within one class of share have equal rights and obligations. This amendment allows companies more flexibility in structuring their shareholder structure; i.e. distinguishing between financial investors and shareholders partaking in the operation of the company.

Furthermore, minimum nominal share value requirements no longer apply for JSCs and SJSCs. The old law required that the value of a share in any company had to be at least SAR 10 (approx. USD 2.66). This requirement was abandoned for JSCs and SJSCs in the new law, allowing these companies further flexibility in structuring shareholding.

More flexibility for operation of companies

The new law also liberalized the provisions governing operations of companies. For instance, the new law explicitly allows for meetings to be held and decisions to be taken by remote communication or virtual means. Hence, shareholders’ and board meetings can now be held remotely; i.e. as video conferences.

The new law also abandoned the rule whereby a company would be automatically wound up in case its losses exceeded the company’s assets plus 50 percent of its share capital. The new law now provides for the option of continuation of the company’s business provided it finds a way to finance its activities.

Furthermore, under the new law shareholders can offer shares in their companies to a third party as compensation for them performing work or service for or in the interest of the company. This option is, however, not open to JSCs and SJSCs.

Finally, the new law permits LLCs to issue debt instruments and tradeable financial instruments in compliance with the Capital Market Authority Law. This possibility was introduced to improve the financing and business dynamics of LLCs.

Transfer of shares

The new regime expanded the shareholders’ ability to manage transfer of shares. Shareholders are now free to include in the constitutive documents of companies detailed provisions concerning transfer of shares, including squeeze out, drag along and tag along clauses. With these amendments provisions compelling or allowing shareholders to sell shares in certain situation are for the first time permissible under Saudi law. It remains to be seen whether the Saudi authorities will—in the light of these amendments—also allow more aggressive transfer clauses such as russian roulette or shoot out clauses. Given the prevalence of Islamic law principles in Saudi Arabia, we expect Saudi authorities to continue to reject such mechanisms as unlawful due to their resembling gambling.

Clarification on obligations of management

In general, all directors and managers are under a fiduciary duty to act in the best interest of their company. In addition, new provisions have been introduced that detail certain obligations for company management. For instance, the new law explicitly provides that managers and directors of companies may not represent the company in contracts or undertakings they—directly or indirectly—hold interest in, except with the explicit authorization from the shareholders issued by resolution of the general assembly or written circular executed by all shareholders. Furthermore, the new law explicitly prohibits a company’s management from—directly or indirectly—engaging in any activity that competes with their company, or using or usurping—directly or indirectly—the company’s assets, information or corporate opportunities for their benefit or the benefit of others. While many of these restrictions were typically imposed on management by shareholders’ resolutions, the law now clarifying that these restrictions apply is welcome.

Also, the new law for the first time expressly allows companies to procure insurance for their managers and directors against claim or liability arising out of them performing their duties. Under the old regime it was not prohibited to procure such insurance. However, the clarification is welcome.

Way forward

Many of the provisions introduced with the new law are clarifications that practices already well established in Saudi Arabia are permissible. For instance, while shareholders’ agreements have been commonly used by investors in Saudi Arabia, the new law now clarifying that these agreements are legal an binding is a welcome clarification. The same is true for clarifications on the obligations of management and the possibility for procuring management insurance.

Other changes introduced such as liberalization of the regimes for structuring and operating companies and transferring shares therein, are welcome additions that make the Saudi competition regime more competitive. This also is true for the introduction of the SJSC as an alternative for entrepreneurs and investors that require more flexibility than offered by an LLC, but want to avoid the increased administrative requirements of a JSC.

Overall the changes introduced with the new law will ease doing business and investing in Saudi Arabia. Still, unless administrative reform follow many of these benefits will not be effective. Their gains will be muted by the existing cumbersome administrative procedures.

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