Saudi Arabia’s New Companies Law – The Key Changes
Charlotte Jackson writes for LexisNexis, Legislative Inisght on Saudi Arabia Cabinet Decision No. 678/1443; Saudi Arabia Royal Decree No. M3/1437; Saudi Arabia Royal Decree No. M17/1441.
On 28 June 2022, the Kingdom of Saudi Arabia (KSA) approved a new Companies Law, enacted by Saudi Arabia Cabinet Decision No. 678/1443 on the Approval of the Companies Law, that will come into force 180 days from Friday 22 July 2022, the date upon which it was published in the Official Gazette.
The long-awaited amendments seek to bring a number of changes to its predecessors, Saudi Arabia Royal Decree No. M3/1437 on the Approval of the Companies Law and Saudi Arabia Royal Decree No. M17/1441 on the Approval of the Professional Companies Law, in line with the government’s intention to diversify the KSA economy and market, encourage investment, and strengthen the private sector.
Saudi Arabia Cabinet Decision No. 678/1443 governs commercial, non-profit and professional companies, streamlining the legislation into one comprehensive document. Saudi Arabia Royal Decree No. M3/1437 and Saudi Arabia Royal Decree No. M17 /1441 will be superseded along with any other provisions which are in conflict with Saudi Arabia Cabinet Decision No. 678/1443.
Saudi Arabia Cabinet Decision No. 678/1443 has introduced a number of key changes, as outlined in this Legislative Insight.
Introduction of a Simple Joint Stock Company
The main change in Saudi Arabia Cabinet Decision No. 678/1443 is the introduction of a new form of company in KSA, a ‘Simplified Joint Stock Company’ (SJSC) as outlined in Articles 138-155 of Saudi Arabia Cabinet Decision No. 678/1443 to try and meet the growing demands of entrepreneurship and venture capital growth.
An SJSC can be established by one or more people whose capital will be divided into tradable shares with a structure organised by the Articles of Association. There is no minimum capital requirement in an SJSC and shares can be issued in-kind. Shareholder decisions can be made by circulation as an alternative to a general assembly.
Similar to Limited Liability Companies, the chairman and board of directors have the widest powers in the management of the company in order to achieve its purposes under Saudi Arabia Cabinet Decision No. 678/1443, with the methods of management to be defined in the Articles of Association.
Clarity on the standing of Shareholders’ Agreements
Saudi Arabia Cabinet Decision No. 678/1443 has introduced the ability for shareholders to enter into a binding shareholders’ agreement, provided it does not conflict with Saudi Arabia Cabinet Decision No. 678/1443 or the Articles of Association. This has been a difficult position historically, given that such agreements have not been fully recognised by Courts and Court practice has been inconsistent. Saudi Arabia Cabinet Decision No. 678/1443 confirms that the shareholders can enter into agreements regulating the relationship among them or with the company.
Micro and Small company exemptions
Under Article 19 of Saudi Arabia Cabinet Decision No. 678/1443, the requirement to appoint an auditor does not apply to micro and small companies (save for certain exceptions), to encourage start-ups into the KSA market. Regulations determine what qualifies as a micro or small company, however, the exception can only apply to a company during the first fiscal year of its incorporation or during two consecutive fiscal years.
Multiple Classes of Shares
Saudi Arabia Cabinet Decision No. 678/1443 specifically allows a company to issue ordinary shares, preference shares and redeemable shares, as outlined in Article 108(1) of Saudi Arabia Cabinet Decision No. 678/1443. However, it also allows a company's Articles of Association to provide for other share classes and to grant or restrict certain rights or privileges, vastly widening the flexibility of company structures to attract investment. Previously, this had been limited to ordinary and preference shares only.
Article 108(2) of Saudi Arabia Cabinet Decision No. 678/1443 confirms that shares of the same type or class must have equal rights and obligations, and that the company's Articles of Association should stipulate all rights and obligations of each type or class of shares. Regulations will be issued to specify controls for types and classes of shares that may be issued.
Wider choice of Company Names
Saudi Arabia Cabinet Decision No. 678/1443 has loosened restrictions on the choice of company names, they can now be in languages other than Arabic and can be derived from (i) its purpose, (ii) its current or former shareholders, or (iii) a combination of both. It can also choose a distinctive name as long as it complies with Saudi Arabia Royal Decree No. M15/1420 on the Approval of the Trade Names Law (Saudi Arabia Cabinet Decision No. 133/1420 on the Approval of the Trade Names Law).
Encouraging Employee shares
Saudi Arabia Cabinet Decision No. 678/1443 appears to be supporting incentivisation of talent within companies, making reference to employee incentive schemes in Article 72(2)(b) of Saudi Arabia Cabinet Decision No. 678/1443 and confirming that shareholders do not have pre-emption rights when a company issues shares that are allocated to employees. However, we note that further controls and procedures for the allocation of shares to employees will likely be implemented.
Financing for Limited Liability Companies
Under Article 179 of Saudi Arabia Cabinet Decision No. 678/1443, Limited Liability Companies are permitted to issue negotiable debt instruments or financing instruments (subject to Saudi Arabia Royal Decree No. M30/1424 Related to the Capital Market Law (Saudi Arabia Cabinet Decision No. 91/1424 Approving the Capital Market Law)), broadening the scope for financial capabilities and enhancing the stability of such structures.
Merger and Re-Structuring provisions
Saudi Arabia Cabinet Decision No. 678/1443 sets out a more detailed procedure for objections to mergers, both by shareholders of the merging parties and creditors. It also provides a more sophisticated framework regarding the practicalities around completion of the merger (including when it comes into effect) and clarifies that the surviving company is treated as a successor with the rights, obligations, assets and contracts being treated as transferred upon enforcement.
Saudi Arabia Cabinet Decision No. 678/1443 also clarifies that the consideration for the merger should be the agreed shares in the surviving company and that a merger can be completed even where an entity is in liquidation, as per Article 225(3) of Saudi Arabia Cabinet Decision No. 678/1443.
Further, Saudi Arabia Cabinet Decision No. 678/1443 allows for special regulations to be put in place for mergers between a subsidiary and a parent, noting exemptions from the provisions of Saudi Arabia Cabinet Decision No. 678/1443 to allow easier group re-structuring and more flexible corporate arrangements.
Article 113 of Saudi Arabia Cabinet Decision No. 678/1443 permits constitutional ‘squeeze-out rights’. Where at least 90% of the shareholders agree to sell, they can require the minority shareholder to accept an offer from a bona fide buyer to purchase the entire issued share capital, subject to the same being permitted in the company's Articles of Association, making companies in the region more attractive to investment opportunities. However, it seems that the majority shareholders are required to guarantee that the sale of minority shares will be sold at the same price and on the same terms and conditions as the sale of majority shares.
Dividends can now be declared annually or on an interim basis from distributable profits to shareholders in Joint Stock Companies, the SJSC and Limited Liability Companies, modernising the distribution of profits in such companies.
Attendance at General Meetings
General meetings for Joint Stock Companies and the SJSC can be held through modern technical means.
Limited Liability Companies may issue shareholder decisions at a general meeting. Previously where there was less than 20 members in a company, shareholder decisions could be issued through circulation without the need for a general meeting, with shareholders voting in writing. This exception appears to have been removed to make the management of such companies simpler.
Consolidation and sub-division
Under Article 103(1) of Saudi Arabia Cabinet Decision No. 678/1443, the shares of a Joint Stock Company remain nominal and indivisible. Where a share is owned by multiple persons, one shall be selected to represent them in the use of their rights and these persons shall be jointly liable for the obligations arising from owning the share.
However other company shares may be sub-divided so that they represent a lower nominal value (subject to the requirements that all shares in a class of shares shall have the same nominal value). Further, shares can also be consolidated, so that they have a higher nominal value. Regulations and controls as to sub-division and consolidation may be implemented.
Share Lock-in Periods
Under Saudi Arabia Royal Decree No. M3/1437 and Saudi Arabia Royal Decree No. M17/1441, founders who subscribe for shares in a Joint Stock Company are prohibited from transferring their shares prior to the publishing of financial statements for two full years, save to other founders or to their beneficiaries in case of death. This restriction appears to have been removed in Saudi Arabia Cabinet Decision No. 678/1443.
Saudi Arabia Cabinet Decision No. 678/1443 is wide-ranging and innovative. Whilst we will have to wait to see what impact it will make and what further regulations will be issued to aid its implementation, the changes will likely be warmly welcomed by the legal and business communities in Saudi as a step-forward in simplifying the management of companies and encouraging investment.