13 Dec 2022
Introduction
One of the largest and most dynamic economies in the Middle East is the Kingdom of Saudi Arabia, the KSA continues to draw capital from around the globe. Comparing the KSA legal framework to the structures and ideas that are often found throughout Europe, the US, and Asia, various restrictions are presented to both domestic and foreign investors. This is a characteristic that is ubiquitous throughout the Middle East, which has led to corporations frequently structuring their holding vehicles in countries with a common law system, such ADGM or DIFC, to get beyond the restrictions of local law. But in response to this dynamic, governments all throughout the region are changing their corporation rules to include the level of sophistication that both domestic and foreign investors demand. Sharia, Islamic law originating from the Quran and the Sunnah (traditions) of the Islamic prophet Muhammad, serves as the foundation for Saudi Arabia's legal system. The Islamic scholarly consensus that emerged after Muhammad's demise is another source of Sharia. The literalist Hanbali school of Islamic law's medieval writings had an influence on how Saudi Arabian judges interpreted it. Saudi Arabia is the only Muslim nation to have adopted Sharia in its uncodified form. The extent and content of the laws of the nation are quite unknown as a result of this and the lack of judicial precedent. As a result, the government declared its desire to codify Sharia in 2010, and in 2018, the Saudi government issued a sourcebook of legal precedents and principles.
Sharia law governs business and commerce in the KSA. The board of grievances, which is composed of judges with Sharia training, has jurisdiction over commercial disputes, but there are also special tribunals tasked with figuring out ways to get around some of the more onerous provisions of Sharia law. Because of the Sharia component, commercial law's content is ambiguous for foreign investors, which deters them from making investments in Saudi Arabia. Contract law is not codified because it is regulated by Sharia. It gives the parties a great deal of latitude to decide on contract terms within the general restrictions of Sharia. Contracts that involve speculation or the payment of interest, however, are forbidden and unenforceable. Saudi courts will only compensate for proven direct damage when a contract is broken. Claims for lost revenue or missed opportunities won't be accepted since they would amount to speculation, which is against Sharia law.
By Saudi Arabia Cabinet Decision Number 678/1443 on the approval of the Companies Law, which was adopted on June 28, 2022, the Kingdom of Saudi Arabia (KSA) adopted a new Companies Law that will take effect 180 days after it was published in the Official Gazette on July 22, 2022. In keeping with the government's goals to diversify the KSA economy and market, promote investment, and strengthen the private sector, the long-awaited amendments aim to make a number of changes to its predecessors, Saudi Arabia Royal Decree Number M3/1437 on the Approval of the Companies Law and Saudi Arabia Royal Decree Number M17/1441 on the Approval of the Professional Companies Law. Commercial, nonprofit, and professional organizations are governed by Saudi Arabia Cabinet Decision Number 678/1443, which consolidates all applicable laws into a single, comprehensive document. All laws that are inconsistent with Saudi Arabia Cabinet Decision Number 678/1443, including Saudi Arabia Royal Decree Numbers M3/1437 and M17/1441, shall be repealed. As described in this Legislative Insight, Saudi Arabia Cabinet Decision Number 678/1443 has made a number of significant reforms.
What Does The New Amendment Cover
The new law allows business owners to establish a family charter to operate while exempting tiny or micro firms from audit procedures. The new law allows for the issue of several share classes with different rights, limitations, and benefits. The temporary or annual distribution of earnings is also authorized, as long as the rights of the company's creditors are upheld. A Simplified Joint Stock Company, which strives to serve the needs of entrepreneurs and draw venture capital, is now permitted by the new legislation, which is significant. The new variation will allow non-profit organizations to produce returns and fund charitable endeavours by acting as an investment arm. There are no longer any limits on the typical incorporation, practising, and exit phases, as well as restrictions on company names.
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Introduction of the New Forms of Company |
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Simple Joint Stock Company |
LLC Holding Company |
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Association of the company |
Activity of the holding company |
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Capital |
The subsidiary company that owns shares in the holding company |
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Management |
Issuance of the debt instruments |
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Trading of shares |
Capital and profits |
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Tagalong and drag-along mechanism |
General assembly of partners |
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Companies name |
Conversion of the company |
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Related provisions to shareholders |
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Shareholders agreement or family constitution |
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Liquidation of the company |
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Cumulative voting |
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JSCS Are Joint Stock Companies
The New Law makes a number of new amendments to the regulations governing the formation and operation of JSCs, including:
The ability to create a JSC with just one shareholder, the removal of the necessity to hold an incorporation assembly, the removal of the maximum number of board members, the authorization to issue different classes of shares, such as ordinary, preference, and redeemable shares, with different rights and obligations, the removal of the maximum cap for board member compensation, and the delegation of authority to the general assembly to decide on the rewards and compensation of officers. Simplified JSC stands for a simplified joint stock company. The Simplified JSC is a brand-new entity type introduced by the New Law. By implementing a Simplified JSC, the KSA's rapidly expanding startup and venture capital markets will have their demands and requirements met.
The Main Components of a Simplified JSC Are as Follows
The firm may be controlled by one chief executive officer, one or more managers, or a board of directors. General assemblies (ordinary and extraordinary) are substituted by less complicated shareholder meetings. There are no minimum capital requirements.
Establishment of a Simple Joint Stock Company
In order to try and fulfil the expanding demands of entrepreneurship and venture capital growth, Saudi Arabia Cabinet Decision Number 678/1443's key reform is the introduction of a new type of company in KSA, a Simplified Joint Stock Company (SJSC), as described in Articles 138–155. An SJSC may be founded by one or more individuals, with the capital being divided into marketable shares and the organizational structure set forth in the Articles of Association. An SJSC can issue shares in-kind and has no minimum capital requirement. Circulation is a method of shareholder decision-making that can be used instead of a general assembly. According to Saudi Arabia Cabinet Decision Number 678/1443, the chairman and board of directors have the broadest authority in the management of the company to accomplish its goals, with the management strategies to be outlined in the Articles of Association. This is similar to limited liability companies.
Clarification About the Status of Shareholder Agreements
It is now possible for shareholders to engage in a legally binding shareholders agreement under Saudi Arabia Cabinet Decision Number 678/1443, provided that it does not conflict with the Articles of Association or Saudi Arabia Cabinet Decision Number 678/1443. Due to varying court practices and the partial underrecognition of such agreements by courts historically, this has been a challenging position. According to Saudi Arabia's Cabinet Decision Number 678/1443, the shareholders are permitted to make agreements that govern their interactions with one another and the company.
Exemptions For Small and Micro Businesses
With a few exceptions, micro and small businesses are exempt from the necessity to appoint an auditor under Article 19 of Saudi Arabia Cabinet Decision Number 678/1443, which was passed to promote new businesses entering the KSA market. Regulations specify what counts as a micro or tiny firm, but the exception is only valid for businesses that have been incorporated for the first time or for two consecutive fiscal years.
Multiple Classes of Shares
According to Article 108(1) of Saudi Arabia Cabinet Decision Number 678/1443 a corporation is particularly permitted to issue ordinary shares, preference shares, and redeemable shares. However, it also permits a business to establish additional share classes and to give or restrict specific rights or privileges in its articles of association, greatly enhancing the adaptability of corporate structures to draw in investment. This used to be restricted to just common and preferred shares. Shares of the same kind or class must have equal rights and liabilities, according to Article 108(2) of Saudi Arabia Cabinet Decision Number 678/1443, and the company's articles of association must outline all of the rights and obligations of each type or class of shares. Regulations outlining the restrictions on the types and classes of shares that may be issued will be published.
A Larger Selection of Company Names
The Saudi Arabian Cabinet Decision Number 678/1443 has lifted limits on the choice of company names; they can now be in languages other than Arabic and can be derived from its purpose, its current or past shareholders, a combination of both, or a combination of the two. As long as it complies with Saudi Arabia Cabinet Decision Number 133/1420 on the Approval of the Trade Names Law (Saudi Arabia Royal Decree Number M15/1420 on the Approval of the Trade Names Law), it may also select a distinctive name.
Promoting Employee Sharing
By mentioning employee incentive programs in Article 72(2)(b) of Saudi Arabia Cabinet Decision Number 678/1443 and reaffirming that shareholders do not have pre-emption rights when a company issue shares that are allocated to employees, Saudi Arabia Cabinet Decision Number 678/1443 appears to support the incentivization of talent within businesses. We do observe that further procedures and controls for the distribution of shares to employees will probably be put in place.
Limited Liability Company Financing
Limited Liability Companies are allowed to issue negotiable debt instruments or financing instruments under Article 179 of Saudi Arabia Cabinet Decision Number 678/1443, expanding their financial capabilities and improving the stability of such structures (subject to Saudi Arabia Royal Decree Number M30/1424 Related to the Capital Market Law; Saudi Arabia Cabinet Decision Number 91/1424 approving the Capital Market Law). A more thorough process for shareholder and creditor challenges to mergers is outlined in Saudi Arabia Cabinet Decision Number 678/1443. It also clarifies that the surviving company is treated as a successor, with the rights, obligations, assets, and contracts being treated as transferred upon enforcement. It also provides a more sophisticated framework regarding the practical aspects surrounding the completion of the merger (including when it comes into effect). Additionally, Saudi Arabia Cabinet Decision Number 678/1443 makes clear that a merger can be accomplished even while a corporation is in liquidation and that the agreed-upon shares in the surviving company should serve as the consideration for the merger. Additionally, Saudi Arabia Cabinet Decision Number 678/1443 permits the establishment of special regulations for mergers between a subsidiary and a parent, noting exemptions from its restrictions to facilitate faster group reorganization and more adaptable corporate structures.
Squeeze-Out Rights
Constitutional squeeze-out rights are allowed by Saudi Arabia Cabinet Decision Number 678/1443's Article 113. When at least 90% of the shareholders agree to sell, they can require the minority shareholder to accept an offer from a genuine buyer to purchase the entire issued share capital, provided that this is allowed by the company's articles of association. This increases the investment appeal of local companies. It appears, nonetheless, that the majority shareholders must vouch for the sale of minority shares to occur at the same price and under the same terms and conditions as the sale of majority shares.
Interim Dividends
The distribution of earnings in Joint Stock Companies, the SJSC, and Limited Liability Companies can now be modernized by the declaration of dividends on a yearly or interim basis from distributable profits to shareholders.
Participation in General Meetings
The SJSC and joint stock companies can have general meetings using current technology. At a general meeting, Limited Liability Companies may make decisions that affect its shareholders. In the past, where a corporation had less than 20 members, shareholder decisions may be made through circulation without calling a general meeting, with shareholders casting their votes in writing. This exception seems to have been eliminated in order to simplify the management of such businesses.
Subdivision and Consolidation
The shares of a joint stock company continue to be nominal and indivisible, in accordance with Article 103(1) of Saudi Arabia Cabinet Decision Number 678/1443. When more than one person owns a share, that individual will be jointly responsible for the obligations associated with that ownership and will be chosen to represent them in the use of their rights.
Other firm shares, however, might be divided so that they have a reduced nominal value (subject to the requirements that all shares in a class of shares shall have the same nominal value). Additionally, shares may be combined to increase their nominal worth. Subdivision and consolidation regulations and controls could be put in place.
Lock-in Periods for Shares
In accordance with Saudi Arabia Royal Decree Number M3/1437 and M17/1441, founders who subscribe for shares in a joint stock company are not permitted to transfer those shares for two full years prior to the publication of financial statements, with the exception of to other founders or to their beneficiaries in the event of death. Saudi Arabia Cabinet Decision Number 678/1443 appears to have lifted this limitation.
Conclusion
Despite the fact that the new law has not yet taken effect, it is anticipated that it would provide more flexibility when forming and running businesses within a new legal framework that is more in accordance with recognized worldwide standards. The Ministry of Commerce has not yet set a date for existing companies to alter their bylaws or articles of association in order to comply with the New Law. However, we advise businesses to assess their AoAs and by-laws in light of the New Law to determine whether any revisions are necessary and to determine how they may best benefit from the new regulatory environment that the New Law envisages. The legal and commercial sectors in Saudi Arabia will probably warmly embrace the revisions as a step forward in streamlining company management and promoting investment. However, we must wait to see what influence it will have and what further rules will be released to facilitate its implementation. Get in touch with top-class commercial lawyers to know more about the latest legal updates.