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Overview: New Draft Saudi Arabian Companies Law

The Saudi Arabian Ministry of Commerce and the Capital Market Authority (CMA) recently published a draft companies law (the "Draft Law") which was made available for public consultation. Under the new proposal, certain significant changes to the framework of the existing Companies Law have been proposed. The impact of the proposed changes on companies established in the Kingdom will potentially be significant.

 

General Proposed Changes

Under the Draft Law, it will no longer be possible to establish an Unregistered Company1, although two new types of legal entities have been introduced, namely: (i) the Company Limited by Shares2and (ii) the Simple Joint Stock Company3.

A notable characteristic of the Company limited by Shares as set out in the Draft Law is the requirement that it be comprised of two classes of shareholder: a shareholder with personal liability and a shareholder with limited liability (with management responsibilities vesting in the former).

Conversely, the Draft Law provides that a Simple Joint Stock Company may be formed with a single shareholder. We note there is no prescribed minimum capitalisation requirement associated with such entities. Management responsibilities may vest in the hands of a board of directors or a single general manager. Unlike the classic joint stock company ("JSC") under the existing regime, the Simple Joint Stock Company is proposed to have a lighter or more relaxed corporate governance framework. For example, the Draft Law does not prescribe the quorum for a general assembly or management meeting, neither does it set out the requisite voting threshold for passing resolutions; rather, it allows such matters to be determined in the company's bylaws.

All managers and directors of all companies under the Draft Law have an explicit duty of (reasonable) care and loyalty; historically, such duties were explicitly imposed on the directors of JSCs only.

Moreover, the concept of automatic dissolution by operation of law (in the event losses of a JSC or limited liability company ("LLC") reach or exceed 50 per cent. of its share capital and provided certain shareholder or management actions are not taken within a specified period) has been removed. Under the Draft Law, if a company's losses reach or exceed this threshold, any party with an interest may petition for the dissolution of the company by the competent court.

It is worth noting that under the Draft Law, share option arrangements will be permissible subject to the implementing regulations (drafts of which are yet to be published). Such arrangements may include, for example, put and call options and/or drag and tag-along rights—the enforceability of which is uncertain under the existing regime.

JSCs and LLCs under the Draft Law are permitted to distribute annual or interim dividends under certain conditions, namely: (i) having sufficient liquidity and retained profits no less than the dividends that are intended to be distributed; (ii) having the ability to meet its financial obligations for a 12-month period following the distribution of the interim dividend; and (iii) the aggregate of the financial commitments of the JSC/LLC and the proposed dividend distribution does not exceed the value of such company's assets.

The Draft Law introduces an exclusion of liability concept for the benefit of company managers and directors akin to the common law's business judgment rule, effectively absolving management of any liability for decisions made in good faith and for legitimate purposes provided they have no personal interest in the matter and have exercised due care to ensure the decision was made for the company's benefit.

All managers and directors (and their relatives of the second degree) with a direct or indirect interest in company transactions will, subject to certain exceptions, be required to make disclosures to seek approvals from the general assembly. Historically, disclosure and consent requirements were limited to JSCs.

It is worth noting that the statutory reserve requirement from the old regime is expected to fall away under the new Draft Law. As drafted, optional reserves may be created if so stipulated in the Bylaws.

Under the Draft Law, Small4 and Micro Enterprises 5 6 are exempted from the requirement to appoint an auditor.

 

Proposed Changes specifically for JSCs

Under the Draft Law, the minimum capital requirement of SAR 5 million or to be established by the government or quasi-government will no longer be required for single-shareholder JSCs. Furthermore, the maximum number of board members of JSCs and the board remuneration cap of SAR 500,000 has been removed. JSCs are expected to have flexibility in issuing different classes of shares, ordinary shares, preferred shares and redeemable preferred shares.

The Draft Law seeks to codify squeeze-out arrangements where 90 per cent. of a JSC's shares are sold, shareholders holding 3 per cent. of the shares may offer the buyer their shares within a specified period. The purchaser of 90 per cent. of the shares of a JSC may request the competent authority within a specified period to approve a mandatory offer to force the minority shareholders to sell their shares.

 

Proposed Changes specifically for LLCs

Under the Draft Law, the restriction on a single shareholder LLC owning another single shareholder LLC has been removed. In addition, under the new proposal, LLCs are permitted to issue tradeable debt or sukuk instruments in accordance with the Capital Market Authority Law.

The Draft Law is expected to come into force 180 days following publication. Companies established prior to the Draft Law coming into effect shall have one year from its effective date to comply with it.
 

1 شركة المحاصة
2 شركة التوصية بالأسهم
3 شركة المساهمة البسيطة
4 الشركات الصغيرة
5 الشركات المتناهية الصغر
6 The Small & Medium Enterprises General Authority has designated those entities which have 1-5 employees and revenues of up to SAR 3 million as Micro Enterprises, while entities employing 6-49 employees and which generate revenues between SAR 3 million and SAR 40 million are designated Small Enterprises.

 

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