Exploring the Advantages of setting up a Simplified Joint Stock Company in the Kingdom of Saudi Arabia
Corporate Structuring / KSA
The new Companies Law is a comprehensive set of regulations aimed at modernising the country’s corporate legal framework and attracting foreign investment.
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Hesham Al HomoudPartner, Head of Corporate Structuring - Saudi Arabia
Antonis TheodosiouAssociate,Corporate Structuring
Sabeeha MoollaProfessional Support Lawyer,Corporate Structuring
One of the recent changes in the legal framework for businesses in the Kingdom of Saudi Arabia (KSA) is the enactment of the new Companies Law, which became effective as of 19 January 2023 and as of January 2024, it has been in effect for one year.
The new Companies Law is a comprehensive set of regulations aimed at modernising the country’s corporate legal framework and attracting foreign investment. The law replaces the previous Companies Law of 2015 and introduces several key changes and improvements to the legal framework for businesses in KSA.
The new law aligns with the KSA’s Vision 2030 and introduces new changes, allows for greater flexibility, protects the interests of businesses, strengthens the private sector, follows international best practices, and adheres to global benchmarks.
The new Law provides for five different types of companies that investors and entrepreneurs can choose from, depending on their business and legal needs. These are: general partnership, limited partnership, joint stock, simplified joint stock, and limited liability. Investors may alternatively establish a branch of their foreign entities in KSA.
This article delves into understanding the concept of a Simplified Joint Stock Company (SJSC), a novel entity that amalgamates attributes and advantages from joint stock and limited liability companies. Tailored for the needs of small and medium-sized enterprises (SMEs), it provides enhanced flexibility, simplified formation, and streamlined share transferability. Key features of an SJSC encompass its absence of a minimum capital requirement, the ability to issue various share types, and the elimination of the necessity to convene meetings of the general assembly of shareholders.
A Simplified Joint Stock Company is a variation of a joint stock company characterised by its streamlined structure and increased managerial and governance flexibility. This unique corporate structure is specifically tailored to cater to the requirements of small and medium-sized enterprises (SMEs), offering them the advantages inherent in a joint stock company, including shareholders' limited liability, simplified share transfer procedures, and the capacity to issue various types of shares.
A simplified joint stock company can be established by one or more natural or legal persons, with no minimum capital requirement. The capital may comprise different classes of shares, with different share nominal values and rights, such as ordinary, preferential, or redeemable shares. The shares can also be subject to restrictions on their disposal, such as a lock-in period or a prior approval requirement, for up to 10 years.
Some of the other key features are:
A Simplified Joint Stock Company dispenses with the necessity for general assemblies, unless otherwise stipulated in its articles of association.
Shareholders retain the authority to wield their competencies and designate individuals, whether it be the director or the board of directors, to act on their behalf.
The director or the board of directors assumes the responsibility for managing the company and holds the power to commit it through their actions, unless the articles of association place constraints on their prerogatives.
Furthermore, the company has the option to establish mechanisms for dispute resolution, whether among shareholders or involving the director or board members, through methods like arbitration or alternative procedures.
A limited liability company is one of the most common forms of companies in KSA, as it provides greater flexibility and less regulatory restrictions than a joint stock company. However, a limited liability company also has some disadvantages, such as the difficulty of transferring shares, the prohibition of issuing different kinds of shares, and the inability to issue convertible debentures. The introduction of the simplified Joint Stock Company provides an alternative solution for investors in the region.
The table on the right summarizes the main differences between a simplified joint stock company and a limited liability company under the new Law:
Feature
Limited Liability Company
Simplified Joint Stock Company
Number of shareholders
Any number, but generally smaller than a joint stock company.
Any number, but generally smaller than a regular joint stock company.
Share Capital requirements
Subject to the Foreign Investment Laws and Regulations, the share capital requirements for a limited liability company are determined by the partners in the articles of incorporation.
The company's articles of association must specify the amount of authorised and issued share capital. Subject to specific requirements the paid-up capital may be less that the issued.
Types of classes of shares
Only indivisible and untradeable shares. No different classes of shares.
Can be divided into different classes with different rights.
Transferability of shares
Transfer of shares to third parties may be pre-empted by other shareholders (subject to the relevant provisions, existing shareholders may opt to acquire the shares before any other, interest third party). A share transfer must be registered with the Commercial Register.
Transfer of shares requires registration with the company’s shareholders' register and the Commercial Register.
Management
Managed by one or more managers appointed by the partners.
Managed by a president, manager, board of directors, or any other structure specified in articles of association.
Dispute resolution
The articles of association may provide for arbitration or alternative dispute resolution, which are alternative ways of settling disputes without going to court.
The articles of association may stipulate that disputes among shareholders or between the company and the president, manager or board member are subject to arbitration or alternative dispute resolution, such as mediation or conciliation.
A simplified joint stock company offers several benefits/advantages for businesses in KSA, such as:
It allows more flexibility and customization in the company's structure, governance, and decision-making.
It facilitates the transfer and sale of shares, which can attract more investors and partners.
It enables the company to issue different kinds of shares, which can accommodate different preferences and rights of shareholders.
However, a simplified joint stock company also has some drawbacks, such as:
It may entail more complexity and costs in drafting the articles of association.
It may create conflicts of interest or power imbalances among shareholders, especially if there are different types and classes of shares with different rights and obligations.
The simplified joint stock company presents a fresh alternative for investors and businesses in KSA, offering certain advantages akin to those of a traditional joint stock company as well as a limited liability companies. It is suitable for SMEs and start-ups that seek more flexibility, diversity, and growth potential in their business model.
Nonetheless, meticulous planning and precise formulation of the articles of association, along with adherence to applicable laws and regulations, are essential. Before selecting the most suitable form of company for their requirements, investors and businesses should assess the advantages and disadvantages of each and seek advice from legal and financial experts.
If you are interested in establishing an entity in the KSA, understanding the benefits of the different entities, or if you have any questions or concerns about entity incorporation or the new Companies Law, please contact our offices for expert advice and assistance. We have extensive experience and expertise in advising clients on the KSA corporate and regulatory framework and can help you navigate the requirements and opportunities in the region.
For further information,please contact Hesham Al Homoud and Antonis Theodosiou.
Published in January 2024
