We focus on the ability of corporate entities to issue tradeable debt instruments (bonds and notes) and Sukuk pursuant to the New Companies Law.
Rafiq JafferPartner,Banking & Finance
Muhammad MithaSenior Counsel,Banking & Finance
Abdulaziz AlHoshanAssociate,Banking & Finance
In line with the Kingdom of Saudi Arabia’s (“KSA") Vision 2030, the Council of Ministers approved the new Companies’ Law on 28 June 2022 enacted by Cabinet Resolution No. 678, dated 29/11/1443H (corresponding to 28th June 2022) and ratified by Royal Decree No. (M/132), dated 01/12/1443H (corresponding to 30th June 2022) (“New Companies Law”).
Our law update article on this subject will be a two part series. This law update article will focus on the ability of corporate entities to issue tradeable debt instruments (bonds and notes) and Sukuk pursuant to the New Companies Law. We will also present a snapshot of the threshold issues and key matters to consider when issuing such instruments.
We will issue a second part of this series in the following months and will cover details of regulations as applicable to private offering and public offering of debt instructions and Sukuk in KSA.
Under the previous companies’ law, various limitations applied on companies issuing bonds and Sukuk. Previously, only joint stock companies were able to issue debt instruments and these debt instruments were required to comply with Sharia principles. Limited Liability Companies were not permitted to issue debt instruments. The New Companies Law incorporates certain provisions that specifically deal with the issuance of debt instruments and Sukuk that help clarify the legal and regulatory regime as applicable to bond and Sukuk issuances in the KSA.
Who can issue – Pursuant to the New Companies Law, Joint Stock Companies (Article 117), Simple Joint Stock Companies (Article 138(1)) and Limited Liability Companies (Article 179) are able to issue debt instruments and Sukuk.
Convertible Bonds and Sukuk – Limited Liability Companies are not permitted to issue bonds or Sukuk that are convertible into shares. Such restriction does not apply to Joint Stock Companies or Simple Joint Stock Companies.
Types of issue – As mentioned above, while previously it was expected that joint stock companies would issue Sharia compliant instruments, the New Companies Law states that both ‘negotiable debt instruments’ and ‘Sukuk’ can be issued. Therefore, pursuant to the New Companies Law, Joint Stock Companies, Simple Joint Stock Companies and Limited Liability Companies would be able to issue Sukuk (i.e. Sharia compliant instruments) as well as conventional bonds / debt instruments provided that such debt instruments comply with the relevant laws and regulations of the Capital Markets Authority in the KSA.
Corporate approvals – The general assembly of the Joint Stock Company may approve the issuance of the debt instruments or Sukuk. Typically, such approval by the general assembly is granted upon the recommendation of the board of directors. The general assembly would approve the overall value of the issuance and grant the board of directors the necessary authority to determine and negotiate the specific terms and conditions of the issuance along with the relevant issuance and finance documents. Particularly in relation to a convertible bond or Sukuk issuance, the board of directors may approve the issuance of the new shares of the joint stock company at conversion without seeking any further approval from the general assembly for such increase, on the basis that the general assembly would have initially approved the issuance of the convertible bonds or Sukuk.
In relation to Limited Liability Companies, the Partners representing at least 75% of the capital are required to issue a resolution approving the terms of issue of the debt instruments and Sukuk in accordance with the conditions. As part of the corporate approvals, the managers of the company could be appointed to determine and negotiate the specific terms and conditions of the issuance along with the relevant issuance and finance documents.
Matters to consider – Particularly in relation to convertible debt instruments and Sukuk issued by Joint Stock Companies and Simple Joint Stock Companies, the board of directors must consider the pre-emption rights of the existing shareholders – such pre-emption rights must be waived by the existing shareholders as part of the corporate approval process.
While it is common for Joint Stock Companies to be able to issue such instruments, Limited Liability Companies or Simple Joint Stock Companies are typically unable to issue bonds or Sukuk due to limited capital of such companies.
The provisions of the New Companies Law open up new funding avenues for smaller sized entities (such as Limited Liability Companies or Simple Joint Stock Companies) to tap into alternative means of raising capital through issuance of debt instruments and Sukuk.
From an issuers perspective, there is much more flexibility in how the issuance could be structured. Depending on the business activities and the funding requirements, Limited Liability Companies or Simple Joint Stock Companies source funding from general public investors as opposed to the traditional bank borrowing route.
Bond or Sukuk of varying tenors (for example perpetual notes, medium term notes) and commercial terms (hybrid / convertible) could be structured based on company needs. Such bonds or Sukuk could be privately placed with identified institutional investors or listed on the exchange for trading purposes subject to compliance with the Capital Markets Authority’sies regulations.
Key Threshold Issues:Bond and Sukuk issuances would require approval from the Capital Markets Authority and are issued pursuant to the Rules on the Offer of Securities and Continuing Obligations (“ROSCO”). Securities may be offered under ROSCO by way of:
an exempt offer;
a private placement offer;
a public offer; or
a parallel market offer.
Key considerationsWhen assessing bond or Sukuk issuance transactions, the relevant issuer or sponsor entity should consider certain key aspects that would drive the overall structuring of the transaction and other legal and regulatory matters, for example:
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Identify the targetedinvestors category
Type of Issuer
Institutional and qualified clients
Special purpose entity
LLC / JSC / Simple JSC
Asset Backed- Securitized instruments
The ability of certain types of companies (as discussed above) to issue debt instruments against funding raised through the investors is a promising step in KSA to portray the country’s ability and willingness to support the growth of the corporations that are contributing to its economic revolution.
Implementation of change has already started – small and medium size corporates can take advantage of the change and start thinking about alternate funding sources for their business.
For further information,please contact , Rafiq Jaffer or Mohammmad Mitha.
Published in January 2023