Introduction of New Companies Law in the Kingdom of Saudi Arabia

Corporate Structuring / KSA

The new companies’ law has consolidated, clarified, and streamlined several corporate processes and, by the same token, improved certainty and predictability in relation to several provisions.Contents

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Law Update: Issue 363 - Energy, Utilities, Mining and COP28

Introduction of New Companies Law in the Kingdom of Saudi Arabia

Omar AlHumaid
Senior Counsel,
Corporate Structuring

PreambleOn the 19th of January 2023, the new companies’ law of the Kingdom of Saudi Arabia (adopted by Royal Decree no. M/132, dated 01/12/1443H - corresponding to 30/06/2022) has entered into force, marking one of the most significant milestones towards "Vision 2030" gigantic initiative. The Companies Law is accompanied by implementing regulations (adopted by Minister of Commerce Resolution no. 284, dated 23/06/1444H - corresponding to 16/01/2023G), which further clarify and canonise the provisions of the new companies’ law.Legal FormsThe new company’s law - the country's primary source of corporate structuring and governance - was revamped in a number of ways to align with the world's best business practices.In terms of legal forms, the new companies’ law has now introduced the Simplified Joint Stock Company. A Simplified Joint Stock Company is a variation of the joint stock company. In essence, a Simplified Joint Stock Company is subject to the same provisions applicable to joint stock companies, except the incorporation formalities, management, and shareholders' meetings, for which the new companies’ law makes separate provisions.At the same time, the new companies’ law has abolished the joint venture type of company. The abolition of the joint venture per se does not mean that investors may not pursue joint-venture initiatives. A joint venture could instead be formed under a different legal form, such as a limited liability company.In brief, the new companies law now regulates the incorporation and operation of the following legal forms: (i) general partnership, (ii) limited partnership, (iii) joint stock company, (iv) simplified joint stock company, and (v) limited liability company.Non-Profit OrganisationThe new companies’ law formally introduces and regulates non-profit organisations. Non-profit organisations may engage in business activities and contribute profits to pre-approved causes, be either public or private entities, and only be incorporated in prescribed legal forms. They may, nevertheless, allocate some of their profits to investments to maximise their profits.Professional CompaniesThe professional companies’ law and its implementing regulations were effectively replaced by the new companies law. In a nutshell, professional companies may be incorporated by licensed professionals, or licensed professionals and others, and may take any of the legal forms mentioned above, subject to further qualifications. Subject to additional requirements, licensed professionals may set up a professional company together with foreign professional companies, provided that the stake of the Saudi licensed professional is at least 25%.Shareholders' Agreement and Family CharterNotably, the new companies law formally recognises the validity of shareholders' agreements. According to the relevant provision, shareholders may, either during the incorporation process or following the entity's incorporation, enter into one or more agreements regulating the relationship between each other or the relationship between themselves and the company. Similarly, in the case of companies closely held by families, shareholders may enter into family charters regulating the ownership and management of the company, employment of family members, and other related issues.Limited Liability CompanyConcerning limited liability companies - the most common investment vehicle for foreign investors who wish to do business in the Kingdom of Saudi Arabia - the incorporation and commercial registration formalities and processes largely remain the same. The articles of association must be agreed upon, approved by the Ministry of Commerce, and notarised before a notary public. Following incorporation, the company's articles of association must be published, and the newly incorporated company must be registered with the Commercial Register of the Ministry of Commerce.At the management level, a new provision now requires the shareholders of a company with a sole director to appoint a new director within fifteen (15) days from the date they became aware of the director's vacancy. The same provision provides that, in such case, the company's auditor or the shareholders may convene a general assembly meeting to appoint the new director.Furthermore, the new companies’ law has repealed the statutory reserve requirement. It now falls upon the discretionary powers of the shareholders to determine, either under the articles of association or by a separate resolution, whether the company should allocate an amount of the net profits to specific reserves, to be used in achieving certain business goals.In addition, drag-along and tag-along rights may now form part of the company's articles of association. In brief, a drag-along right is a right of the majority shareholder to oblige the minority shareholder to accept a third party's offer to purchase all the shares in the company under the same terms and conditions. On the other hand, a tag-along right is a right of the minority shareholder to oblige the majority shareholder to guarantee the sale of minority shares under the same terms and conditions applicable to a proposed acquisition of the majority shares.Under the previous companies’ law, if the losses of the company, at any point, were equal to 50% of the company's share capital, the director(s) were obliged to register the losses with the Commercial Register and, additionally, convene the general assembly, within ninety (90) days from the date they have been aware of the loss, in order for the shareholders to consider whether the company should continue its business or be dissolved. Under the new companies’ law, such a loss is no longer registrable with the Commercial Register. The director(s) are only obliged to convene the general assembly, within sixty (60) days from the date the loss came to their knowledge, to consider the continuation of the company, by taking measures to eliminate the loss, or its dissolution.As a last point, a new visionary provision in the companies’ law provides that the articles of association of a company may make provisions for the settlement of disputes arising between the shareholders or between the company and its directors by resorting to arbitration or other means of alternative dispute resolution.ConclusionOverall, the new companies’ law has consolidated, clarified, and streamlined several corporate processes and, by the same token, improved certainty and predictability in relation to several provisions, and in the long run, will increase the investors' confidence in the Kingdom's booming economy.

For further information,
please contact Omar Alhumaid.

^{Published in November 2023}