Kingdom of Saudi Arabia – Share Pledges in Limited Liability Companies and Unlisted Joint Stock Companies

Saudi Arabia Focus

Kingdom of Saudi Arabia – Share Pledges in Limited Liability Companies and Unlisted Joint Stock Companies

Aurangzeb Maqsood
Senior Associate,
Banking & Finance

Ghadah Al Nafea
Associate,
Banking & Finance

The newly issued Companies Law came into force in January 2023 and has brought in significant changes that will have a long-lasting impact on trade and commerce and finance in the Kingdom of Saudi Arabia (“KSA”). From a debt finance perspective, one major change has been the creation of a framework for shareholders to pledge shares in a limited liability company (“LLC”). The Companies Law also clarifies the position relating to the creation of security over shares in joint stock companies (“JSC”) including the newly created simple joint stock company. This article will examine the developments relating to pledge of shares in LLCs and JSCs.Pledge of Shares in a Limited Liability CompanyBefore the new Companies Law was enacted, the process for pledging of shares in an LLC was not expressly provided under any law. This was a cause for uncertainty when it came to creating security over shares in an LLC. It was understood that a pledge over shares of an LLC would be governed by the Movable Assets Security Law and the Amendment to the Commercial Pledge Law . With the implementation of the new Companies Law, the process of pledging shares in LLCs has been clarified. The changes brought about by the Companies Law provides a clear legal framework for shareholders to pledge their shares as collateral for loans or other financial obligations. RequirementsUnder Article 180(2) of the Companies Law, a shareholder of an LLC can pledge its shares and the secured party is also entitled to receive the dividends of such shares unless otherwise provided in the pledge agreement. Articles 68 and 69 of the Implementing Regulations to the Companies Law provide the requirements for a valid share pledge to exist.

Article 69 of the Implementing Regulations specifies the basic elements that must be included in share pledge agreements for pledge of shares of an LLC. These agreements must include the following details:

the names, ID numbers, and addresses of the shareholder and the pledgee (secured party);

the number of pledged shares, the value thereof and the LLC’s commercial registration number;

the total debt secured by the pledge and its upper limit (if any);

the names, ID numbers, and addresses of the debtor (if different from the pledgor);

the date of the pledge agreement;

terms and conditions for pledge release; and

any other terms that the parties have commercially agreed upon.

The Companies Law does not specify any requirements to carry out registration of the pledge over shares or any other perfection steps to be taken. However, it is debateable as to whether or not registration of a share pledge relating to shares of an LLC would continue to be required under the Movables Asset Security Law. As a matter of practice, we expect that the registration on the Unified Register for Rights Over Movable Assets would continue to be a requirement. Pledge of Shares in an Unlisted Joint Stock CompanyPledge of shares in an unlisted joint stock company (“Unlisted JSC”) were previously governed under the now repealed Regulatory Rules of Unlisted Joint Stock Companies. The Regulatory Rules of Unlisted Joint Stock Companies have now become a part of the Implementing Regulations of the Companies Law and process for the pledge of shares of an Unlisted JSC have been provided under such Implementing Regulations.RequirementsArticles 46, 47, 48 and 49 of the Implementing Regulations stipulate the requirements for the pledge of shares on an Unlisted JSC. Article 48 of the Implementing Regulations specifies the basic elements that must be included in the share pledge agreements relating to shares of an Unlisted JSC. These agreements must include the following details:

The names of the pledgor shareholder, the name of the pledgee, their respective identifications and addresses;

The quantity of pledged shares, their value and serial numbers, as well as name of the issuing company and the commercial registration number thereof;

The total debt secured by the pledge and its maximum limit (if any);

The debtor's name, identification number and address;

Terms and conditions for pledge release; and

Article 49 of the Implementing Regulations provides the procedures for the recording, registering and releasing of the pledge of shares of an Unlisted JSC:(a) Pledge Application: Where the Unlisted JSC prepares and maintains a shareholders register itself, the pledgee and the pledgor shareholder must submit the pledge application to the chairman of the board of directors of the Unlisted JSC. The application forms and process of authentication of signatures are provided for in the Implementing Regulations.
(b) Recording: The pledge will then be recorded in the shareholders register of the Unlisted JSC, and the certificate of the pledged shares are required to be annotated indicating the pledging thereof and the name of the pledgee.
(c) Release: the pledge will be released upon the expiry of the term of the pledge (if any) or by virtue of a request for release of a pledge by using the format annexed to the Implementing Regulations.

The said pledge over shares of an Unlisted JSC will not be effective until it is registered in the shareholders register.

For further information, please contact
Rafiq Jaffer, Aurangzeb Maqsood
and Ghadah Al Nafea.

^{Published in March 2023}