Welcome change: The new Saudi companies law
A new Saudi Companies law has brought with it changes and innovations which, as our partner, Edoardo Betto explain, look likely to support the Kingdom’s booming venture capital market.
“After two years of drafting, consultations and reviews, the Saudi Arabian Cabinet approved the new Saudi Companies Law on 4 July 2022 through Saudi Arabia Cabinet Decision No. 678/1443 (the 2022 Companies Law),” states Edoardo Betto. “This law was then published on 22 July 2022. As a result, the current Saudi companies legislation, issued in 2015, and the Law on Professional Companies have been repealed, modernised and consolidated within the 2022 Companies Law.”
“It is significant to note that it took 50 years to update this cornerstone piece of legislation, as the first and original Companies Law was issued in 1967. However, it took only seven years to release new companies legislation from when the previous version was issued in 2015.”.
“This clearly shows the speed taken in order to ensure the legislative framework is in line with Saudi’s 2030 Vision and a fast-paced economy.”
New business types
“Although we are yet to see the impact of the 2022 Companies Law and will not be able to fully assess this until its Implementing Regulations, which are yet to be issued, come out, this new Law should not simply be dismissed as an updated version of the 2015 Companies Law as, in many respects, it is a complete reboot of that law, ” states Thamer Alzayer.
“One example of this is that the 2022 Companies Law has introduced a completely new type of company – the Simplified Joint Stock Company (SJSCs),” Alzayer adds. “This form of company will surely cater for Saudi’s booming venture capital market. In addition, drawing on the Saudi Capital Market rules, the concept of small and micro companies has also been introduced to cater for the growing domestic SME and start-up eco-system.”
“These entities have been introduced to simplify the management of companies, provide economic, social and structural reforms and changes to the overall business landscape that have been taking place so quickly in Saudi Arabia in recent years and have required significant changes and updates to companies legislation, greater flexibility for business owners and to encourage investments,” Alzayer continues. “The Implementing Regulations will clarify what constitutes a micro or small company.”
“Another new concept introduced by the 2022 Companies Law is that of the non-profit company,” Betto adds. “The aim is to cater for the third sector and help stimulate social responsibility. These type of company will also be able to receive gifts and bequests, which was something of a grey area previously.”
“Professional companies can also now be established among professionals who are licensed to practice different professions, such as auditors and lawyers, subject to what will be stated in the Implementing Regulations and the rules of their relevant professional bodies,” Betto adds.
Related legislation
Article 153 of Saudi Arabia Cabinet Decision No. 678/1443 With the exception of criminal acts, the Company’s Statute may provide for the settlement of disputes or conflicts of whatever nature which may arise among the shareholders or between the Company and its president, its manager or any member of its Board of Directors by resorting to arbitration or other alternative dispute resolution methods. (Source: Lexis Middle East Law)
Joint Stock and Limited Liability Company changes
“One of the changes we are most excited about is the possibility for Joint Stock Companies (JSCs) to provide for share classes other than ordinary, preference and redeemable, therefore widening the flexibility of company structures to attract investment,” Betto states. “This looks likely to stop the trend that in the past saw companies incorporating in other neighbouring jurisdictions which allowed this.”
“Another significant change designed to attract and motivate talent is the introduction of the possibility for Saudi JSCs to issue shares or options to dedicated employees for example by way of Employee Stock Option Plans.”
“In addition, the 2022 Companies Law has removed the limitation on a maximum of 11 individuals permitted to sit on the board of directors of JSCs as well as the ceiling on their compensation, which was capped at SAR 500,000,” Alzayer adds. “This will give these companies greater flexibility on their board structures and the remunerations at Board level, which should help attract top talent to Saudi Arabia at an executive level.”
“The introduction of a wide array of instruments for Limited Liability Companies (LLCs), such as the possibility to issue bonds and sukuks (to raise capital), to pledge shares as a form of guarantee or buy-back their shares to be held in treasury, for a variety of reasons, including to pay off investors, is also generating excitement,” Betto adds. “This will provide LLCs with greater flexibility in their approaches.”
“The final recognition of drag along and tag-along rights for JSCs and LLCs is also an interesting development,” Betto continues. “Though these forced-sale contractual provisions were common in the past they were largely unenforceable.”
“However, the positive impact of this change has been reduced by the fact that the 2022 Companies Law states that, in order to be enforceable, these provisions must be included in the company’s articles of association and are subject to the approval of at least 90% of the company’s capital which is certainly a high threshold to exercise a drag-along or tag-along right and resembles more of a ‘squeeze-out’ process.
It is hard to see why a 10% minority shareholder willing to exercise a tag-along right would require the approval of the 90% of the capital to exercise such right. Unfortunately, these provisions are not as flexible as those found in some other jurisdictions. We are hopeful the Implementing Regulations will revisit this point.”
Related story
Action Required: A Practical View on the New KSA Companies Law2022-09-14_39
As part of a surge of issuing and refreshing laws and regulations, Saudi Arabia has recently issued the new Companies Law by Saudi Arabia Royal Decree No. M132/1443 on the Approval of the Companies Law (equivalent to Saudi Arabia Cabinet Decision No. 678/1443 on the Approval of the Companies Law). Shareholders, those who are part of senior management of a Saudi company or banking or financial institutions, are likely to have to start preparing for the changes.
Other changes
“Other areas of change include that shareholder agreements and family charters will also now be officially recognised,” states Betto. “In addition, the distribution of interim dividends is also now officially codified and articles of association, bylaws and commercial registration certificates which contain key information like the identity of the owners and, at times, the authority of the managers can also now be officially disclosed to the public. Another area of change is that the notion of control for holding companies has been clarified and their remit expanded.”
Corporate governance
“However, one of the most significant changes introduced by the 2022 Companies Law has been the codification for the first time ever of the fiduciary duties of company managers and their accountability for any breach of those duties “ Alzayer adds. “In fact, a whole new standalone chapter in the law is dedicated to this subject. Hopefully, this will encourage good corporate governance practices which are more closely aligned to those in Western jurisdictions and even neighbouring UAE.”
Shareholders, Joint Venture Agreements and Family Charters
“As noted, the 2022 Companies Law also provides for the recognition of shareholders. Joint venture agreements and family charters as long as they are referenced in the articles of association or bylaws,” states Alzayer. “This will validate them before the Saudi courts if there is a dispute between the shareholders. This may imply that the terms of these agreements would override or complement the terms of the articles or bylaws so long as they do not contravene Saudi’s mandatory laws. In the past, these agreements were not clearly recognised by the Saudi Arabian courts and enforcing certain provisions included in these supplemental agreements was time consuming,” Betto adds.
“Another key change is that the two-year mandatory lock-up period for shareholders of JSCs on incorporation has been removed.”
Next steps
“Saudi Arabia Cabinet Decision No. 678/1443 is due to come into force on 18 January 2023,” states Betto. “The Implementing Regulations, which will give a fuller picture of the change, are also expected to be released before or around the same time as the new Law comes into force.”
“Both established companies and companies under-formation should review their current articles of associations from the perspective of the new law and amend their constitutional documents and corporate structure to comply with any changes required by the new Law,” states Alzayer. “When doing this and deciding what changes to make, they should also take full advantage of the novel provisions in this law which allow for greater flexibility. Existing companies will have to adjust their current structures and Articles of Association within two years of its coming into force, that is by 18 January 2025. As done previously, we expect the Ministry of Commerce to issue new standard model articles of associations and bylaws in due course, which will help with this.”
“This new law will enable the increasing number of entrepreneurs and venture capital firms operating in Saudi Arabia to incorporate as SJSC there,” Alzayer adds. “These can be incorporated by one or more shareholders and divided into various classes of shares providing ultimate flexibility from a management perspective. These changes will allow swift access to the Saudi capital and venture market and will provide shareholders with the ability to construct their businesses in a more bespoke way that better aligns with their business needs and ambitions.”
“This new law should also encourage the flow of further foreign investments into Saudi by introducing mechanisms and structures widely used in other jurisdictions across the globe and will also likely reduce barriers to entry into this market.”
Authored by: Edoardo Betto*
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