The new Companies Law introduces significant changes in the areas of governance, structure, penalties and punishments.  Implementation regulations are still awaited in relation to many of the changes; bylaws are currently being prepared by the Ministry of Commerce and Industry (“MoCI”).

General

The new Companies Law recognises that both Joint Stock Companies (JSCs) and Limited Liability Companies (LLCs) can be holding companies for a group of companies, as long as this is identified in the company name, in a move that is expected to assist large corporate groups and family businesses.

“In kind” contributions for shares, in either JSCs or LLCs, require valuation by a certified valuation expert, in order for such shares to be issued.

JSCs

The JSC minimum capital requirement is reduced from SAR 2 million to SAR 500,000, and the minimum number of shareholders has been reduced from five to two.  In certain cases, including where the share capital is SAR 5 million or more, a JSC may be formed by a sole shareholder.

The new Companies Law also provides legal guidelines for a JSC issuing tradable debt/financial instruments in accordance with Capital Market Authority (CMA) regulations.

In addition, JSCs are now expressly allowed to purchase or pledge their own shares.  It remains to be seen how this concept develops as an area of law considering the issues regarding financial assistance and capital maintenance that are relevant in other jurisdictions.

LLCs

Similar to JSCs, LLCs can now be established by a single shareholder, whereas under the previous law, a minimum of two shareholders were required.  However, an individual cannot own or establish more than one single shareholder LLC, and an LLC owned by a single shareholder (individual or company) cannot own or establish another single shareholder company.

Previously, if the LLC’s debts exceeded 50 percent of the company's share capital, the shareholders would become personally liable.  This was a notable issue that was often raised during due diligence exercises.  However, under the new Companies Law, the LLC will, in this situation, dissolve by operation of law if the shareholders fail to dissolve or recapitalize the LLC themselves.  Incidents of losses exceeding 50 percent of the LLC's capital are to be recorded in the Commercial Register by the managers.

The new Companies Law further modifies provisions regarding pre-emptive rights on transfer of shares. Previously, pre-emptive rights were only triggered if the transfer was for consideration and the statutory provisions prescribed a set notice period and method of valuation. Now, if a shareholder wishes to transfer its shares to a third party, with or without consideration, the shareholder must notify the other shareholders of the transfer conditions through the LLC’s manager and the Law provides that any interested shareholder can buy the shares at fair value within 30 days of being notified.  However, it also sets out that the shareholders can now agree on an alternative valuation method and notice period in the LLC’s articles of association.  

By way of a further progressive change, the new Companies Law allows companies, including LLCs, to publish their articles of association on MoCI’s website.  It is expected that this will help to reduce the costs of publication that were associated with incorporating LLCs.

Corporate Governance

There is a new focus on providing clearer guidelines in corporate governance, transparency and disclosure.

For example, the chairman of the Board of Directors in a JSC may not hold another executive position in the JSC.

In addition there is no requirement for a person to hold shares in the JSC before they can become a board member.  This is expected to encourage independence at board level, remove a potential barrier to M&A transactions and generally simplify procedures.

The minimum number of directors for a JSC board is three, with a maximum of eleven board members.

Further importance is given to the issue of transparency and governance by requiring every JSC to establish an audit committee to oversee its financial affairs.

Moves have also been made to modernise shareholder communications.  The new Companies Law allows shareholders the right to participate in the deliberations of the General Assembly and the right to vote on the decisions made by using modern technology and telecommunications.

Family Owned Businesses

Focussed support has been given to family owned businesses, recognising their role in the KSA commercial sector, and their significant contribution to the Saudi economy.  The Companies Law now allows single shareholder holding companies and a clear procedure to convert family owned companies to a closed JSC, if they wish to improve the business’s statutory corporate governance structure.

Punishments and Penalties

The new Companies Law provides sanction for breach by way of penalties and punishments, including imprisonment for up to 5 years, and fines up to SAR 5 million, and including potential  fines not exceeding SAR 500,000 for failing to publish the company’s financial statements or providing MoCI with the required documents. 

Conclusion

This is a progressive and welcome move by Saudi Arabia that is expected to help in growing the economy by eliminating hurdles for business owners and encouraging investment.