Thoroughly Modern Legislation

As first published in the February/March 2016 issue of the Lexis Middle East Law Alert

With Saudi Arabian company law dating back to the 1960s, legislators there decided a clean sweep was needed. Amgad Husein and Jonathan Burns of Dentons explain the likely impact of the new more modern regime there.

"The truth is for some time the business community in Saudi Arabia have felt the Kingdom's 1965 Companies Law needed overhauling. Many of the provisions had become dated as a result of more modern commercial complexities."

"Things have changed. For example, since the sixties there has been considerable growth in the number of large family-owned Saudi Arabian conglomerates and the Saudi Arabian capital markets regime, which in turn has seen an increase in the number of public listings."

"There has also been a number of amendments made to the 1965 law since it was initially issued and it was felt by some that it was time for a clean slate as a result of this," Amgad Husein explains.

“As a result, on 9 November 2015, the Saudi Arabian authorities announced a new Companies Law and a new set of company regulations, which had been approved by the Council of Ministers and the Shoura Council earlier in the year, would soon be adopted. They were then adopted with the passage of Royal Decree No. 3/1437 and Article 106 - Saudi Arabia Cabinet Decision No. 30/1437 in December 2015."

"These new laws repeal Saudi Arabia Royal Decree No. M6/1385 and its corresponding Cabinet Decision. Under Article 227 of the new law, the new regime will come into force on 2 May 2016 (or 150 days after its publication in the Official Gazette),” Husein says.

"The new companies law includes several changes to the previous 1965 law. Some will have little to no
impact on investors doing business in Saudi Arabia, but there are others which will definitely have a significant impact,” Husein adds.

Joint Stock Company change

“Under the 1965 law, Joint Stock Companies (JSCs) have to be established with a minimum 2 million Riyals paid-up capital and could not be owned by less than five shareholders."

"Under the new law, however, JSCs need a minimum of just 500,000 Riyals paid-up capital and have to be owned by no less than two shareholders."

"In addition, a JSC can be wholly owned by a single shareholder if the paid-up capital amount is no less than 5 million Riyals or the single shareholder is the Government, a company wholly owned by the
Government, or any other public entity.

"This is particularly important because, under the 1965 Law, a minimum of five shareholders were
required to set up a JSC. If an exception needed to be made, a specific Royal Decree had to be issued
allowing this. These Royal Decrees will no longer be needed, which simplifies the position."

A single shareholder

"In addition, under the 1965 Law, the corporate forms available for incorporation had to be owned by a
minimum of two partners, owners or shareholders, although Saudi Arabian sole proprietors were able to
register as an ‘establishment’ and foreign investors could set up a wholly owned ‘branch’ office as a matter of policy. However, establishments and branches were not officially recognised corporate forms under both the 1965 law and the new law. The new law does allow a single shareholder to incorporate a limited liability company (LLC). A single shareholder can also now incorporate a JSC with a minimum paid-up capital of 5 million Riyals but there is a restriction."

"Under Article 154.2 of the new law, a natural person may not be the sole shareholder in more than one
single owner LLC and an LLC owned by a single shareholder (whether a natural or legal person) may not be the sole shareholder in a subsidiary LLC," Husein explains.

Reserves

"The new legislation also covers the area of reserves."

"Under the old law, LLCs and JSCs had to set aside 10% of their net profits each year as a statutory reserve until that reserve reached 50% of the company’s paid-up capital amount."

"Under the new law this provision is less onerous. LLCs and JSCs must set aside 10% of their net profits each year as a statutory reserve until the reserve reaches 30% of the company’s paid-up capital amount."

"This will require shareholders of both LLCs and JSCs to ‘trap’ less cash than before. It will be especially helpful for those companies which have a very high paid-up capital requirement as it will help
improve their cash flow.”

Losses

“Another interesting change is in the area of loss liability."

"Under the old law, where the losses of an LLC exceeded 50% of the paid-up capital amount,
shareholders could be held personally liable for the company's debts."

"Similarly, if a JSC's losses exceeded 75% of its paid-up capital amount, the company could be
dissolved by operation of law if the shareholders did not meet to decide on the continuation or dissolution of the company.”

“Under the new law, shareholders of an LLC whose losses exceed 50% of its paid-up capital amount will not be held personally liable for the LLC's debts."

"Instead, the shareholders must meet and decide whether to dissolve the company and publish this
decision if applicable."

"However, if no meeting or decision is made, the company will be considered to be dissolved by
operation of law."

"There are also changes for JSCs. Where a JSC's. Where a JSC's losses exceed 50% of its paid-up capital amount, the company may be dissolved by operation of law if the shareholders do not meet to decide on the continuation or dissolution of the company.”

Management and directorial responsibilities

“The new law also has specific provisions outlining management and director responsibilities. These
include liability for not publishing the company's articles, management liability for not complying
with the company's articles of association and general mismanagement of the company."

"There is also liability as a result of an improper resignation, liability for damage arising out of breach of confidentiality and a statute of limitations of five years,” Husein notes.

More minor changes

“There are a number of smaller procedural changes to note. For example the new law allows online publication of articles of association and amendments, as part of the Kingdom's growing
trend to do more business online."

"The par value of shares in JSCs has been reduced from 50 to 10 Saudi Riyals under the new legislation. JSC boards of directors must also have between three and 11 members under the new law. In addition, although previously JSC directors were required to own shares in the company with a value of at least 10,000 Riyals, under the new law, they are not required to own any shares in the company," Jonathan Burns says.

Impact

“This new law includes some significant changes and will modernise the company law regime in Saudi
Arabia. Companies doing business in Saudi Arabia should benefit from it and from the increased attention by the authorities on regulations affecting companies doing business in the Kingdom."

"In fact, with advice from experienced counsel, companies should be able to increase their profitability and reduce their risks by leveraging the changes in this new legislation. However, it will also be interesting to see how the Saudi Arabian authorities like the Ministry of Commerce and Industry implement these proposed changes as a matter of practice,” Husein concludes.