The change in leadership in 2015 and subsequent launch of Vision 2030 has led to significant economic and political reforms in the Kingdom of Saudi Arabia. In addition to these reforms, there are notable changes and developments taking place within the legislative and regulatory framework, relating specifically to the transparent management of listed companies and enforcing good standards of corporate governance.
The Kingdom has relaxed its rules on foreign direct investment, actively encouraging growth in foreign capital into listed Saudi companies. In order to support that change, a key focus of the legislators and regulators in the Kingdom is to introduce regulatory improvements which will boost confidence in the market and ensure transparency in order to attract investors. This comes at a time when the Kingdom is suffering from the depreciation of oil prices and is looking to diversify its economy. The most high profile development is the proposed initial public offering (IPO) of part of Saudi Aramco, which is predicted to be one of the largest IPOs in history.
In this article, we provide a general overview of the remit of the Capital Markets Authority (the CMA), which regulates the issuance of securities and the activity of listed companies in Saudi Arabia. We highlight some of the high profile CMA investigations and securities disputes that are ongoing in Saudi Arabia, with possible implications for D&O and professional liability Insurers.
Finally, we look at new proposed changes recently published to the existing Securities Disputes Proceedings Regulations, by which a mechanism for class action suits in Saudi Arabia is proposed. This is a significant change and the first of its kind in the onshore regimes in the GCC. We discuss the implications of this below.
The Current Regulatory Framework
The CMA was established under Chapter Two of the Capital Markets Law which was passed in 2003. The remit of the CMA includes regulating and monitoring securities, as well as the activities of issuers of securities (i.e. listed companies) in Saudi Arabia. The Capital Markets Law emphasises the need for transparent disclosure of information connected with securities to shareholders and the public. Pursuant to Article 25 of the Capital Markets Law, a quasijudicial court was established known as the Committee for the Resolution of Securities Disputes (the CRSD), which has jurisdiction over matters which arise from breaches of the Capital Markets Law, including Shareholder claims. The CRSD can determine both civil and criminal matters and, amongst its broad powers, it can issue inter alia an award of damages, fines, an order for production of documents and restitutionary orders. A decision of the CRSD can be appealed to the Appeal Committee for the Resolution of Securities Disputes (ACRSD). The decisions of the ACRSD are considered final decisions and are not subject to appeal.
Recent High Profile Matters
There has been a visible increase in investigations commenced by the CMA against listed companies, their management individuals and other parties, such as auditors. These investigations are largely related to financial or accounting irregularities and have resulted in both civil and criminal sanctions.
A high recent high profile CMA investigation took place into a Saudi Arabia based engineering, procurement and construction contractor which underwent a IPO in 2008, raising sums in the region of SAR 6.5 billion.
In November 2014, the CMA issued proceedings before the CRSD against that company and management individuals and other related parties. The CMA’s case was that misrepresentation occurred at IPO stage, so that the IPO share price was incorrectly valued. There were also allegations of actual deliberate wrongdoing on the part of some of MMG’s key management individuals.
Subsequently, the CRSD banned the company’s auditors, a “Big 4” from carrying out audit work in Saudi Arabia for a period of 2 years, arising from their involvement in this case.
In June 2016, the CRSD imposed imprisonment on two management individuals of the company, as well as an order to pay the sum of SAR 1.62 billion (which the CRSD considered to be the level of unjust enrichment received by the directors, following the IPO). That decision was appealed to the CRSD and upheld in February 2017, so that the convictions and orders for payment are now final and not subject to further appeal.
Another accounting scandal that has struck Saudi Arabia and has wide ranging ramifications for international insurers is the CMA investigation and ongoing CRSD proceedings (led by the CMA) into Mobily (Saudi Arabia’s second largest telecoms provider) and its management individuals. Following a revision by Mobily of its financial statements, cutting its stated profit, a well-publicised CMA investigation took place leading to proceedings before the CRSD and share trading was suspended. Consequently shareholder claims have arisen.
Given the CRSD procedures in place at the moment, any shareholder claims that arise would each have to be progressed separately by different claimants with different legal representation, at different times. This can be a significant administrative challenge for the CRSD defendant companies and their management.
The Proposed Introduction of a Class Action Suit
On 15 May 2017, the CMA Board published a draft regulation to introduce a class action regime within the CRSD and the ACRSD process. This development is the first of its kind within the onshore GCC regimes although the DIFC Court (which is a common law system within a financial services free zone in Dubai) does have provision for a Group Litigation Order (GLO) to be made under the DIFC Court Rules. The regulation proposed by the CMA provides that under Article 1, a suit may be filed by one or more plaintiffs “on behalf of a group of persons who share an identical or similar suit in terms of legal bases, grounds and merits”.
The CRSD /ACRSD will approve a request subject to its discretion and when considering whether to allow a class action suit to proceed, consistency and fair treatment will be considered. Under Article 5, there will need to be at least 10 requests to register a class action suit within 3 months after the announcement of the first request.
Under Article 6, the CRSD/ACRSD could take the initiative to join identical or similar suits once a class action suit has been registered although a member of a class action suit could request to exit the group by way of a 30 days written notification.
Implications and Summary
This development has various benefits and should enable more efficient management of high volumes of shareholder claims that may arise from future scandals or ongoing high profile CMA investigations involving listed companies in Saudi Arabia.
In particular, the benefit of this development in the context of the current CRSD and ACRSD proceedings is that a class action regime will mean administrative ease, uniformity of the committee’s approach and uniformity in terms of the matters pleaded. It also means consistency of outcomes and judgments. This will in turn result in lower litigation costs, where one claim is pleaded and responded to (rather than multiple differently pleaded claims).
The development does however present a risk to management individuals of listed companies in Saudi Arabia, its Directors and Officers (D&O) and consequently D&O Insurers. Whilst there are great procedural advantages to a class action regime, this proposed change could signal an intention by the CMA to become even more aggressive in its approach against listed companies, such that it envisages increased shareholder action in the Kingdom. Finally, the availability of a class action regime may encourage shareholders to join and take collective action, where the costs of doing so will now be lower, if shared amongst multiple parties.
In summary, this is a notable development in this region and one which highlights the Saudi Arabian government and regulators’ determination to make it a place that is (i) robustly regulated, (ii) investor-friendly, both in terms of standards of transparency but also ease of litigation.