Following the issuance of the new Companies Law dated 28/01/1437H (corresponding to 10 November 2015G (the "Companies Law") there was concern around its effect on new and existing companies and in particular the entities that are licensed by the Saudi Arabian General Investment Authority ("SAGIA").
SAGIA has recently applied article (154) of the Companies Law, which indicates that the limited liability company can be formed by a single person (the "Article"). SAGIA has applied the Article in relation to new and existing investments through converting any limited liability company ("LLC") with more than one shareholder or any individual establishment to a limited liability company with a single shareholder.
We anticipate as a result of this development that SAGIA will receive many applications to establish companies, and/or for existing companies to amend LLC ownerships (i.e. transfer of shares to a single shareholder) or to convert legal structures (i.e. branch to LLC). Most foreign investors prefer to utilize one vehicle as the investment arm to invest in a specific region. However, based on the previous Companies Law, foreign investors who wish to avoid establishing a branch whether due to liability or tax reasons, had one option when it came to establishing an LLC which requires at least two shareholders. Therefore, the foreign investor had to partner with one of its subsidiaries or local partners as the second shareholder to fulfil the conditions of the previous Companies Law.
There are several advantages of applying the Article to include the new investments:
- First: It minimizes the number of required documents to one shareholder only when establishing an LLC. This will solve a vital issue, especially for investors in the management consultancy or contracting field as the requirements of such activities are high compared to other activities. For example, we have seen that many international management consultancy investors struggle to find another subsidiary with the same qualification of their parent company to fulfil the LLC set up requirements in light of the previous companies law. The same applies to contracting companies who wish to use their parent company to establish an LLC.
- Second: Is to facilitate the company management, whether by minimizing the number of directors or transferring all the reserved matters to the single shareholder. This will in turn, for example, render the issuance of a shareholder resolution easier and faster.
- Third: unlike the branch, the liability is limited with the freedom to manage the company.