The new KSA Companies Law (the New Law) will come into force tomorrow on 2 May 2016 (the Effective Date). The manager/directors of any company that is incorporated in the KSA should start to consider what changes may need to be made to the company’s articles of association or bylaws (collectively, the Constitutional Documents). Since our communication last week on the New Law, we have been busy advising our clients on its implications for their businesses and corporate structures. We would be delighted to also assist you in this respect. Please contact Alain Sfeir or Nouf Aljoaid using the details below if you wish to have a discussion about this.
Further to our previous update regarding the highlights of the New Law, this article sets out some of the required next steps managers/directors need to take to ensure their companies’ Constitutional Documents are in line with the New Law.
The grace period
Article 224 of the New Law allows existing companies a 12 months grace period (the Grace Period) after the Effective Date in which the companies must adjust their positions. This means that existing companies need to amend any conflicting provisions in their current Constitutional Documents by the beginning of May 2017. The Grace Period does not include new companies that are established after the Effective Date. Additionally, violations and sanctions set out in the New Law will be enforceable on the Effective Date.
It is important to note that the Grace Period does not mean that existing companies should not comply with the New Law for a year. The New Law states that the Ministry of Commerce and Industry (MoCI) and the Capital Market Authority (CMA) board can exceptionally determine certain provisions of the New Law that will be effective on existing companies upon the Effective Date.
Joint stock companies (JSC)
The MoCI and the CMA jointly issued a statement recently clarifying the implementation mechanism for the New Law in respect of JSCs and holding companies. The announcement specified some examples of provisions in the New Law that will fall under the Grace Period for existing companies and others that must be implemented upon the Effective Date.
Provisions that existing JSCs must abide by upon the Effective Date
- Article 90: Shareholders’ ordinary general assemblies (OGA) or extraordinary general assemblies (EGA) are held by notice from the JSC's board of directors in the manner prescribed in the JSC’s bylaws. The Board must call for a general assembly meeting pursuant to a request by (i) the JSC's auditor; (ii) the audit committee; or (iii) a number of shareholders representing at least 5% of the share capital. However, the JSC's auditor may call for the meeting if the board of directors did not call for the same within 30 days from the auditor's request. The OGA can be held by virtue of a resolution issued by the MoCI/CMA in certain cases such as the occurrence of discrepancies between the New Law and the JSC's bylaws or there are flaws in the JSC's management. Additionally, a number of shareholders representing at least 2% of the JSC's capital can submit a request to the MoCI/CMA to call for the OGA if such case, or others mentioned in article 90.2, occur. In this case, the MoCI/CMA must call for the meeting within 30 days from the date of the shareholders' request, provided that the call must include the agenda of the meeting and the items to be approved by the shareholders.
- Article 95: The JSC’s bylaws must state the manner of voting at general assembly meetings whereby the accumulative voting method must be used in electing the board of directors to ensure that each share has only one vote. In addition, the board of directors cannot participate in voting for general assembly resolutions related to discharging such directors' liabilities from the management of the JSC or those related to a direct or indirect benefit to them.
Provisions that fall under the Grace Period
- Article 68.1: The JSC must be managed by a board of directors whose number of members is specified in the JSC’s bylaws provided that the board consists of at least 3 and not more than 11 directors.
- Article 76: The JSC’s bylaws must specify the manner of remunerating the members of the board of directors. Such remuneration may represent a specific amount, an attendance allowance, in-kind benefits or a certain percentage of the JSC’s profits and two or more of these types of remunerations may be combined. If the remuneration is a share of the profits such share must not exceed 10% of the JSC’s net profits after deducting the agreed reserves and distributing dividends to the shareholders of at least 5% of the paid up capital, provided that such remuneration is proportionate to the number of meetings the director attends. In all cases, the total remuneration a director receives must not exceed SAR 500,000 per year, be it in cash or in-kind. Additionally, the board of directors’ report to the JSC’s OGA must include a full statement of the remunerations received by the board of directors during the financial year, the number of board of directors' meetings and the number of those attended by each director as of the date of the last general assembly meeting. Furthermore, based on the board of directors’ recommendation the general assembly may terminate the membership of a director who fails to attend 3 consecutive board meetings without a reasonable excuse.
- Article 81.1: The board of directors must appoint from amongst its members a chairman and a vice chairman; and it may also appoint a managing director. A single director cannot hold the positions of a chairman and any executive position in the JSC simultaneously. In addition, the JSC’s bylaws should specify the duties and authorities of the chairman and the managing director as well as the special benefits each receives over the board of director’s prescribed remuneration.
- Articles 101 to 104: These provisions address the formation of the JSC’s audit committee and its mandate.
- Article 150: If the losses of the JSC reach 50% of its paid up capital, the board of directors must send a notice within 15 days of being informed of the losses to hold an EGA meeting within 45 days of knowing of the losses to determine whether the JSC’s capital should be increased or decreased or if the JSC should be dissolved. The JSC will be deemed dissolved by force of law if (i) the EGA is not convened within the prescribed period; (ii) the EGA is convened but fails to determine the matter; or (iii) the EGA decided that the capital should be increased and no subscription for increase of capital is made within 90 days from the date of issuing the resolution of increase.
While existing JSCs are granted a Grace Period to justify their position, it is important to note that they cannot take any new action contrary to the New Law after the Effective Date. For example, the MoCI/CMA announcement clarified that an existing JSC must adhere to article 68.1 mentioned above if it wishes to appoint a new board member. Article 101 to 104 must also be complied with in relation to the formation or reformation of the audit committee.
In addition to the announcement made by the MoCI and the CMA in respect of JSCs, the announcement also addressed the formation and regulation of holding companies. The announcement mentioned that the following provisions in the New Law fall under the Grace Period.
- Article 182: The holding company can either be a JSC or a LLC aiming at controlling other JSCs or LLCs that will be called subsidiaries. This control occurs by owning more than 50% of the capital of such subsidiaries or controlling the formation of their board of directors.
- Article 183: The objectives of a holding company include (i) managing the subsidiary or participating in the management of other companies in which it has shares and providing such companies with the required support; (ii) investing its funds in shares and other securities; (iii) owning properties and movables to conduct its business; (iv) submitting bids, bonds and finance to the subsidiaries; (v) owning industrial property rights, patents, trademarks, industrial marks, rights of concession and other moral rights; using and leasing the same to the subsidiary or third parties; and (vi) any other valid activity commensurate with the nature of the company.
- Article 184: Subsidiaries cannot own shares or stocks in the holding company. Any act leading to the transfer of shares or stocks from the holding company to the subsidiary will be considered null and void.
- Article 185: At the end of every financial year, the holding company must prepare consolidated financial statements including its financials and those of its subsidiaries.
- Article 186: The holding company will be subject to the same rules and regulations of the type of company it falls under i.e. JSC or LLC.
Amendments to the Articles of Association of a limited liability company (LLC)
Within the Grace Period LLCs are expected to begin filing their applications to amend their articles of association (Articles) to comply with the provisions of the New Law. The MoCI has issued template Articles for LLCs to use as a guideline in drafting their own Articles. We highlight below a few of the changes in the template Articles for LLCs.
- General assembly: The general assembly meeting must be convened within 4 months (used to be 6) following the end of the LLC’s financial year.
- Accounts and reporting: The LLC’s managers are required to prepare the accounts and reports within 3 months (used to be 4) from the end of the financial year and share them with the MoCI within one month (used to be 2) of preparation.
- Transfer of shares: If a shareholder wishes to transfer its shares to a third party, either with or without consideration, the shareholder must first notify the other shareholders of the transfer conditions through the LLC’s manager. In this case, any interested shareholder can buy these shares at fair value within 30 days of being notified. However, the shareholders can agree on an alternative valuation method and duration in the LLC’s Articles.
- Statutory reserve: The LLC can decide to stop setting aside 10% of its net profit when the reserve reaches 30% of the capital (used to be 50%).
- Losses: Where the losses of the LLC reach 50% of its capital the LLC’s managers must record such incident with the Companies Commercial Registry and must serve a notice on the shareholders to a meeting in no later than 90 days from the date of knowing of such loss to consider whether the LLC should continue or be dissolved. The LLC will be dissolved by force of law if (i) the LLC’s managers fail to send a notice to the shareholders; or (ii) the shareholders fail to pass a resolution on whether the LLC should continue or be dissolved.
The managers / directors must check that their Constitutional Documents do not contradict any of the provisions of the New Law. As with many new, important pieces of legislation, it may take some time for the whole impact of the New Law and its interpretation to be understood by the market and to be fully reflected in practice. However, managers/directors are well advised to think about the changes which may need to be made, not only to the existing Constitutional Documents, but also with respect to how they conduct their corporate affairs.
The authors would like to thank Sofanah Hakeem for her contribution to this article.