349
Legal Framework
Overview of the law for both local and foreign investors
Regulations on owning property for non-GCC nationals
Up-to-date laws on intellectual property and copyright
Environmental guidelines for construction projects
New standards for disclosure of financial information
LEGAL FRAMEWORK OVERVIEW
Financial regulations are subject to both sharia and legal decrees
The growth of the Saudi economy over the last few
decades has been nothing short of staggering, and
today the country is one of the top 20 economies in
the world. Historically, the hydrocarbons sector has
dominated the economy, though growth in other segments,
including industry, manufacturing, retail, trade
and construction, has created tremendous opportunities
in the private sector. As part of the growing economy,
the legal and regulatory framework has evolved
to accommodate new needs. In this section, we highlight
a number of the main regulations of which any
investor in Saudi Arabia should be aware.
SOURCES OF LAW & REGULATIONS: Islamic sharia is
the main source of law in Saudi Arabia. Sharia is composed
of a collection of fundamental principles derived
from a number of different sources, including the Holy
Quran, the Sunnah, or sayings of the Prophet Muhammad,
and the opinions and interpretations of sharia
scholars. Enacted legislation is a second source of legal
decrees in the country and can be authorised via royal
orders, royal decrees, resolutions by the Council of
Ministers, and ministerial resolutions and circulars,
among other means. All such laws are ultimately subject
to, and cannot conflict with, sharia.
FOREIGN INVESTMENT REGULATIONS: There are a
number of rules governing foreign investment:
Foreign capital investment: The Foreign Investment
Law (Royal Decree No. M/1 dated 5/1/1421H, corresponding
to 10/4/2000) requires any firm in Saudi
Arabia that has foreign shareholders to obtain a foreign
capital investment licence. All licences for foreign
capital investment are issued by the Saudi Arabian General
Investment Authority (SAGIA). Also, note that for
the purpose of the Foreign Investment Law, corporate
entities based in GCC member states are treated as Saudi
firms and are, therefore, not subject to the Foreign
Investment Law. However, in the case that a corporate
entity established in another GCC state has any shareholders
who are not nationals of the GCC, the Foreign
Investment Law would apply to such investments.
As a general rule, there is no limit to the amount of
foreign investment that can be invested in a company
incorporated in Saudi Arabia and the establishment of
100% foreign-owned companies is permitted in most
cases. The Supreme Economic Council is responsible
for issuing and periodically updating a list of activities
(generally referred to as the Negative List) that foreign
investors are prohibited from carrying out in Saudi Arabia.
For the most up-to-date Negative List and minimum
capital requirements visit: http://www.sagia.gov.sa. In
addition, there are certain caps on foreign ownership
in certain types of business. For example, foreign ownership
for firms that engage in retail and wholesale is
limited to 75% and the minimum foreign investment is
SR20m ($5.33m). Certain sectors, such as health care
and education, may also have additional restrictions on
foreign investors imposed by the regulatory authorities
for the sector, or sector-specific rules.
When licensed under the Foreign Investment Law, a
company enjoys all privileges and incentives offered to
wholly Saudi-owned companies, such as ownership of
freehold property, which is necessary to carry out
licensed activity; privileges granted by the anti-double-
taxation treaties to which Saudi Arabia is a party;
prohibitions against expropriation or confiscation of
investments; rights to repatriate profits; etc.
Incorporating a local entity: The Regulations for Companies
(Royal Decree No. M/6 dated 22/3/1385H, corresponding
to 22/7/1965) sets out the rules for the
establishment and governance of Saudi corporate entities.
The main forms of legal entities are the limited liability
company (LLC), the joint stock company and the
branch of a foreign company.
Other notable forms of legal entities include the sole
proprietorship and the general partnership. It should
be noted that a new version of the Regulations for
Companies is in the process of being developed.
(i) Limited liability companies: The most common form
of company in Saudi Arabia is the LLC. It should be noted
that an LLC is the most common corporate vehicle
351
THE REPORT Saudi Arabia 2014
Informed investing
Regulations relating to the investment landscape for both foreign and
local investors
LEGAL FRAMEWORK OVERVIEW
for equity participation by foreign investors. An LLC
must have a minimum of two shareholders and may not
have more than 50 shareholders. Natural persons and
corporate entities may be shareholders.
Generally, shareholders are liable for the debts of the
company only to the extent of their respective interests
in the corporate entities’ shares. To the extent a
shareholder sells their shares, the liability of the selling
shareholder as between himself and other shareholders
ceases from the date that is specified as the
effective date of the sale and purchase agreement;
however, as far as any statutory liability under the Regulations
for Companies is concerned, the departing
shareholder remains potentially liable until the amended
articles of association reflecting the sale are re-registered
by the Ministry of Commerce and Industry (MCI).
(ii) Joint stock companies: A joint stock company must
have a minimum of five shareholders. There is no maximum.
Natural persons and corporate entities may be
shareholders. Shares in a joint stock company are typically
evidenced by share certificates, although dematerialised
shares are becoming more common.
Shareholders are liable only to the extent of the value
of their shares. The minimum share capital for a
closed joint stock company (not offering shares for
public subscription) is SR2m ($533,200). Subject to
the approval of the MCI, the share capital subscribed
for in cash may be paid in stages, provided that the
amount payable per cash share upon subscription is
not less than one-quarter of its par value.
(iii) Local branches of foreign companies:Local branches
of foreign companies in Saudi Arabia are subject to
the provisions of the Regulations for Companies and
to the laws and regulations applicable to their specific
activities. A foreign company that opens a branch in
Saudi Arabia is required, as is the case with LLC and joint
stock companies, to deposit an amount equivalent to
the capital required by SAGIA with a local bank. The
deposit will then be frozen by the bank until the issuance
of a certificate of registration for the branch by the MCI.
Exit from investment:Subject to any statutory (e.g., the
right of existing shareholders to purchase shares) or
contractual pre-emption rights, the exit of a foreign
shareholder is implemented by means of cancellation
or transfer, as the case may be, of the SAGIA investment
licence. This regulatory restriction is designed to
ensure that foreign shareholders are not unjustly
removed from Saudi companies. The cancellation of a
SAGIA investment licence is generally more straightforward
than the approval of foreign capital investment,
unless new foreign shareholders are coming in,
in which case the procedure would be analogous to that
of applying for a new licence.
Unlike the case with an LLC, transfer of shares in
joint stock companies occurs by way of cancellation of
the transferor’s share certificates and the subsequent
issuance of new ones to the transferee. The liability of
the departing shareholder as between their self and
the other shareholders ceases from the date of the
transfer that is reflected in the company’s register of
shareholders. It should be noted that before a shareholder
wishing to transfer their shares in a joint stock
company can do so, they must wait until after the lapse
of the statutory lock-up period (two complete financial
years, each consisting of at least 12 months from
the date of incorporation of the joint stock company
in question). Additionally, foreign shareholders may
also be liable for capital gains tax on their sold shares.
Commercial agency relationship: Due to restrictions
on foreign investment (such as the Negative List
described previously) and pursuant to the Commercial
Agencies Regulations (Royal Decree No. M/11 dated
20/2/1382H, corresponding to 22/7/1962), foreign
manufacturers and principals have generally appointed
Saudi agents or distributors to trade and distribute
their products in the local market.
A Saudi commercial agent or distributor must register
with the MCI each time it enters into an agency
or distributorship relationship. As part of the registration
process, the Saudi agent or distributor must submit
its agreement with its non-Saudi principal to the
MCI for registration within three Hijri months from the
effective date of the agreement. The MCI has published
standard forms of agency and distributorship contracts
for the benefit of investors. However, the use of
such forms is not mandatory.
The failure of a Saudi agent or distributor to register
with the MCI could result in fines and other penalties
for agents or distributors, but would not render
the underlying agency or distributorship agreement
invalid nor otherwise subject the non-Saudi principal
to any penalties except that, in certain circumstances,
the principal may be barred from participating in tenders
for public sector projects.
CAPITAL MARKETS LAW: The Capital Markets Law
(Royal Decree No. M/30 dated 2/6/1424H, corresponding
to 31/7/2003) established the Capital Markets
Authority (CMA), which is the sole regulator and supervisor
of capital markets in Saudi Arabia. The CMA is a
government organisation with financial, legal, and
administrative independence and reports directly to the
352
Due to restrictions on foreign investment, foreign firms generally appoint Saudi agents to trade
www.oxfordbusinessgroup.com/country/Saudi Arabia
LEGAL FRAMEWORK OVERVIEW
president of the Council of Ministers. The Saudi Arabian
Stock Exchange was also re-established, pursuant
to the Capital Markets Law. The exchange was set up
as a joint stock company, the shares of which are wholly
owned by the Saudi government through its investment
arm, the Public Investment Fund.
The CMA’s function is to regulate and develop the
Saudi capital markets. It issues rules and regulations
for implementation of provisions of the Capital Markets
Law aimed at creating an appropriate investment
environment, protecting investors and ensuring fairness
and efficiency in the market. The CMA is governed
by a board of full-time members appointed by royal order.
The Capital Markets Law is a generic legislative framework
for capital markets in Saudi Arabia and refers to
specific implementing regulations that provide a detailed
regulatory framework for various securities matters,
including licensing of “authorised persons” and offering
and marketing of securities in Saudi Arabia. The CMA
has already promulgated 10 major implementing regulations,
namely:
• Rules for listing companies;
• Regulations regarding offers of securities;
• Definitions of authorised persons;
• Regulations on securities business;
• Rules for market conduct;
• Regulations on corporate governance;
• Regulations on investment funds;
• Rules for real estate investment funds;
• Framework for mergers and acquisition; and
• Rules for anti-money laundering and measures intended
to counter financing for terrorism.
EMPLOYMENT LAW: Employment matters in Saudi
Arabia are governed by the Labour Law (Royal Decree
No. M/51 dated 23/8/1426H, corresponding to
27/9/2005). The Ministry of Labour regulates all labourrelated
issues in Saudi Arabia through Labour Offices
located in different regions of the country. The Labour
Law imposes certain minimum standards on labourrelated
matters, such as working hours, vacations, safety
standards and termination of employment.
Upon termination of employment, an employee is
entitled to an end-of-service payment, which is calculated
on the basis of half a month’s salary for each year
of their first five years of employment, and one month’s
salary for each year following their first five years of
employment, with the employee’s most recent wages
being the basis for the award calculation.
The government has set a long-term strategic goal
of increasing the proportion of Saudi employees in
both the public and private sectors. This policy is known
as “Saudiisation” and is effected by requiring companies
to employ a certain percentage of Saudi citizens.
Such percentages range from 5% to 75% based on the
nature of business, condition of work and the availability
of Saudi employees in the field.
REAL PROPERTY: Ownership of real property in Saudi
Arabia is evidenced by title deeds. Although a central
registry under the joint auspices of the Ministry of
Justice and the Ministry of Municipal and Rural Affairs
where all real property rights are recorded, including
mortgages, is provided for by law, it has yet to be set
up. Currently, real property records are kept manually
and administered by designated notaries public, who
also register ownership and transfers of real property.
OWNERSHIP BY NON-GCC NATIONALS: Ownership
and investment in real property by non-GCC nationals
is governed by the Ownership of and Investment in
Property by Non-Saudis Regulations (Royal Decree No.
M/15 dated 17/4/1421H, corresponding to
19/7/2000). A non-GCC investor in possession of a foreign
investment licence from SAGIA is allowed to own
real property in Saudi Arabia, excluding real property
located within the limits of the two holy cities of Makkah
and Medina. The property in question must be necessary
to an investment project, including real property
necessary to house people who will be employed by
the project. Non-GCC individuals residing in Saudi Arabia
may, subject to approval from the Ministry of Interior,
acquire property at a private residence.
OWNERSHIP BY GCC NATIONALS: Ownership and
investment in real property by GCC nationals is governed
by the Rules for Real Estate Appropriation by Nationals
of GCC States (Royal Decree No. M/55 dated
27/10/1405H, corresponding to 16/7/1985).
It is permissible for nationals of GCC member states
to own up to three private residences in residential
areas in Saudi Arabia, excluding the two holy cities of
Makkah and Medina. It is permissible for GCC nationals,
whether natural or corporate persons, to own real
property in Saudi Arabia provided such real property is
exclusively used and adequately sized for conducting
the business for which they are duly licensed.
CURRENT REGIME & PRACTICE FOR MORTGAGES:
While the new Mortgage Regulations (Royal Decree No.
M/49 dated 13/8/1433H, corresponding to 3/7/2012)
were enacted to regulate taking mortgages over real
property in Saudi Arabia, the Mortgage Regulations
have not yet been implemented given that the central
registry of real properties has not yet been established.
At present Saudi Arabia does not have the required
353
THE REPORT Saudi Arabia 2014
Nationals of GCC member states are permitted by law to own up to three private residences
LEGAL FRAMEWORK OVERVIEW
mechanisms for recording mortgages over real property.
Historically, notaries public in Saudi Arabia have
refused to record mortgages over real property as they
view them as contrary to sharia. Saudi notaries public
have also refused to record mortgages over real property
in the name of commercial banks as the mortgagee
on the grounds that such transactions secure an indebtedness
that has been tainted by interest contrary to
sharia and, therefore, the religious beliefs of the notary
public overseeing the transaction would be compromised
if they recorded such instruments.
ALTERNATIVE METHODS: Following the refusal by
notaries public to record mortgages of real property,
even in the case of commercial banks, such banks started
to use nominees to act as mortgagees on their
behalf. However, notaries public then refused to record
any mortgages of real property in favour of any company
or individual outside of a limited group of specialised
credit institutions, like the Saudi Industrial
Development Fund and Public Investment Fund.
Under Saudi law, the absence of record of any encumbrance
or other third party right, which has been contractually
entered into with respect to real property, does
not preclude any party claiming the existence of such
encumbrance from enforcing it against the owner of
the real property. Therefore, for commercial banks to
obtain security interest or a mortgage over real property
in Saudi Arabia, the current practice is to transfer
the title of the real property to the commercial bank
with the commercial bank effectively becoming the
owner of the real property, subject to all liabilities and
consequences associated with ownership of the property,
such as environmental compliance, tax/zakat obligations,
actions brought by tenants or lessees of the
property, and other potential liabilities.
In order to limit such liabilities, most commercial
banks have opted to establish LLCs to act as the owner
of the property that they desire to obtain a security
interest over. In order to transfer the title deed of
any property to the LLC, notaries public would require
the owner/mortgagor to present the consideration
received in exchange for the property. Recently, commercial
banks have issued “dummy checks” to the owner/
mortgagor to satisfy this requirement, and would
then require the owner/mortgagor to confirm in documentation
that the check will be returned to the bank
once the transfer of ownership occurs.
Upon the transfer of a title deed, a Saudi Arabian adjudicatory
body should hold that upon transfer of the title
deed, the property ceases to be treated as the asset of
the borrower and would be unavailable to such borrower’s
creditors in the event of a bankruptcy, insolvency,
liquidation or generally otherwise.
It should be noted that the procedures set out above
with respect to the transfer of title deeds to commercial
banks (and to any special purpose LLC) are only applicable
to Saudi banks and financial institutions.
TAXATION REGULATIONS: In general, the principal
taxes in Saudi Arabia are income tax, Islamic tax on
wealth, known as zakat, and withholding tax. Pursuant
to the Tax Law (Royal Decree No. M/1 dated
15/1/1425H, corresponding to 7/3/2004), the following
persons or entities are subject to taxation:
• A resident capital company with regard to its non-
Saudi shares;
• A resident non-Saudi natural person who conducts
financial activities in Saudi Arabia;
• A non-resident person who conducts activities in
Saudi Arabia through a permanent establishment;
• A non-resident person who has other income that
is subject to tax from sources within Saudi Arabia;
• A person engaged in investment activities related to
natural gas; and
• A person engaged in the production of oil and other
hydrocarbons.
Income Tax: The income tax rate is 20% for all taxpayers,
except for certain specific investment activities
related to natural gas, which are subject to a defined
investment tax that provides a 30% base tax rate, as
well as additional rates of up to a maximum of 85%. Oil
or other hydrocarbons-related activities are subject to
a tax rate of 85%. Income that is subject to tax includes
all income, profits, gains of any type or payment resulting
from carrying out any activity, including capital
gains or incidental income that is not an exempt income.
Employee salaries and benefits are not taxable income.
Zakat: Zakat is an Islamic tax on wealth and is levied on
Saudi citizens, nationals of GCC member states, wholly
Saudi- or GCC-owned entities, and Saudi or GCC
shareholders of companies. While the calculation of
zakat is complex, the effective rate for natural persons
is 2.5% of their net worth and for companies it is 2.5%
of their total capital resources.
The tax base for calculation of zakat for companies
excludes fixed assets, long-term investments and
deferred costs from total capital resources, but includes
profits from foreign investments that do not consist of
investment in real property. Profits of foreign non-real
property investments are estimated by the Department
of Zakat and Income Tax to be 15% of the revenues
in cases where no details are made available.
354
Both residents in the country and non-residents who conduct activities in Saudi Arabia are subject to taxes
www.oxfordbusinessgroup.com/country/Saudi Arabia
LEGAL FRAMEWORK OVERVIEW
Withholding Tax: Any resident – whether or not considered
a taxpayer under the Tax Law –who makes payment
to a non-resident from a source in Saudi Arabia
is subject to withholding tax. Generally, income is considered
to be “derived from a source in the Kingdom”
if it is derived from an activity in Saudi Arabia. Tax rates
for such payment are as follows:
• 5% for rents;
• 15% for royalties;
• 20% for management fees;
• 5% for payments for air tickets, air freight and maritime
freight;
• 5% for payment of international telecommunications
services; and
• 15% for any other services.
INTELLECTUAL PROPERTY: Intellectual property in
the Kingdom includes trade names, trademarks, copyrights
and patents.
Trade Names: The Trade Names Law (Royal Decree No.
M/15 dated 12/8/1420H, corresponding to
20/11/1999) protects registered trade names in Saudi
Arabia by requiring every business operating in the
country to register its trade name with the Commercial
Register at the MCI, proscribing any other business
or individual from using registered trade names. Only
Arabic or Arabised trade names may be registered,
except for companies with foreign shareholders whose
names are registered outside of Saudi Arabia.
Trademarks: The Trademarks Law (Royal Decree No.
M/21 dated 28/5/1423H, corresponding to 7/8/2002)
permits a person or company to register a unique combination
of letters, numbers, symbols or signs that are
applied to a specific category of goods or services in
such a way as to distinguish those goods or services
from similar ones in the marketplace.
Trademark registrations are valid for 10 Hijri years
from the date of application and are perpetually renewable
for further periods of 10 Hijri years. Two years of
continuous, open and uncontested use of a registered
trademark gives rise to an irrefutable presumption of
ownership. In 2004 Saudi Arabia acceded to the Paris
Convention for Protection of Industrial Property.
Copyrights: Copyrights are protected by the Copyright
Law (Royal Decree No. M/41 dated 2/7/1424H, corresponding
to 30/8/2003). The Copyright Law covers
all scientific, literary or artistic works regardless of their
type, importance, manner of expression or purpose.
Works of foreign and Saudi authors are protected if they
are published, acted or shown for the first time in Saudi
Arabia. Copyrights will in most cases be valid for the
lifetime of the author plus 50 Hijri years from the date
of death. Protection of sound and audio visual works,
photographic works and works in applied arts is limited
to 25 Hijri years from the date of publication. Protection
of computer software is for 50 Hijri years from
the date of publication. In 1994 Saudi Arabia acceded
to the Universal Copyright Convention, and in 2004
acceded to the Berne Convention for Protection of Literary
and Artistic Works.
Patents: Patents are protected by Patent Law (Royal
Decree No. M/27 dated 29/5/1425H, corresponding
355
THE REPORT Saudi Arabia 2014
The country has acceded to several international regulations regarding intellectual property rights
to 17/7/2004). The King Abdulaziz City for Science
and Technology has authority to issue “protection documents”
in Saudi Arabia. Protection of patents (and
plant patents) lasts for a period of 20 years from the
date of filing an application. Protection of layout design
certificates is valid for 10 years from the start of commercial
exploitation anywhere in the world. Protection
of industrial design certifications is valid for 10 years
from the date of filing the application. Saudi Arabia has
acceded to the GCC Patent Law.
Trade Secrets: Trade secrets are protected by Protection
of Confidential Trade Secrets Regulations (Ministerial
Resolution No.3218 dated 25/3/1426H., corresponding
to 4/5/2005) from being divulged by third
parties or official authorities entrusted with such secrets.
ENVIRONMENTAL LAW: The Meteorology and Environmental
Protection Administration (MEPA) is the
agency responsible for regulating pollution control and
related environmental matters. MEPA has issued Environmental
Protection Standards for, among other things,
ambient air quality, air pollution sources, receiving water
guidelines, direct discharge performance and discharge
pretreatment guidelines. The General Environmental
Regulation (Royal Decree No. M/34 dated 28/7/1422H,
corresponding to 15/10/2001) provides a specific legislative
underpinning to MEPA’s activities and for the
expansion of its role.
Saudi Arabia has also approved the General Environmental
Regulation for the GCC and the Environmental
Assessment Regulation for the GCC. The General Environmental
Regulation prohibits any act or failure to
act that may result in adverse environmental effects
and, among other things, requires that precautionary
and preemptive measures be implemented so as to
ensure that such adverse effects do not occur as a
result of the construction of any project. The Environmental
Assessment Regulation includes a list of projects
that could have an environmental impact and
require an environmental assessment or study be conducted
with respect to projects under its coverage.
LEGAL FRAMEWORK ANALYSIS
New rules implemented in January 2012 improve disclosure standards
Since its formation in July 2004, the Capital Markets
Authority (CMA) has taken various measures to
improve corporate governance and disclosure standards
for Saudi Arabian public companies, which has
also resulted in the improvement of such standards
among private companies that may seek to be publicly
listed in the future.
PREPARING THE GROUND: The CMA adopted the
Corporate Governance Regulations in November
2006, and since then through a series of board resolutions
has made more and more of its rules binding.
In addition to being applicable to publicly listed
companies, the CMA extended the application of
the Corporate Governance Regulations to non-publicly
listed financial institutions that are licensed as
authorised persons by the CMA. Furthermore, pursuant
to the listing rules adopted by the CMA in January
2012, increased disclosure standards were
implemented and are applicable to a public company
both at time of listing and on an ongoing basis.
The CMA has also issued a number of resolutions
that are meant to provide the market with additional
guidance on what types of material information
should be announced by a public company, as well
as how and when such disclosures should be made.
In addition to the measures taken by the CMA, the
Ministry of Commerce and Industry (MCI), through
its enforcement of Regulations for Companies, and
the Saudi Arabian General Investment Authority
(SAGIA), through its licensing of entities with foreign
shareholding and other initiatives, have taken
steps to improve corporate governance and the
transparency of firms operating in the country.
CORPORATE GOVERNANCE REGULATIONS: In addition
to matters of corporate governance, which are
proscribed in the Regulations for Companies as
enforced by the MCI, the CMA adopted a set of rules
that are applicable to all companies listed on the Saudi
Arabian Stock Exchange. In addition, companies
that are filing for a public listing must show that they
are in compliance with the Corporate Governance
Regulations and certify to same. Items required by
the Corporate Governance Regulations include:
• Adoption of proper internal control systems, including
a written policy regulating conflict of interest,
and clear policies, standards and procedures
for membership on the board of directors;
• That the majority of board members should be
non-executives, independent directors should not
be fewer than two members or one-third of the
board, whichever is greater, and that the position
of chairman and managing director must be separate;
• That the board sets up a suitable number of committees
to enable the board to perform its duties
in an effective manner, and that such committees
include a sufficient number of non-executive members;
and
• That companies are required to set up an
audit committee, as well as nomination and remuneration
committees.
Furthermore, in January 2014, SAGIA announced the
launch of an initiative to establish a corporate governance
index for public and non-public companies
operating in Saudi Arabia. The aim of the index is to
evaluate the level of corporate governance standards
of share-issuing companies in Saudi Arabia
(both public and non-public). The index will be based
on a number of board ratings criteria, which will
include the independence and compensation of
directors, and the composition of the board.
DISCLOSURE STANDARDS: Pursuant to the CMA’s
listing rules, there are clear disclosure requirements
for publicly listed companies, both at the time of listing
and on an ongoing basis after listing. As part of
its initial public offering, an issuer must prepare a
prospectus that contains all information which is
necessary to enable an investor to make an assessment
of the activities, assets and liabilities, financial
position, management and prospects of the
356
Improved transparency
Developing corporate governance and disclosure standards for public
companies
www.oxfordbusinessgroup.com/country/Saudi Arabia
LEGAL FRAMEWORK ANALYSIS
issuer and its profits and losses. At a minimum, the
prospectus must contain each of the items included
in Annex 4 of the listing rules (Contents of a
Prospectus for Shares), which include, without limitation,
provision of thorough information on the
issuer, management discussion and analysis, a business
description, organisational and management
structure, material agreements, and so on.
ADDITIONAL REQUIREMENTS: In addition to the
disclosures required in the prospectus, a publicly
listed company is required to publish any material
developments in its sphere of activity which are not
public knowledge and which may have an effect on
the assets and liabilities, financial position, or on
the general course of business of the issuer or its
subsidiaries and which may (1) lead to movements
in the price of the listed securities or (2) significantly
affect an issuer’s ability to meet its commitments
in respect to debt instruments.
The listing rules also provide guidelines as to what
types of information constitute material developments,
which include any purchase or sale of an
asset, any debt issuance and losses, increase or
decrease in nets assets, and increase or decrease in
gross profit, in each case equal to or greater than
10% of the net assets of the company.
Other matters that must be disclosed include: significant
changes in the firm’s production environment
or activity, changes to the makeup of the board
or CEO, significant legal proceedings where the value
is equal to or greater than 5% of the net assets
of the company, entering into or termination of a
contract with revenues equal to or greater than 5%
of the company’s gross revenues, any transaction
between the company and a related party and any
interruption in principal activities of the company
or its subsidiaries. Whether in the prospectus or as
part of the company’s continuous obligations, the
disclosure must be clear, fair and not misleading.
The CMA also issued General Instructions which set
out the main items that should be included in any
announcement to be made by a public company and
include forms that should be used when making certain
announcements. In announcing any major development
or expected major development, public firms
should comply with the following rules:
• The heading of the announcement should be clear
and should reflect the major development that is
the subject of the announcement;
• The announcement must include a detailed
description of the major development;
• The reasons that led to the major development
should be highlighted in the announcement;
• The announcement must set out any financial
implications of the major development to the
extent applicable and possible;
• The announcing company must make a reasonable
endeavour to ensure that any facts or information
relating to the major development being
announced is correct and not misleading;
• The announcing company must not delete or hide
any information relating to the major development;
and
• Any future development related to the major development
should be announced when it occurs.
Other rules that apply generally to announcements
by public companies include:
• In the event that two major developments
occurred, a separate announcement for each
development should be published;
• Each company must have policies and procedures
in place for announcing important developments
so that it can comply with the disclosure rules; and
• Each company must have the ability to determine
the need to respond to any rumours related to any
developments and the CMA has the right to oblige
a public company to respond to any rumours to
the extent a response is considered necessary.
357
THE REPORT Saudi Arabia 2014
Companies are now required to notify shareholders about any development that would impact financials
The CMA has also issued strict guidelines for public announcements
OBG would like to thank Latham & Watkins for their contribution
to THE REPORT Saudi Arabia 2014
LEGAL FRAMEWORK VIEWPOINT
One of the most challenging issues for investors in the
Kingdom is how to adequately and commercially address
the requirements of the Saudiisation policy. This is a
particular challenge for foreign investors, who often
have a harder time recruiting Saudi workers. The rationale
behind the policy is clear: the Kingdom has a very
young population and every year more young Saudis
are entering the workforce. According to the Central
Department of Statistics and Information, in 2013 the
unemployment rate among Saudi men was 11.7% and
33.2% for Saudi women. If more jobs are not created
for young Saudis, such rates could substantially increase
in the coming years. Through its Saudiisation policy, the
government has been trying to increase the number
of nationals employed in both the public and private
sectors. The policy requires private sector firms to
employ a certain percentage of Saudi nationals, ranging
from 5-75% based on the nature of the business,
conditions of work and the availability of qualified Saudi
nationals for such positions. Foreign investors may
also be subject to higher Saudiisation requirements by
the Saudi Arabian General Investment Authority.
Employment matters are generally governed by the
labour regulations, which are enforced by the Ministry
of Labour (MoL). Pursuant to the labour regulations,
the Saudiisation rate for all employers should not be
lower than 75%. However, if Saudi nationals with certain
technical skills or educational qualifications are not
available, the minister of labour may temporarily reduce
the requirement. At present, the 75% target is a longterm
objective, and the MoL has imposed standards with
the aim of eventually achieving that goal.
In 1993 the MoL issued Ministerial Resolution No.
50, which stipulates that every firm that employs 20
workers or more must increase the number of Saudi
nationals in its workforce by 5% annually. According to
the MoL, the current Saudiisation threshold for firms
with more than 20 employees is 30%. In addition, Ministerial
Resolution No. 50 forbids establishments from
employing expatriate workers as recruitment officers,
receptionists, government service officers, cashiers or
as civil security guards. Establishments in violation of
any of these provisions are subject to penalties that
include denial of sponsorship transfer applications and
requests to renew employee residence permits; exclusion
from government bids; disqualification for loans
and government subsidies; and fines. The Saudiisation
policy is now being implemented under a new system
known as Nitaqat. This system classifies Saudi Arabian
firms into different categories depending on their level
of compliance with Saudiisation requirements. The
categories are: Excellent, for exceptional compliance;
Green, for good compliance; Yellow, for below average
compliance; and Red for poor compliance.
The classification of an entity in a particular category
will depend on how many Saudi nationals it employs.
The required Saudiisation percentage for entities incorporated
in the Kingdom is determined by the MoL on
a case-by-case basis depending on the number of
employees, the relevant industry and activities being
undertaken. In January 2014, the MoL published a draft
resolution that proposed a mechanism for determining
the weight of expatriate workers on the Nitaqat scale
by taking into account the size of their family, their salary
and how long they have been working in the Kingdom.
In a recent move, the government cracked down on
illegal workers in the Kingdom as part of its push to create
job opportunities for Saudi nationals and announced
that it will no longer tolerate expatriate employees
working for employers other than their sponsors, which
has been used as a way to circumvent requirements.
All investors in the Kingdom should anticipate that
the government will continue to take measures to
increase the participation of Saudi nationals in the
workforce, including imposing higher requirements,
increasing the costs associated with hiring expatriate
workers and imposing additional work permit restrictions.
Every company operating in the Kingdom should
have a clear Saudiisation strategy and should plant to
adapt as and when new measures are implemented.
358
Emphasising local growth
Salman Al Sudairi, Managing Partner of Riyadh Office, Latham &
Watkins, on addressing the requirements of Saudiisation
www.oxfordbusinessgroup.com/country/Saudi Arabia
- How-to guide How-to guide: How to comply with legal developments relating to Diversity, Equity and Inclusion (USA) Recently updated
- Checklist Checklist: What to consider when terminating a contract (USA) Recently updated
- How-to guide How-to guide: How to draft a confidentiality agreement and confidentiality clauses (USA) Recently updated