The global financial crisis and credit crunch prompted the Capital Markets Authority in Saudi Arabia (the “CMA”) to introduce rules to increase investor awareness of public company financial difficulties. In May 2013, the CMA published draft guidelines and instructions setting out certain rules that apply to public companies when the losses of a public company reaches 50% or more of its share capital (the “Guidelines”). The deadline for the business community to provide comments on the draft Guidelines was June 26. While the business community awaits further guidance from the CMA, below follows a summary of the key rules in the draft Guidelines.
The Guidelines set forth separate rules that apply once the accumulated losses of a public company reaches 50%, 75% and 100% of its share capital. “Accumulated losses” is defined as the aggregate of the losses of the company for all of the previous years as reflected in its balance sheet in addition to the net losses accumulated for the current period.
Rules Applicable when Accumulated Losses Reach 50% of the Share Capital
As soon as the accumulated losses of a company reaches 50% (but not exceeding 75%) of its share capital, the company shall:
- announce to the public the amount of the accumulated losses and its percentage in the share capital and the main reasons that caused the losses; and
- within ten days following the end of each month, publish its management accounts.
One day following the public announcement referred to above, Tadawul shall add a sign next to the company’s name on Tadawul’s website indicating that the company’s accumulated losses have reached 50% of its share capital but do not exceed 75% of its share capital.
Rules Applicable when Accumulated Losses Reach 75% of the Share Capital
The same rules highlighted above when the accumulated losses of a company reach 50% of its share capital apply when the accumulated losses reach 75%. In addition, the following rules will apply:
- the settlement of trade orders on the company’s shares shall be prolonged to T+2 (as opposed to the usual instantaneous settlement);
- the board of the company shall put together a plan setting out, among other things, the steps the company intend to take to restore the financial health of the company (Appendix 1 of the Guidelines include a list of the items that the plan should cover);
- the board of the company shall form a committee of their members (one of which shall be a board member) to undertake the implementation of the plan highlighted above;
- and at the end of each financial quarter, the company shall announce to the public the status of the implementation of the plan highlighted above.
The listing of the company’s shares shall be cancelled thirty days following the occurrence of any of the following:
- the company does not submit to the CMA the plan highlighted above; or
- the company failing to reduce its accumulated losses below 75% of its share capital within two financial years after the financial year in which the accumulated losses of the company reached 75% of its share capital or making operating profits in its last financial year.