Knowing which corporate vehicle to use is a key concern in any commercial enterprise. This article will summarise the different types of corporate entity used within the Kingdom of Saudi Arabia and the key differences between them.
Regulation of Companies
The formation and operation of corporate entities in the Kingdom is regulated by the New Companies Regulations (the “NCR”) which came into effect on 2 May 2016.
The five forms of companies which can be established in the Kingdom are:
- joint liability companies (the equivalent of general partnerships);
- limited partnership companies (the equivalent of limited liability partnerships);
- joint ventures;
- joint stock companies (“JSCs”); and
- limited liability companies (“LLCs”).
In addition, the NCR permits foreign companies to establish branches or representative offices in the Kingdom. Foreign investment in the Kingdom is also regulated by the Foreign Investment Law of 2000 and its Implementation Regulations of 2013 (as amended), which prohibits foreign investors from engaging in certain activities in the industrial and service sectors and requires foreign investors to obtain an investment licence from the Saudi Arabian General Investment Authority (“SAGIA”) before establishing any type of corporate structure in the Kingdom.
LLCs, JSCs and branches are the most common vehicles used by foreign investors in the Kingdom, although investors’ choices are generally driven by factors such as shareholder numbers, management structure and the business activities permitted. Industrial and certain types of service companies can be wholly-owned by foreign investors.
Other vehicles in the Kingdom include general partnerships, limited partnerships and joint ventures. Joint ventures do not have legal personality, are not subject to registration formalities and are not entered into the commercial register.
Characteristics of LLCs
LLCs are the equivalent of private limited companies and are the most common form of corporate vehicle in the Kingdom. Main characteristics of LLCs include:
- Shareholders: Minimum of one and maximum of 50 shareholders. A sole shareholder may only form one single shareholder LLC; a single shareholder LLC may not own another single shareholder LLC.
- Capital and Reserves: No minimum capital requirement, except for certain categories of SAGIA licensed companies which must have the required minimum capital; For example, a SAGIA-licensed industrial LLC must on incorporation have a minimum capital of SAR 1 million. Share contributions in kind must be independently valued. LLCs must annually set aside a minimum of 10% of net profits to form a statutory reserve. The LLC may stop this allocation when the statutory reserve reaches 30% of the LLC’s paid-up capital.
- No public subscription: The LLC may not offer its participation interests (shares) for public subscription. To do so, the LLC must be converted to a JSC.
- Liability of Shareholders: Shareholders are generally liable for the debts of the company only to the extent of their respective interests. Where a LLC’s losses exceed 50% of its capital and its directors do not take any steps to call a shareholder meeting or the shareholders fail to recapitalise or liquidate the LLC, the LLC will be liquidated by operation of law.
- Directors: The LLC is managed by a sole director or a board of directors. Confidentiality: A duty of confidentiality applies to all shareholders in respect of company information they receive in their capacity as shareholders.
- Share Transfers: Transfers to third parties are subject to a statutory pre-emption right. Transfers must be (i) recorded in the LLC’s share register lodged with the Ministry of Commerce and Investment (“MOCI”) and (ii) reflected in the LLC’s articles of association through execution of a shareholder’ resolution before a Saudi notary public. Shareholders are able to specify a valuation method for their interests in the LLC in the articles of association.
Characteristics of JSCs
JSCs are the equivalent of public limited companies. Certain types of business must be carried out through a JSC, including banking, insurance and finance business. There are two types of JSCs: “closed” JSCs, which are unlisted JSCs and “public” JSCs, which are listed as JSC-listed. All companies listed on the Saudi Stock Exchange are “public” JSCs and are subject to a higher degree of oversight, including by the Capital Market Authority. JSCs are incorporated on the basis of a resolution of the MOCI; further authorisation by royal decree is required if the JSC is to receive state assistance or intends to undertake public sector projects, banking or insurance activities. JSCs are subject to more regulation than LLCs and compliance costs are significantly higher. Other characteristics of JSCs include:
- Shareholders: Minimum of two shareholders. A closed JSC may be incorporated with a single shareholder if the JSC is owned by a government-related body or its share capital is SAR 5 million or more.
- Capital and Reserves: Minimum capital requirement of SAR 500,000, except for certain categories of SAGIA licensed companies which must have the required minimum capital. 25% of a JSC’s capital must be paid up at the time of incorporation and the balance must be paid up within five years. Share contributions in kind must be independently valued. Like LLCs, JSCs must set aside a minimum of 10% of net profits until the statutory reserve reaches 30% of the JSC’s paid-up capital. The shareholders of a JSC enjoy statutory pre-emption rights on issue of new shares.
- Liability of Shareholders: As for LLCs.
- Directors: Minimum of three and maximum of 11 directors.
- Minority Interests: The NCR strengthened the position of minority interests in the following ways:
- introducing cumulative voting for the election of members of the board. This allows shareholders to cast all of their votes to a single nominee for the board, rather than having to divide the total value of their votes amongst different candidates for board membership. As a result, depending on how majority shareholders 3 allocate their votes, minority shareholders may still be able to appoint their own board members, thereby improving their representation;
- imposing a requirement to establish an audit committee independent from the board; providing that the position of the chairman may not be combined with any other executive position; and
- granting the right to nominate board members in accordance with the shareholder’s ownership percentage.
- Debt Issuance: JSCs may issue sukuks and other debt instruments; these may be converted into negotiable shares.
- Dealing in Shares: JSCs are permitted to buy-back or mortgage their shares.
- Transfers: The shareholders of a JSC do not enjoy statutory pre-emption rights on share transfers.
- Conflicts of Interest: Rules prevent JSC board members who have a direct or indirect interest in any of the JSC’s business from voting at board or shareholder meetings in respect of the same. Where a board member fails to disclose such interest, the relevant contract could be nullified and the board member may be required to repay any profits received.
Both LLCs and JSCs are permitted to be holding companies, provided none of their subsidiaries hold shares in the holding company.
Branches and TSOs
Foreign investors may establish branches and Technical and Scientific Offices (“TSO”) in the Kingdom. All branches and TSOs must be licenced by SAGIA.
Branches are considered an extension of the parent company. Branches must have a minimum capital of SAR 500,000. The main advantage of branches and TSOs is that they can be established relatively quickly compared to LLCs and JSCs. Branches:
- can be used for a full range of activities permitted in the SAGIA licence of the branch;
- can engage in projects in both the public and private sector; and
- may promote and solicit its SAGIA-licensed business throughout the Kingdom.
Branches are not allowed to conduct promotion, marketing and trading activities. TSOs do not have minimum capital requirements. A TSO cannot engage in commercial activities. Its activities are limited to providing technical information and assistance regarding the foreign company's products to its Saudi distributor(s) and to end users of the products, studying and reporting on the market and conducting research.