New Saudi Companies Law 2023
Q&A and answers on the construction contracts in Saudi Arabia
August 5, 2024
Executive Summary
- A new Companies Law comes into force in January 2023
- The new law introduces a new company form called a Simplified Joint Stock Company (SJSC) which has no minimum registered capital requirement
- Joint Stock Companies (JSC) can have multiple classes of shares or a single shareholder
- Limited Liability Companies (LLCs) can be financed by the issuance of corporate bonds （sukuk）
- Squeeze-Out Rights are introduced for LLCs
Background
- On 28 June 2022, the Kingdom of Saudi Arabia (KSA) approved a new Companies Law, enacted by Saudi Arabia Cabinet Decision No. 678/1443, which will come into force 180 days from Friday 22 July 2022, the date upon which it was published in the Official Gazette (the “New Law”)
Legal Forms of Company
- General partnership
- Limited Partnership
- Joint Stock Company
- Simplified Joint
- Stock Company
- Limited Liability Company
1. The Joint Stock Company (JSC)
The most notable changes to the rules governing
a JSC are the following:
- A JSC can be established with only one Abdulaziz Bin Ali Law Firm Abdulaziz Bin Ali Law Firm www.binali lawfirm.com New Saudi Companies Law 2022 shareholder
- Attendance at general assembly meetings can be carried out through electronic means. The cap on the maximum number of board members has been removed.
- Different classes of shares with different rights and obligations can be issued. * This can prevent dilution of the management shares and secure their absolute control over the company.
- The maximum cap on board members’ remuneration has been removed.
- The general assembly has been granted powers to determine the benefits and remuneration of board members according to fair standards
2. The Simplified Joint Stock Company (SJSC)
The most notable changes to the rules governing
a JSC are the following:
- A JSC can be established with only one Abdulaziz Bin Ali Law Firm Abdulaziz Bin Ali Law Firm www.binali lawfirm.com New Saudi Companies Law 2022 shareholder
- Attendance at general assembly meetings can be carried out through electronic means. The cap on the maximum number of board members has been removed.
- Different classes of shares with different rights and obligations can be issued. * This can prevent dilution of the management shares and secure their absolute control over the company.
- The maximum cap on board members’ remuneration has been removed.
- The general assembly has been granted powers to determine the benefits and remuneration of board members according to fair standards
3. The Limited Liability Company (LLC)
The most significant changes brought in by the New Law relate to LLC’s：
3.1 Shareholders’ agreement or family charter will be acknowledged by the New Law. The New Law
introduces a provision that shareholders in an LLC may, during or after the incorporation process, enter into a shareholders’ agreement or a family business charter to organize the relationship between the shareholders and/or family members between themselves and/or the company. The shareholder agreement and/or the family business charter are considered binding and shall form a part of a company’s AoA or bylaws and they may not violate the AoA or bylaws. This is a very positive breakthrough, because in previous KSA judicial practice, any shareholders’ agreement that breached the terms of the company’s AoA or the Companies Law would have been difficult to enforce in the Court. However, the New Law acknowledges the shareholders’ agreement as part of the AoA. It will allow shareholders to make more complex arrangements yet will also present challenges to both Saudi lawyers’ and Saudi Judges in handling complicated shareholder disputes which in the past has been rarely seen in KSA.
3.2 Micro and Small Companies will be exempt from appointing auditors for the first 2 fiscal years since establishment.
Per the KSA Small and Medium Enterprises General Authority（Monsha’at）definition, a micro enterprise is an enterprise with less than 5 full-time employees and Revenues less than 3 million SAR a small enterprise is an enterprise with less than 50 full-time employees and Revenues less than 4 million SAR.
According to Monsha’at, KSA has over 750,000 SMEs by the close of Q1 2022. The exemption for SMEs’ to hire an auditor for the first 2 consecutive fiscal years since establishment is aimed to encourage more SMEs to set up in KSA.
3.3 The issuance of debt (Sukuk) and other financial instruments will be permitted.
The New Law allows LLCs to issue debt instruments such as Sukuk which is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia. Abdulaziz Bin Ali Law Firm www.binali-lawfirm.com New Saudi Companies Law 2022
The Company which issues a Sukuk essentially sells an investor group a certificate, and then uses the proceeds to purchase an asset that the investor group has a direct partial ownership interest in. The Company must also make a contractual promise to buy back the certificate at a future date at par value.
Recently, we have seen a growing demand by investors for Shariah Compliant instruments and the desire of Companies in KSA to raise Shariah Compliant funds cost-effectively. Allowing companies to issue Sukuk would make it easier for them to raise funds for their working capital/Project financing under a Shariah Compliant framework.
3.4 Share Buy-Back
The New Law allows LLCs to buy-back its shares or mortgage such shares if the AoA provides for it although such shares shall not be entitled to voting rights. Such a framework would allow LLCs to restructure their existing share capital and potentially facilitate an alternative exit route for the existing shareholders. This rule also applies to JSC and SJSC.
3.5 Squeeze-Out Rights
Under the new law, the AoA of an LLC may give the majority shareholder (which represents 90% of the shares in the company) a right to “squeeze out” the shares from the remaining minority shareholders and sell to a bona fide buyer. Hence, the bona fide buyer can acquire 100% of the shares of the company.
This change will make takeover more attractive to buyers, yet the definition of “bona fide” buyer remains unclear. It is very important for companies to draft AoA carefully in a way which makes a balance of protecting the interests of the minority and the conditions to allow the majority shareholders to use squeeze out rights.
Summary
As with many new, important legislation, it may take some time for the whole impact of the New Law to be understood by the market and to be fully reflected in practice. However, managers/directors and shareholders 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.
This article contains general statements in relation to the New Law and should not be construed in any way as legal advice. Formal legal advice should be sought on a case by case. If you have any questions about the new Companies Law, please free to contact us.
Key Changes and next steps for Companies in KSA
Abdulaziz Bin Ali, Founding Partner & Sabrina Zhou, Senior Legal Counsel September 2022
