There is no better place to be than the Kingdom of Saudi Arabia. This country is modernizing and advancing at an unprecedented pace thanks to the drive of Vision 2030, and in order to welcome in the changes for the long-term, the laws of the country had to be updated.
By the names of some of the recent laws themselves, you can begin to glimpse the impact Vision 2030 had on the country's legislations. We were recently introduced with the Environment Law (2020), the Moveable Assets Security Law (2020), the Commercial Courts Law (2020), the Law of Judiciary Fees (2021), the Personal Data Protection Law (2021), the Communications and Information Technology Law (2022), and there are many more laws and regulations in the pipeline, including the Law of Distribution and Commercial Agencies Agreements (draft).
Yet, a major factor in the growth of a country's economy is in the companies or corporate laws and the flexibilities afforded therein for businesses. On that note, we have now just been introduced with the new Companies Law, promulgated by Royal Decree number M/132, dated 1/12/1443H (the "New Companies Law"). While we have still not seen this law in effect as it is targeted to be in force around the beginning of 2023, I believe most businesses will find this law more flexible to work with than its predecessor issued back in 2015 (the "2015 Companies Law"). Moreover, the New Companies Law seems to address a lot of the drawbacks that I find in the 2015 Companies Law.
The fact that the New Companies Law itself mentions that there will be Implementing Regulations to the law is in itself much needed in my view. This is currently a gap under the 2015 Companies Law. Actually, as I was previously undergoing my training, I held the view that the veteran legal experts in corporate law themselves serve as "walking Implementing Regulations to the Companies Law." This is primarily because… we simply never had any Implementing Regulations to the Companies Law and those veterans have an understanding how the law is normally implemented in practice by the authorities.
Accordingly, such Implementing Regulations can clarify the practical side of the law, in addition to other things that are not expressly identified in the law. For example, the latest Moveable Assets Security Law does not explicitly address the pledging of shares in Limited Liability Companies; and neither does the 2015 Companies Law itself. Based on the New Companies Law, however, it seems we will have the much-needed clarifications on that aspect outlined in the Implementing Regulations to the Companies Law.
I can delve more into how important an Implementing Regulations to the Companies Law would be, but let us focus for now more on the New Companies Law itself and what level of flexibility it offers for businesses. I will discuss some of the primary developments in my view in the New Companies Law versus its predecessor.
The first major element you might notice is the addition of a new for-profit entity type. This new entity type is known in France as "Société par actions simplifiée" (Simplified Joint Stock Company). The Simplified Joint Stock Company offers immense leeway for the stockholders to organize the corporate governance of the company in a manner that suits the stockholders, without necessarily having the requirement of forming a Board of Directors as in Closed or Public Joint Stock Companies. This is in addition to the fact that Simplified Joint Stock Companies have no minimum share capital requirements, while thankfully at the same time offering businesses with many of the benefits of a Joint Stock Company, such as the flexibility to issue different types and classes of stocks.
This addition is helpful for small and medium-sized enterprises ("SMEs"), especially considering the flexible set-up afforded for this entity type and the ability to draft a Bylaw that captures a suitable governance structure for the stockholder(s). Actually, majority of SMEs in the Kingdom of Saudi Arabia could potentially be in the forms of Simplified Joint Stock Companies due to the benefits mentioned. This new entity type could really help SMEs play a bigger role in the economy, which aligns with one of the Vision 2030 goals on the same note.
Other flexibilities afforded by the New Companies Law includes the ability to choose trade names in Arabic or in any other languages, which will most likely be complemented by an updated Trade Names Law (currently in draft form). More importantly, the trade name does not strictly need to be derived from the activities of the company as was the case under the 2015 Companies Law. This will certainly be more helpful to many of my international clients who sometimes face difficulties reserving trade names in the manner they wish.
In terms of profits, the New Companies Law now explicitly allows annual or interim dividends to be distributed in Joint Stock Companies and in Limited Liability Companies. This is also not explicitly the case for Limited Liability Companies under the 2015 Companies Law. However, the New Companies Law mentions that further guidelines on distribution of profits will be clarified in the Implementing Regulations to the Companies Law, which is expected to be issued within a maximum of 180 days from the publication of the law itself.
On the management side of businesses, there are many new elements introduced that are absent in the 2015 Companies Law. I usually receive questions about the responsibilities of a manager in a Limited Liability Company from the perspective of the 2015 Companies Law. While you may find mentions of such responsibilities under the 2015 Companies Law, it is not as comprehensive or as detailed as I wish it to be. One example of this issue is in the absence of a clear criteria and procedures on disclosure of conflicts of interests. The 2015 Companies Law does not resolve situations in which a manager is conflicted on a specific matter/project, especially for Limited Liability Companies. Thankfully, this is no longer an issue as the New Companies Law expands provisions dealing with responsibilities of managers by introducing an entirely new chapter dedicated solely for “Company Management” applicable to all entity types. The new chapter is helpful on standardizing management responsibilities across the different entity types, including obliging managers to practice their duties within the boundary of the powers vested to them as well as disclosing any instances of conflicts of interests (more details expected from the Implementing Regulations).
The New Companies Law also modifies some of the responsibilities and structures of management versus those outlined under the 2015 Companies Law. For example, a Board of Directors in a Joint Stock Company is mandatorily required to meet at least four times a year rather than two times as the 2015 Companies Law requires, which will help ensure Boards of Directors be more active in Joint Stock Companies. Additionally, a Board of Directors in a Closed Joint Stock Company is no longer obliged to appoint a Vice Chairman among its members.
Moreover, there is no specific maximum number of Board members that can be appointed in a Joint Stock Company, which is a shift from the eleven-member maximum under the 2015 Companies Law. More significantly is that there are no specified cap as to how much a Board member in a Joint Stock Company can receive in remunerations, unlike the 500,000 Saudi Riyals cap imposed by the 2015 Companies Law. This will help companies create attractive remuneration schemes to motivate Board members to be more active.
Last, but not least, the new law finally touches upon call and put options whereby, in certain conditions, majority shareholders can use the call option to purchase the shares of the minority shareholders and minority shareholders can use the put option to oblige the majority to buy them out. This is a feature that is not available in the 2015 Companies Law. However, both the call and put options are usually found in Shareholders Agreements (usually those that involve foreign shareholders), although their enforceability before courts is controversial. It would be interesting to see how the courts will enforce these options in practice once the New Companies Law comes into effect.
I look forward to seeing this impressive new law in action and I believe it will be a positive game-changer for businesses in the Kingdom of Saudi Arabia. I am sure there are also significant changes that the Implementing Regulations will bring, and it is only a matter of time before we find out.
Faisal A. Linjawy IS A PARTNER AT MAHASSNI & CO. LAW FIRM WHO FOCUSES HIS PRACTICE ON JOINT VENTURES, CORPORATE GOVERNANCE, RESTRUCTURING, INCORPORATION AND LIQUIDATION OF REGIONAL AND FOREIGN MULTINATIONAL COMPANIES DOING BUSINESS IN THE KINGDOM OF SAUDI ARABIA.
For any further questions or feedback in connection with this article, please feel free to reach out to Faisal via flinjawy@mahassni.com.sa