The overall structure of the Saudi Arabian company law is derived from French law through Egyptian law. The Companies Regulation, Royal Decree No. M/6 of 22nd Rabi Awal 1385 Hejra corresponding to 20th July 1965 Gregorian, has been amended only four times in its thirty five years of existence, but further changes are expected in the foreseeable future.
It covers a wide range of aspects relating to incorporation, regulation, merger, liquidation and dissolution of eight different types of bodies corporate, which are:
01. Collective name partnerships, or general partnerships (Arabic: sharikat al-tadamun, French: société en nom collectif), which are partnerships as the term is understood in Common Law jurisdictions, with all partners being fully liable for the partnership’s debts (Companies Regulation, Articles 16 to 35);
02. Simple commandite partnerships, or limited partnerships (Arabic: sharikat al-tawsiya, al basita, French: société en commandite simple), which consist of at least one general name partner who is responsible to the extent of his entire fortune for the partnership’s debts, and at least one limited and unnamed partner who is responsible for the partnership’s debts to the extent of his interest in the partnership’s capital (Companies Regulation, Articles 36 to 39);
03. Joint ventures (Arabic: sharikat al mahasu, French: société en participations), which have no legal personality and which may be formed without this being publicised (Companies Regulation, Articles 40 to 47);
04. Joint stock companies (Arabic: sharikat al musahama, French: société anonyme), which are the equivalent of the Common Law public limited company (Companies Regulation, Articles 48 to 148);
05. Share commandite companies (Arabic: sharikat al-tawsiya bi’l ashum, French: société en commandite par actions), which consist of at least one general shareholder who is responsible to the extent of his entire fortune for the company’s debts, and at least four limited shareholders who are responsible for the company’s debts to the extent of their interest in the company’s capital (Companies Regulation, Articles 149 to 156);
06. Limited liability companies (Arabic: al-sharika dhat mas’uliyya al mahdudah, French: société à responsibilité limitée), which are the equivalent of Common Law limited liability companies (Companies Regulation, Articles 158 to 180);
07. Variable capital companies (Arabic: al-sharika dhat ras al mal al qabil li tarir, French: société au capital variable), which are companies which provide in their articles of association or bylaws that their capital may be increased by additional payments made by the shareholders or by the admission of new shareholders, or that their capital may be reduced by withdrawal of shareholders’ shares from the capital (Companies Regulation, Article 181 to 188);
08. Co-operative companies (Arabic: al-sharika ta’awuniyya), which are joint stock companies or limited liability companies which are incorporated as co-operatives (Companies Regulation, Articles 189 to 209).
The Companies Regulation does not apply to companies incorporated by Royal Decree, which are usually government owned entities such as Saudi Aramco. In addition, the Companies Regulation prohibits foreign companies from issuing securities, unless prior approval has been obtained from the Ministry of Commerce and Industry.
The Companies Regulation provides that the capital of a company can consist of shares contributed in cash or shares contributed in kind and prohibits the personal creditor of a shareholder from collecting his debt from the shareholder’s share in the capital of a company. The Companies Regulation also contemplates the conversion of one type of body corporate into another.
Two unusual features of the Companies Regulation are that it allows articles of association to prescribe the profits of each shareholder different from such shareholder’s ownership of the capital of the company, and it requires that each company should have a minimum of two shareholders.
In addition to following the procedures contained in the Companies Regulation, foreign shareholders have to obtain the appropriate licences from the relevant government bodies and comply with other restrictions, both of which are not contained in the Companies Regulation.
The most common entity is the limited liability company, which, as the name suggests, limits liability of the shareholders. A limited liability company requires at least two but not more than fifty shareholders. This is the most common type of body corporate for foreign investment in Saudi Arabia. Limited liability companies are specifically prohibited from engaging in insurance and banking activities.
Apart from the flexibility of profits not being distributed in proportion to share ownership, shares in limited liability companies give equal voting rights to all shareholders. In addition, shareholders have the right of first refusal if another shareholder wishes to sell his shares to third parties. For limited liability companies, share certificates are not issued as share ownership is evidenced by the articles of association of the company and any changes in the company nationality or increase in the financial obligations of the shareholders requires unanimous approval of the shareholders.
The company’s balance sheet, profit and loss account, report showing the activities and financial situation of the company and recommendations regarding the distribution of profits has to be prepared for each fiscal year and has to be audited by auditors licensed in Saudi Arabia. After completion of the above, an annual meeting of shareholders is required.
A limited liability company can be managed either by a General Manager or a Board of Managers (Board of Directors). In addition, if the limited liability company has more than twenty shareholders then a supervisory board consisting of at least three shareholders has to be formed to supervise the General Manager or Board of Managers.
The Companies Regulation also makes the managers (General Manager or Board of Managers) jointly liable for damages or injuries suffered by the shareholders, by the company, or by third parties due to the failure to observe any of the provisions of the Companies Regulation, the company’s articles of association or faults in the performance of their duties. The shareholders can give written proxies only to other shareholders for representation at shareholders’ meetings. The shareholders are also jointly liable, without any limitations, to third parties for the incorrect valuation of shares in kind; provided that such action is commenced within three years from publication of the summary of the company’s articles of association in the Official Gazette.
Finally, the Companies Regulation provides that, if a limited liability company incurs losses in excess of or equal to half of its capital, the managers have to notify the shareholders, and the shareholders must meet to determine whether to dissolve the company or to maintain the company. Whatever the decision, such decision must be published in the Official Gazette. If the shareholders decide to continue the existence of the company, then the shareholders must inject further capital. If the shareholders fail to inject further capital and the company continues to do business, then the shareholders shall have joint personal liability for the company’s debt.
The Companies Regulation heavily regulates joint stock companies as compared to other bodies corporate. The joint stock company is a limited liability company, which has the option to issue shares to the Saudi public. In order to incorporate a joint stock company, a licence is required from the Minister of Commerce and Industry. Furthermore, certain types of joint stock companies cannot be incorporated except pursuant to a licence granted by Royal Decree. Such types of joint stock companies are companies with government concessions, companies operating public utilities, companies receiving state subsidy, companies with participation from the government or other public body and companies carrying out banking or insurance activities. Ownership of joint stock companies is evidenced by share certificates, which can be issued in bearer form. Joint stock companies can also have different classes of shares including preferred shares. Subject to certain exceptions, shareholders in a joint stock company have preemptive rights unless the company’s articles of association provides to the contrary.
As in a limited liability company, accounts of a joint stock company must be audited by auditors licensed in Saudi Arabia and the annual meeting of the shareholders is required. The management of a joint stock company is through a Board of Directors consisting of not less than three members each of whom must own not less than a certain specified number of shares.
Similar to a limited liability company, once losses equal or exceed three quarters of the capital of a joint stock company, the directors are obliged to call for a meeting of the shareholders to determine whether to dissolve the company or to continue to maintain the company. In either case, the public has to be notified as to the action taken by publication in the Official Gazette. If the directors fail to convene a shareholders meeting or it is impossible for such meeting to pass a resolution, any interested person may apply for the winding up of the company.
Joint ventures are essentially unincorporated associations in the form of a consortium. If a foreign entity is a joint venture partner in an unincorporated association, it has to be either licensed pursuant to the Foreign Investment Regulation and commercially registered with the Ministry of Commerce and Industry or it must have a temporary commercial registration from the Ministry of Commerce and Industry in the event that such foreign entity is part of a consortium bidding for public sector contracts. For practical purposes, the joint venture is considered as a general partnership.
*This Saudi Arabian Law Overview is not intended to be legal advice, and cannot be relied on as a substitute for legal advice. We make no representation that the contents of this Saudi Arabian Law Overview are or will remain accurate or current.
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