Saudi Arabian company law is derived from the Companies Regulation which was enacted pursuant to Royal Decree No. M/6 of 22nd Rabi Awal 1385 Hejra corresponding to 20th July 1965 Gregorian and has been amended a number of times. The Companies Regulation was recently amended pursuant to Council of Ministers’ Resolution No. 403 dated 27th Rajab 1439 Hejra corresponding to 10th April 2018 Gregorian.
The Companies Regulation covers a wide range of aspects relating to incorporation, regulation, merger, liquidation and dissolution of six different types of bodies corporate, which are:
01. Collective name partnerships, or general partnerships (Arabic: sharikat al-tadamun), 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 17 to 37);
02. Simple commandite partnerships, or limited partnerships (Arabic: sharikat al-tawsiya, al basita), 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 38 to 42);
03. Joint ventures (Arabic: sharikat al mahasu), which have no corporate personality and which may be formed without this being publicised (Companies Regulation, Articles 43 to 51);
04. Joint stock companies (Arabic: sharikat al musahama), which are the equivalent of the Common Law public limited company (Companies Regulation, Articles 52 to 150);
05. Limited liability companies (Arabic: al-sharika dhat mas’uliyya al mahdudah), which are the equivalent of Common Law limited liability companies (Companies Regulation, Articles 151 to 181); and
06. Holding companies (Arabic: al-sharikat al qabidah), which may be incorporated as joint stock companies or limited liability companies and the purpose of which is to own or control subsidiary companies (Companies Regulation, Articles 182 to 186).
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 establishing branches or subsidiaries without an investment licence from the Saudi Arabian General Investment Authority and a commercial registration certificate from the Ministry of Commerce and Investment.
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, though it is possible, after obtaining a judgment from a competent judicial authority, to collect his debt from the shareholder’s share of the net profits distributed in accordance with the company’s financial statements. The Companies Regulation also contemplates the conversion of one type of body corporate into another, provided the conditions for establishment, publication and registration prescribed for the corporate type into which the body corporate is being converted are fulfilled.
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 permits a limited liability company to be incorporated with a single shareholder. In the case of a single foreign shareholder, it must be permissible for the activity to be carried out by a wholly foreign owned limited liability company which does not require the participation of a Saudi shareholder; however, this requirement is not contained in the Companies Regulation.
In addition to following the procedures contained in the Companies Regulation, foreign shareholders have to obtain the appropriate licences from the Saudi Arabian General Investment Authority and any other relevant government body if required and comply with other restrictions, 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 does not require a minimum number of shareholders but is required to have no 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 its shares to third parties and it is permissible for the articles of association to specify the valuation method for the shares and the period during which the other shareholder may exercise its right of first refusal. For limited liability companies, share certificates are not issued as share ownership is evidenced by the articles of association and share register of the company and any changes in the company nationality or increase in the financial obligations of the shareholders, through increasing the nominal value of the shares or by issuing new shares, requires unanimous approval of the shareholders. The articles of association may be amended by a majority of the shareholders holding at least three quarters of the share capital, unless the articles of association provide otherwise.
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, a Board of Managers if there will be two managers or a Board of Directors if there will be more than two 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, Board of Managers or Board of Directors.
The Companies Regulation also makes the managers (General Manager, Board of Managers or Board of Directors) 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, unless the articles of association provide otherwise. 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 five years from the date of registration of the company in the commercial register.
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 within ninety days to determine whether to dissolve the company or to maintain the company. Whatever the decision, such decision must be published on the Ministry of Commerce and Investment website. If the shareholders decide to continue the existence of the company, then the shareholders must inject further capital. If the managers fail to convene a meeting or the shareholders fail to pass a resolution to continue or dissolve the company, the company shall be deemed to have expired by law.
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 Investment. 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 and subject to the lock-in period of two years which joint stock companies are subject to, shareholders in a joint stock company have preemptive rights.
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.
Similar to a limited liability company, once losses equal or exceed half 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 by increasing the capital or reducing it to a limit whereby the proportion of the losses would be reduced below one half of the capital. In either case, the public has to be notified as to the action taken by publication on the Ministry of Commerce and Investment website and in a local newspaper circulated in the city of the head office of the company, in the case of listed companies. For joint stock companies that are not listed, the shareholders’ resolution must be published on the Ministry of Commerce and Investment website. If the directors fail to convene a shareholders meeting within a specified period, if the shareholders do not pass a resolution or if it is determined to increase the capital but the increase in capital does not occur within ninety days of the date on which the resolution is passed, the company shall be deemed to have expired by law.
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 by the Saudi Arabian General Investment Authority pursuant to the Foreign Investment Regulation and commercially registered with the Ministry of Commerce and Investment or it must have a temporary commercial registration from the Ministry of Commerce and Investment 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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