Saudi Arabian Law Overview

Companies and Partnerships

A new Companies Regulation was enacted by Royal Decree No M/132 of 1 Dhul Hijja 1443 Hejra (corresponding to 30 June 2022). It replaced the Companies Regulation enacted by Royal Decree No M/3 of 28 Muharram 1437 (corresponding to 10 November 2015), the Professional Companies Regulation, Royal Decree No M/17 of 26 Muharram 1441 Hijra (corresponding to 25 September 2019) and the Implementing Rules of the Professional Companies Regulation which were issued on 23 April 2020. The 2022 Companies Regulation will came into effect in January 2023.

As per Article 4 of the 2022 Companies Regulation, the following types of companies can be incorporated:

1. joint liability companies; 

2. simple commandite companies;

3. joint stock companies;

4. simplified joint stock companies; and

5. limited liability companies.

Family-owned companies and non-profit companies are also regulated by the 2022 Companies Regulation.

A company’s capital may consist of shares contributed in cash or shares contributed in kind. It is permitted for articles of association to prescribe the profits of each shareholder different from such shareholder’s ownership of the company’s capital.

Corporate Documents

Joint liability companies, simple commandite companies and limited liability companies utilise articles of association. Joint stock companies, simplified joint stock companies and single shareholder limited liability companies utilise bylaws.

Liability

The founders, partners, managers of a company or members of its board of directors are jointly liable for damages resulting from a failure to register the articles of association or bylaws and any amendments thereto with the Commercial Registry. The manager and members of the board of directors are also jointly liable to compensate the company, partners, shareholders or third parties for damage arising due to violations of the 2022 Companies Regulation, the company’s articles of association or bylaws, or by reason of any error, neglect or default on their part in the performance of their work. Actions for liability are time barred five years from the end of the financial year of the company in which the harmful act occurred, or three years from the end of the work of the manager or of the membership of the concerned member of the board of directors, whichever occurs later, unless the action is in relation to forgery or fraud.

Capital

The Companies Regulation does not prescribe a minimum capital amount for LLCs, simply requiring the capital be sufficient to achieve the company’s objective and be specified in the articles of association. However, depending on the type of activity the company will be engaged in, it may be subject to minimum capital requirements set by MISA, or the Capital Market Authority (CMA). Each year an LLC must set aside at least 10% of its net profits to form a statutory reserve. The shareholders may decide to discontinue this practice once the reserve has reached 30% of the company’s capital.

Management

An LLC can be managed either by a general manager, a board of managers if there will be more than two managers, or a board of directors if there will be more than two directors. In addition, if the LLC has more than twenty shareholders, a supervisory board consisting of at least three shareholders has to be formed to supervise management.

Liability

In general, the liabilities of an LLC’s shareholders are limited to their contribution to the capital. Managers (that is, the general manager, boards of managers or board of directors) are jointly liable for damages or injuries suffered by the shareholders, by the company, or by third parties due to failure to observe provisions of the Companies Regulation, the company’s articles of association, or faults in the performance of their duties. The shareholders are also jointly liable 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.

Limited Liability Companies

The most common form of entity is the limited liability company (LLC), which is also the most common vehicle for foreign investment in Saudi Arabia. Under the 2015 Companies Regulation, LLCs were not permitted to make public offers of their shares, and were specifically prohibited from engaging in insurance, banking, finance and investment activities. Under the 2022 Companies Regulation, this prohibition has been lifted and LLCs are permitted to issue negotiable debt instruments or financing sukuk (subject to the Capital Market Regulations and by the consent of the partners in accordance with the manner laid down for amending the company’s articles of association).

Shareholders

While under the 2015 Companies Regulation the number of shareholders in an LLC could not exceed 50, the 2022 Companies Regulation places no limit upon the number of shareholders in an LLC. Shareholders can give written proxies only to other shareholders for representation at shareholders’ meetings, unless the articles of association provide otherwise.

Capital

Neither Companies Regulation prescribes a minimum capital amount for LLCs, simply requiring the capital be sufficient to achieve the company’s objective and be specified in the articles of association. However, depending on the type of activity the company will be engaged in, it may be subject to minimum capital requirements set by MISA, or the Capital Market Authority (CMA). Under the 2015 Companies Regulation each year an LLC had to set aside at least 10% of its net profits to form a statutory reserve, though the shareholders could decide to discontinue this practice once the reserve had reached 30% of the company’s capital. The 2022 Companies Regulation has removed this requirement, and it is now optional for a company’s articles of association to require a specified amount of the company’s net profits be allocated into a reserve.

Management

An LLC can be managed either by one or more managers, and partners can appoint a board of managers if there are multiple managers. The company’s articles of association or resolutions of the partners determine the mode of management of the company.

Liability

In general, the liabilities of an LLC’s shareholders are limited to their contribution to the capital.

Transfer of Shares

A shareholder’s number of votes is proportionate to their share ownership. In addition, shareholders have the right of first refusal if another shareholder wishes to sell their shares to third parties. It is permissible for the articles of association to specify the valuation method for the shares and extend the period during which the other shareholder may exercise their right of first refusal. Unless this period is extended in the articles of association, the right of first refusal must be exercised within thirty days from receiving notification of the agreed price from the manager, or other method of valuation. Share certificates in LLCs are not issued because share ownership is evidenced by the articles of association and the company’s share register. 

Provided that one or more partners representing at least 90% of the capital consent, the company’s articles of association can set out tag along and drag along rights, enabling a majority of the partners to compel the minority to accept an offer from a purchaser acting in good faith to buy all of the stakes in the company at the price and on the terms and conditions applying to the purchase of the stakes of the majority.

Increasing the nominal share value or suspending the operation of rights of priority requires unanimous shareholders’ approval. 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.

Financials

The company manager prepares for each financial year the company’s financial statements and a report on the company’s activity and financial position for the previous financial year, and the manager’s proposals for the distribution of profits, if any. The manager gives these to the auditor of accounts 45 days before the annual meeting of the general assembly.

The company manager provides the partners with the financial statements and the report on the company’s activities, and the report of the auditor of accounts if any, at least 21 days before the annual meeting of the general assembly.

Loss in Capital

When an LLC incurs losses that equal or exceed 50% of its capital, the managers must summon the general assembly of partners to be convened within 60 days of the manager learning the company has lost half its capital, to determine whether to dissolve or continue the company with the implementation of measures to remedy the loss.

Joint Stock Companies

A joint stock company (JSC) has limited liability and the option to issue shares for public subscription. JSCs may issue negotiable debt instruments and financing sukuk in accordance with the Capital Market Regulations. The Ministry of Commerce and the CMA also regulate the requirements of incorporating JSCs whose shares are to be offered to the public during the incorporation phase, or which will be listed on the capital market. 

Shareholder

Ownership of JSCs is evidenced by share certificates, which can be issued in bearer form. JSCs can issue ordinary shares, preference shares, and redeemable shares. The company’s bylaws can provide for different classes of the types of shares, and grant certain rights, privileges and restrictions over those classes.

Capital

A JSC’s minimum capital must be sufficient to achieve its objectives. The 2022 Companies Regulation prescribes a minimum capital of SAR 500,000, but certain categories of companies licensed by the Ministry of Commerce, the Saudi Central Bank (SAMA) or the CMA set a different capital baseline for incorporation. On establishment, the paid-up portion of capital must be at least 25%. 

Shareholders have a pre-emptive right to purchase shares issued in consideration of cash stakes in furtherance of a company’s capital increase. However, if provided in the company’s bylaws, an extraordinary general assembly may suspend this right of priority or afford it to persons other than existing shareholders in situations where it considers this in the company’s best interests.

Management

The management of a JSC is through a board of directors consisting of not less than three members. The 2015 Companies Regulation set an 11-member cap; however, this limit has been removed by the 2022 Companies Regulation.

Liability

Shareholders’ liability is restricted to the value of their shares. 

Transfer of Shares

Under the 2015 Companies Regulation the shares of the company’s founders were subject to a two-year lock-in period, however this restriction has been lifted by the 2022 Companies Regulation. Founders’ shares can be transferred in bankruptcy, subject to a priority right of other shareholders. By-laws may also impose restrictions on share dealings, provided they do not constitute an absolute prohibition of such dealings. 

Provided that shareholders representing at least 90% of the company’s voting shares consent, the company’s articles of association can set out tag along and drag along rights, enabling a majority of the partners to compel the minority to accept an offer from a purchaser acting in good faith to buy all of the shares in the company at the price and on the terms and conditions applying to the purchase of the shares of the majority.

Financials

The board of directors must, at the end of each financial year of the company, prepare the

company’s financial statements and a report on its activities and financial situation over the

previous financial year (including a proposal for the distribution of profits). The board of directors needs to send these documents to the auditor of accounts, if any, at least 45 days before the convening of the annual ordinary general meeting.

The chairman of the company’s board of directors, its chief executive officer, and its chief financial officer, if any, need to sign these documents and deposit copies of them at the company’s head office. The chairman must also provide these documents and the report of the auditor of accounts, if any, to the shareholders at least 21 days before the convening of the annual ordinary general assembly.

Loss in Capital

If the losses made by a JSC reach 50% of the issued capital, the board of directors must disclose this and make recommendations in respect of those losses, within 60 days from the date that it has knowledge of that amount. The board must summon the extraordinary general assembly to convene within 180 days from the date it becomes aware of the foregoing, to consider whether to continue the company, and to take any steps necessary to remedy those losses, or to dissolve the company.

Simplified Joint Stock Companies

The 2022 Companies Regulation allows a new type of company to be incorporated: the simplified joint stock company (SJSC). A notable feature of this form of company is its flexibility:

1. there is no minimum set amount of capital to incorporate a simplified joint stock company;
2. it can be managed by one or more chairmen or managers or a board of directors;
3. ordinary shares, redeemable shares, and preference shares can be issued. The SJSC’s bylaws can provide for different classes of types of shares, grant specific rights or privileges to those classes, and place restrictions upon those classes; and
4. debt instruments and financing sukuk can be issued.