Legality of Companies Law in Saudi Arabia

Companies Law in Saudi Arabia

Saudi Arabia's Council of Ministers approved the long-awaited New Companies Law, which marks a significant shift in the Kingdom's regulatory landscape. Enacted through Cabinet Resolution No. 678 and ratified by Royal Decree No. (M/132), this new legislation aims to support Saudi Vision 2030 by modernizing the business environment, enhancing Foreign Direct Investment (FDI), and aligning with international standards. With its enforcement slated to begin on January 1, 2023, this comprehensive overhaul introduces several notable changes designed to streamline company operations and foster economic growth.

The New Companies Law replaces the previous laws, including the Companies Law issued by Royal Decree No. (M/3) in 2015 and the Professional Companies Law from 2019. It encompasses 281 articles and integrates various types of companies commercial, non-profit, and professional under a unified framework. This consolidation simplifies the regulatory environment and provides clarity for both domestic and foreign investors.

Simplified Joint Stock Company (SJSC)

A standout feature of the new legislation is the introduction of the Simplified Joint Stock Company (SJSC). Designed to cater to entrepreneurial and venture capital needs, the SJSC offers flexibility not available under previous laws. A SJSC can be established by one or more individuals without a minimum capital requirement. The company’s capital can be divided into tradable shares, and multiple classes of shares can be issued. Unlike traditional models, decisions can be made via circular resolutions instead of requiring a general assembly. This provides operational flexibility and enhances decision-making efficiency. The board of directors has significant authority, mirroring the management structure of Limited Liability Companies (LLCs), which aids in streamlined governance.

Enhanced Shareholder and Investment Provisions

The New Law introduces several provisions to improve shareholder rights and attract investment. The law allows for the issuance of ordinary, preference, and redeemable shares, and permits the inclusion of various share classes with distinct rights and privileges in the company’s Articles of Association. This flexibility facilitates diverse investment structures and enhances investor appeal. Shareholders holding 90% or more of voting shares can force minority shareholders to sell their shares under the same terms and conditions as the majority. This provision aims to make companies more attractive to potential buyers and investors. Companies now have more freedom in choosing names, which can be in languages other than Arabic and may reflect the company’s purpose, shareholders, or other criteria.

Support for Small and Micro Companies

To support the growth of small and micro enterprises, the New Law includes provisions to simplify their regulatory burden. Micro companies (up to 5 employees) and small companies (6 to 49 employees with an annual turnover between SAR 3 million and SAR 40 million) are exempt from mandatory auditor appointments, streamlining their administrative processes. However, foreign entities within these categories still require auditors. The law allows companies to issue shares to employees without pre-emption rights, promoting talent retention and incentivization.

Flexibility in Company Operations and Restructuring

The New Companies Law introduces several measures to enhance operational flexibility and streamline company restructuring. The law removes references to Sharia Law concerning dividend distribution, allowing shareholders to decide on annual or interim dividends based on distributable profits. This modernizes profit distribution practices and aligns with global standards. Shareholders can now resolve disputes through arbitration as stipulated in the company’s Articles of Association or bylaws, providing a flexible and efficient alternative to traditional litigation. The new provisions clarify the rules for company mergers, restructuring, and divisions, offering greater transparency and simplifying these processes compared to the previous legal framework.

Enhanced Financial Instruments and Corporate Governance

The New Law also addresses financial instruments and corporate governance improvements. LLCs can now issue Sukuks and other negotiable debt instruments under the Capital Market Law, expanding their financing options and enhancing business stability. The law provides safeguards for general managers and board directors, ensuring they are not held liable for adverse effects of decisions if they act in the company’s best interest and without personal conflicts of interest.

Conclusion

Saudi Arabia's New Companies Law 2022 represents a significant reform in the Kingdom's business regulatory landscape. By introducing flexible company structures, enhancing shareholder rights, simplifying administrative requirements for small businesses, and aligning with international standards, the law aims to boost economic growth and attract foreign investment. This legislative update is a crucial step towards achieving the objectives of Saudi Vision 2030, transforming the Kingdom into a dynamic and business-friendly environment. Companies operating under the old law should prepare to review and amend their bylaws and Articles of Association to comply with the new regulations. As Saudi Arabia continues to evolve its legal framework, these changes underscore its commitment to fostering a vibrant and competitive business ecosystem.