New Companies Law In Saudi Arabia And Introduction Of Joint Stock Companies

Key takeaways

• The New Companies Law in Saudi Arabia, which is in accordance with the Kingdom's 2030 Vision, brings about fresh reforms, permits more flexibility, protects corporate interests, strengthens the private sector, and adheres to the global standards.
• The "Joint Stock Company" (JSC) is a new type of company that has been particularly created under the New Companies Law.
• The New Companies Law improves business sustainability, promotes investments in small and micro businesses, streamlines procedures and regulatory requirements for Saudi Arabia.

Saudi Arabia has published a new Companies Law (the New Companies Law) that unifies all types of companies operating in the Saudi market, including commercial, nonprofit, family-owned, and professional entities, under a single, comprehensive piece of legislation.

The Saudi Arabian Kingdom's Council of Ministers passed the New Companies Law on June 28, 2022, and on July 4, 2022, it was published in the official Saudi gazette (Umm Al-Qura) (the Publication Date). The Previous Companies Law, which was released in accordance with Royal Decree No. M/3 dated 10 November 2015, will be replaced by the New Companies Law. The New Law, which is in accordance with the Kingdom's 2030 Vision, brings about fresh reforms, permits more flexibility, protects corporate interests, strengthens the private sector, and adheres to the global standards.

The Companies Law of 1437H (2015) and the Professional Companies Law of 1441H (2019) will be repealed, and the New Law will take precedence over any provisions (in any other law now in existence) that contradict with it once it takes effect (180 days) after being published in the Official Gazette.

The New Law regulates commercial companies, non-profit companies and professional companies, and it enables investors to incorporate any of the following types of companies:

1. Joint Liability Company
2. Limited Partnership Company
3. Joint Stock Company
4. Simple Joint Stock Company and
5. Limited Liability Company.

Introduction Of SJSC

The "Simple Joint Stock Company" (SJSC) is a new type of company that has been particularly created under the New Companies Law. The SJSC will be able to meet the growing need for entrepreneurship and venture capital. It is a versatile corporate organisation that may be founded by one or more people, may issue a variety of share classes, and may be run by a single manager or a board of directors. Additionally, it may serve as a platform for investments and open the door for non-profit organisations to operate in the market.

Additionally, article 11 of the New Law permits the inclusion of binding joint venture agreements and family charters in the company's articles of association to regulate family-owned businesses, their governance and administration policy, the employment of family members, and the family business' profits (so long as it does not conflict with the law, articles, or bylaws).

General Provisions of JSC

There is no minimum requirement for the number of partners in a Joint-Stock Company under Article 52 of the New Law (JSC). However, it stipulates that the company will be entirely accountable for any obligations and debts arising from its operations.

On the other hand, the New Law's Article 53 specifies the parameters of naming a JSC. It basically states that every JSC must have a name that accurately describes what it does. It must not, however, contain the name of a natural person unless:

1. The company's purpose is to invest in a patent that is registered in the name of such a person.
2. The company acquired a commercial enterprise and used the name of that enterprise as its name.
3. The name happens to be a name of a company transformed into a JSC and its name includes a name of a natural person.

A JSC's required minimum capital has been altered under the New Law. In this regard, Article 54 specifies that regardless of whether the company is a public or closed JSC, the capital of the company must be sufficient to achieve its objectives but must not be less than 500,000 Saudi Arabian Riyal (SAR), with no less than one-quarter of it paid at the time of incorporation. In contrast, the earlier legislation mandated a 2-million SAR minimum capital requirement for all other transactions and a 10-million SAR minimum capital requirement for initial public offerings (IPOs).

The New Law gives the Ministry of Commerce and Industry the power to provide a JSC incorporation licence. This applies to JSCs that the State or any other public legal entity established whole or in part. In contrast, the former legislation called for a Royal Decree that was approved by the Council of Ministers after taking into account all relevant laws and a request from the Minister of Commerce and Industry.

According to the New Law, if a JSC incorporation application that is owned entirely or in part by the State or by another public legal entity calls for exemptions from the New Law, the application for the licence and the exemptions must be submitted to the Council of Ministers for review and approval.

Establishing a JSC

The time frame within which the founders are required to convene all shareholders for a Founders/Constituents Assembly meeting is different for public JSCs and closed JSCs under Article 62 of the New Law. A public JSC's founders are required to arrange a Founders/Constituents Assembly meeting for all shareholders within 45 days of the IPO's closing, provided that there is a minimum of 10 days' notice before the meeting. On the other hand, it is a requirement that the founders of a closed JSC call a Founders/Constituents Assembly meeting within 45 days of the Ministry's decision to grant the JSC a licence to be incorporated, provided that the time between the call for the meeting and the actual meeting must not be less than three days.

Other Changes Brought By The New Companies Law:

• Increased flexibility: it eases the statutory requirements for small and micro companies, facilitates the incorporation procedures and allows extra flexibility in forming and setting out the company’s articles of association or bylaws.
• It creates more sophisticated vehicles for entrepreneurs, venture capitalists and private equity.
• It removes many restrictions in the company’s incorporation, business conduct and exit from the market.
• It now grants limited liability companies the right to issue negotiable debt instruments or financing instruments.
• It has introduced more developed and elaborate re-structuring and merger provisions.
• It allows companies to split into two or more companies.
• It allows owners of sole proprietorship to transfer their assets to any form of company.
• It allows the issuance of different classes of shares with different rights, privileges or restrictions, and the issuance of shares to employees to attract and motivate talent.
• It allows the distribution of profits on an interim or annual basis and safeguards creditors’ rights.
• It allows attendance at general assembly meetings through electronic means.
• It provides for shares to be divided or split into shares of lower value, or consolidation thereof to represent shares of a higher nominal value.
• It exempts small and micro companies from auditing requirements.
• “Partnership” companies are no longer recognized as a category of companies.
• Under Article (181) of the New Law, the company’s articles of association may provide that, upon the approval of one or more shareholders representing at least (90%) of the company’s capital (1) the majority of the shareholders may force the minority to accept an offer from a bona fide buyer to purchase all the company’s shares at the same price and conditions, (2) the minority of shareholders may force the majority to guarantee the sale of the minority shares if the majority decides to sell their shares, at the same price and condition.

Conclusion

The New Companies Law improves business sustainability, promotes investments in small and micro businesses, streamlines procedures and regulatory requirements, expands market variety by introducing new company kinds, safeguards shareholders, and lessens the likelihood of conflicts in the corporate side of Saudi Arabia.