Analysing Saudi Arabia’s New Companies Law
Recently, the KSA or Kingdom of Saudi Arabia has approved new companies law which will come into effect by starting of 2023. KSA is one of the brightest as well as dynamic economies in the Middle East. Foreign Direct Investment in KSA is around 3778 USD Million from 2006 until 2022 with each year performing better than the last year. Saudi Arabia is a hub for global investment and hence, the new law is a delight to the whole world as these laws are in line with opening the corporate sector of KSA to the world in a systematic and processed manner whereby the rights of KSA people are also secured. New laws have the potential to attract foreign investment and to open doors for modern technologies to thrive. The new law would replace the current Companies Law of 2015 as well as the Professional Companies Law of 2019. The crucial elements of the new law are therefore discussed briefly to give an idea of what is the intent of the new law and how it is achieving the same.
Simplified Joint Stock Company
The new law has created a special category of companies called Simplified Joint Stock Company (SJSC).1 Simply, joint-stock companies are companies in which the shares of a company’s stock can be bought and sold by the shareholders. So categorically, it is a business owned collectively by its shareholders. This form of company has been created in order to meet the inflating demands of entrepreneurship and mark growth in venture capital. As per the law, SJSC can be established by one or more people. Further, the Article of Association (AoA) would deal with the structure resulting in the division of capital into tradable shares. On its face, there is no need for minimum capital requirements. The Chairman and Board of directors will hold the management power of the company, however, controlled under the AoA. Basically, SJSC combines all benefits of a Limited Liability Company like the ease of management, establishment, etc. followed by adding benefits of a Closed Joint Stock Company like ease to trade shares, etc.2
Recognition of Squeeze-out procedures
Basically, a squeeze-out procedure is a procedure that allows certain shareholders holding majority shares to gain complete ownership of the company. So it simply means buying out minority shareholders in one way or the other. So as per new law, where at least 90% of a shareholder is in favour of selling the entire issued share capital to a bona fide buyer, they can require the minority shareholder to also accept the offer and sell their shares at fair value. However, the same must have been dictated by AoA.
Wider Choice of Company names
Under the new law, much flexibility has been given to incorporate the name of a company. Now, certain restrictions have been removed allowing to have wider choice to select a name. Firstly, the company can now keep a name that is not in the Arabic language. Secondly, the name can be kept on seeing the purpose of the company, or its current or former shareholders. Further, the name can be unique however; it must not contradict the Trade Names Law.3
Reduction in legal requirements for Small and Very Small entities
The new law significantly reduces legal requirements and procedures for Saudi-owned MSMEs/ Small or Very Small entities in respect of establishing the same. A small company is a company having less than 50 employees but not less than 6, with an annual turnover of SAR 3 to 40 million. On the other hand, a Very Small company has employees of less than 6 and a turnover of less than SAR 3 million. Small or Very Small companies of Saudi origin now do not need to have a certified auditor. This exception is only for the first fiscal year of its incorporation or during two consecutive fiscal years. It is done with the aim of encouraging start-ups in Saudi Arabia. Nonetheless, the need to have an auditor is a still requirement if the company is of foreign origin.4
Covering the regulatory gap in Shareholder’s agreements
Before the new law, there was a situation where no proper recognition was given to Shareholder’s agreements as they were not properly recognized by judicial authorities. The authorities considered AoA as superseding such an agreement. However, now the situation has changed and the law has become more comprehensive. The new law specifically recognizes such shareholder agreements and even allows incorporating those agreements into the AoA of a company. So, more clarity has been gained on such agreements giving them binding effect and ensuring coherence between AoA as well. This helps shareholders in getting their agreements seeing the light of the law.5
Law on Dividend
Now, the new law allows the company to release interim dividends as well as on annual basis. This can be done from distributable profits and can be given to shareholders. Further, shareholders can now agree on a certain percentage for the distribution of dividends according to their will. Earlier, Sharia Law was followed in which companies used to distribute varying dividends among the shareholders despite their clear ownership percentage.6
Other important changes
- Allowing arbitration to proceed in case of Shareholder disputes as per adding the clause of arbitration in AoA or by-laws.
- Removing restricted approach towards the appointment of a limited number of Board of Directors and compensation related to same with the view to promote higher talent on board with performance-based incentives.
- Allowing the companies to issue multiple classes of shares, like preference shares, ordinary shares, redeemable shares, etc.
- Permitting LLC to issue negotiable debt instruments or financing instruments.
- Incorporating technology by allowing digital means to conduct general meetings of a company.
- Protecting the company general manager or board manager from liability in cases where adverse effects have taken place due to a bad decision taken by the company.
It can be seen that the new amendments and incorporations brought by Saudi Arabia are in tune with the present wave of entrepreneurship and venture capitalization. At each corner, the lawmakers have ensured and have given enough regard to promoting entrepreneurship. Further, the rights of shareholders have been safeguarded. Shareholders have now been given a central position in the whole dynamics of a company. Further, unnecessary regulations that were creating administration and managerial difficulties have been ruled out and the law has been made lenient in most places. The law can be termed as innovative and advanced thereby giving adequate recognition to the global corporate dynamics. However, it is time to observe its implementation and what further laws would be brought into force in order to give complete effect. This new law should be seen as a welcoming step as it has reduced barriers and has ensured freedom of corporate will to shine.