On Monday 9 November 2015, the Ministry of Commerce and Industry (MOCI), announced that the new Saudi Companies Law (NCL) shall come into force 150 days from its publication in the Saudi Official Gazette. This will naturally have a significant impact on investors, their relationships, current investments and potential transactions.
Since the enactment of the previous Companies Law in 1965, there has been much discussion over the years in relation to potential changes. The announcement by MOCI is therefore long awaited and marks a significant change in the legal framework to carry out business in Saudi Arabia.
The NCL was officially announced after a comprehensive comparative analysis study of other countries' companies law. It intends to draw on international best practice and strike a balance between corporate governance and entrepreneurship, creating an environment conducive to companies enhancing their value, activities and growth as well as their contribution to the Saudi Arabian economy.
The NCL consists of 227 articles (compared to 266 articles in the previous 2011 draft law). Noteworthy changes:
- Expressly establishing the position of a holding company which can be established in the form of a Limited Liability Company (LLC) or a Joint Stock Company (JSC) as long as amongst other things the company identifies itself as a holding company by including 'holding' in its name.
- In-kind contributions to capital will need to be valued by a certified evaluator.
Provisions relating to LLCs
- One shareholder may now establish a LLC - previously, the law required two.
- When incorporating and amending articles of association, publication in MOCI's website will be sufficient instead of publication in the official gazette or a local newspaper.
- The statutory reserve which needs to be put aside each year by the company is no longer needed once the reserve has reached 30% of the share capital. This is reduced from the previous requirement of 50% of the share capital.
- The shareholders, in certain circumstances, shall no longer be liable if the company's debts exceed 50% of the company's share capital. Instead, if the General Manager or Board does not call the shareholders to meet, or the shareholders do not resolve to continue the company or dissolve it, the company shall dissolve by operation of law.
- If the number of shareholders in an LLC exceeds 50, the company should be converted to a joint stock company within one year, otherwise the company shall be considered dissolved under the NCL, unless the increase in shareholders was as a result of an inheritance or provisions of a will.
- There is a specific duty of confidentiality imposed on shareholders and the information they receive in relation to the company.
Provisions related to JSCs
- The government, public juristic persons, companies that are totally owned by the government, and companies of capital not less than SAR5 million, may incorporate a one-person joint stock company, with full authority of the shareholders assemblies, including the foundation assembly.
- The number of shareholders required for a Closed JSC has been reduced from 5 to 2 shareholders.
- The minimum capital required for JSCs has been reduced from SAR 2 million to SAR 500,000.
- A chairman of the JSC cannot be appointed as an executive officer.
- The minimum number of members of boards of directors is three, with a maximum of 11. In addition, owning a specified minimum number of shares of the relevant company will no longer be required.
- Flexibility in relation to conducting General Assembly Meetings found in modern articles of associations recognising holding meetings with modern telecommunications and permitting new meetings to be held 1 hour after the previous inquorate meeting if permitted in the by-laws.
- JSCs may issue sukuks and other debt instruments.
- JSCs are allowed to purchase or mortgage their shares.
For queries in relation to the new Companies Law and how it will impact your current or future investments, please contact the authors.
We shall be issuing further releases and holding training sessions over the coming months as we digest and fully analyse the changes. Please get in touch to register your interest for future publications and training.