Kingdom of Saudi Arabia Introduces New Companies Law 2022

By Abdullah Rauf

In June 2022, the Kingdom of Saudi Arabia (KSA) issued the New Companies Law pursuant to Cabinet Resolution No. 678 dated 29/11/1443H (corresponding to 28/06/2022) and ratified by Royal Decree No. (M/132), dated 01/12/1443H (corresponding to 30/06/2022) (New Companies Law) with the aim of providing greater flexibility to corporate structures and follow international best practices.

The New Companies Law will be effective one hundred and eighty (180) days following its publication in the Official Gazette. The KSA 2015 Companies Law and the KSA 2019 Professional Companies Law will be repealed once the New Companies Law comes into effect. Any other provision in any other law in force which conflicts with the New Companies Law will be overridden by this New Companies Law.

The Law regulates both commercial companies and non-profit companies. It reduces the requirements and simplifies the procedure for establishing a new company. These include, inter alia, the option to include commercial terms and conditions in the contracts of incorporation of a company or in its articles of association. Further, restrictions on company names under the previous legislation have been removed pursuant to the New Companies Law.

The New Companies Law also introduces a new form of company, a simple joint stock company that meets the needs of entrepreneurship and venture capital growth. A simple joint stock company may also serve as an investment arm to non-profit companies that enables non-profit companies to invest and generate returns and spend such returns on non-profit purposes. A simple joint stock company provides a flexible corporate structure and may be established by one or more persons. It shares the same benefits as a limited liability company in terms of no minimum share capital requirement, flexibility in management and ease of establishment and also enjoys the benefits of a closed joint stock company in terms of ability to trade shares and issuing shares under different classes. The New Companies Law also provides that general meetings for joint stock companies and simple joint stock companies may be held virtually.

The regulatory requirements in relation to small, medium, and micro companies have also been made less stringent under the New Companies Law. It is no longer mandatory for small and micro companies to appoint a certified auditor. A micro company is classified as a company which has up to five (5) employees with a total turnover of less than three million Saudi Riyal (SAR3,000,000). A small company is classified as a company that has between six (6) and fortynine (49) employees with an annual turnover of three million Saudi Riyal (SAR3,000,000) to forty million Saudi Riyal (SAR40,000,000). However, foreign companies will still be required to have auditors even if such companies fall within the purview of a small or a micro company.

In addition to the above, amendments have been made to the provisions pertaining to transformation and merger of companies and allowing the owners of individual entities to transfer assets to any type of company. The New Companies Law also allows mechanisms permitting a company to be divided into two (2) or more companies. The New Companies Law allows greater flexibility in relation to the issuance of shares. Under the New Companies Law ordinary, preference and redeemable shares may be issued with certain rights and privileges attached to certain class of shares, including voting rights and dividends. It also provides for shares to be divided or split into shares of lower value or consolidated to represent shares of a higher nominal value.

The New Companies Law allows all partners and shareholders of a company to conclude a family charter which consists of regulating the family ownership of the company, including its governance, work policies, policies adhering to the employment of family members, distribution of profits or disposing of shares and the settlement of disputes and others. A family charter is binding and may be part of the companies’ articles of association if it does not violate any provision of the New Companies Law, any other laws or is inconsistent with the articles of association or incorporation of the company. A company’s articles of association may also provide for the settlement of disputes that may occur between partners or between the company and its managers by resorting to arbitration or other alternative means of settling such disputes.

The New Companies Law now allows limited liability companies to also issue tradable debt and financial instruments with the approval of the partners and in accordance with the constitution documents of the company. It also allows for the distribution of interim/ annual dividends to partners/ shareholders in joint stock companies, simplified stock companies and limited liability companies in accordance with the company’s constitutional documents and policies.

The New Companies Law lifts restrictions in relation to the number of directors on the board of closed joint stock companies and joint stock companies allowing for a greater representation at board level. The New Companies Law does not impose any limitation on the remuneration of the members of the board of directors allowing the top performing directors to be remunerated accordingly, allowing businesses to attract and retain the best talent on board level.

Under the New Companies Law dragalong, tag-along and pre-emption rights have also been introduced which can form part of some joint venture arrangements. A tag-along right allows the minority shareholders to participate in a sale of shares by the majority shareholders to a third party at the same price and on the same conditions. Similarly, a drag-along right allows the majority shareholders to compel the minority to accept an offer from a bona fide buyer to purchase all the company’s shares at the same price and conditions. Shareholders of an entity may also have a right of first refusal regarding any transfer of shares made by other shareholders to a third party.

The New Companies Law appears to be another milestone to further and support the objectives of the KSA Vision 2030 initiative, introducing significant changes to the KSA corporate law framework with the aim of attracting investment in small and medium companies by simplifying procedures and regulatory requirements and promoting corporate governance in line with best international practices.