Saudi Arabia promotes investment with new Companies Law

By Wang Jihong and Zhao Huiqi, Zhong Lun Law Firm 
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After two years of drafting, consultation and amendments, the new Companies Law was officially promulgated in Saudi Arabia on 30 June 2022 and will enter into force in January 2023, replacing the old Companies Law of 2015 and the Professional Companies Law of 2019. The new Companies Law, which consists of 281 articles, is more in line with Saudi Vision 2030 than the old law, and will grant investors greater flexibility and better protection of their business interests. The new law makes major breakthroughs and innovations in the following areas.

NEW FORMS OF COMPANIES

Wang Jihong, Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

Under the new Companies Law, the types of companies that can be established by investors include:

    1. Joint liability company;
    2. Limited partnership company;
    3. Joint stock company;
    4. Simple joint stock company; and
    5. Limited liability company (LLC).

Among these, the simple joint stock company is a new company form created by the new law, which will seek to meet the growing demand from investors for startup and venture capital.

As a flexible corporate entity, a simplified joint stock company can be set up by one or more persons and managed by one or more managers, or a board of directors, and it can issue different types of shares.

SETUP OF JOINT STOCK COMPANY

The new Companies Law relaxes the requirements for joint stock companies. It allows the establishment of one-person joint stock companies, eliminates the requirement to hold an establishment meeting, removes restrictions on the number of board members and the remuneration of directors, and allows the issuance of different classes of shares with different rights and obligations.

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JV AGREEMENTS, FAMILY CHARTERS

Article 11 of the new Companies Law expressly allows the inclusion of binding joint venture agreements and family charters in the company’s articles of association (which must not conflict with existing laws and articles of association) as a basis for the governance and management of the company, and the distribution of profits.

Prior to this, no explicit recognition of joint venture agreements or family charters under Saudi law had led to inconsistencies in judicial decisions on their validity.

The new Companies Law recognises the validity of these documents and enables more flexible and complex shareholder arrangements in joint venture agreements tailored to the specific needs of family businesses.

BROADER ACCESS TO FINANCE

Zhao Huiqi, Zhong Lun Law Firm
Zhao Huiqi
Associate
Zhong Lun Law Firm

The new law allows LLCs to issue negotiable bonds and other financing instruments under the capital market laws and regulations, giving them the flexibility to pledge their shareholdings and increase their access to financing in Saudi Arabia. Compared with the old Companies Law, the new law introduces significant changes in the following areas:

  1. Requirements for incorporation documents. The new Companies Law stipulates the requirements for the declaration, documents and articles of association to be submitted for the incorporation of a company. Two of these documents must be submitted for new companies. One is a statement from shareholders stating that the company complies with the requirements of the new Companies Law relating to the incorporation of companies. The other is a statement or report prepared by an accredited valuer showing its fair value if there is any capital contribution in kind.
  2. The duty of diligence and fidelity of directors and managers. The new Companies Law provides that directors and managers are not liable for losses to the company arising from their decisions, provided that the decisions do not involve their personal interests and are based on their reasonable judgment of the objective circumstances and full knowledge of the relevant matters within the necessary scope, acting in the best interests of the company. The burden of proving the relevant issue lies with the aggrieved party. The old Companies Law is unclear in this regard and inconsistent court rulings exist.
  3. Buyback of shares by LLCs. Under the charter, an LLC may buy back or pledge its shares, which do not carry voting rights. This share buyback rule will enable LLCs to restructure their existing share capital more quickly and facilitate shareholders of LLCs to explore new exit routes.
  4. Drag-along and tag-along rights. The articles of association can include the following rules on the consent of shareholders representing 90% or more of the company’s equity: entitling the majority of shareholders to require other shareholders jointly to transfer all shares of the company to a bona fide third party on the same terms and at the same price, and that minority shareholders require majority shareholders to guarantee the same terms and price for selling their shares together. This is the first time Saudi laws have recognised the rights of drag-along and tag-along, which were often difficult to enforce before this arrangement.
  5. Matters relating to the compulsory dissolution of LLCs due to losses. Under the old law, if an LLC lost more than half of its capital, the manager must record that in the commercial register and call a shareholders’ meeting within 90 days after knowledge of the loss to discuss whether to continue in business or dissolve the company. If the manager fails to call a meeting of shareholders, or if the meeting fails to make a decision, the company will be compulsorily dissolved. In contrast, the new Companies Law removes the requirement for the compulsory dissolution of LLCs. It clarifies that if an LLC loses more than half of its capital, the manager has 60 days to call a shareholders’ meeting after becoming aware of the situation to see whether to continue the business and take relevant concrete measures, or liquidate the company.

The new Companies Law has yet to come into effect and authorities have not announced a deadline for amending the articles of association of companies to comply with the new law. However, Chinese investors should take note of the changes to update the articles of association of their Saudi companies, complying with the requirements of the new Companies Law.

Wang Jihong is a partner and Zhao Huiqi is an associate at Zhong Lun Law Firm

Zhong Lun law Firm

Zhong Lun Law Firm

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zhaohuiqi@zhonglun.com

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