May 9, 2018

Recent developments on Saudi’s Companies Law

The Council of Ministers of Saudi Arabia recently approved the amendments of certain provisions of the Companies Law. The amendments introduce 11 adjustments to certain articles, mostly in connection with Joint Stock Companies and Limited Liability Companies. This article aims to outline the various amendments to the Companies Law.

On 10 April 2018G, the Council of Ministers (CoM) approved the amendments of certain provisions of the Companies Law, issued pursuant to the Royal Decree number M/01 dated 10 November 2015G and amended by the Royal Decree number M/79 dated 11 April 2018G (the Companies Law).

The recent CoM's resolution introduced 11 adjustments to certain articles of the Companies Law (the Amendments), mostly in connection with Joint Stock Companies (JSC) and Limited Liability Companies (LLC).

The implication of the Amendments is that the Ministry of Commerce and Investment (MoCI) might reflect them in its unified standard Articles of Association and Bylaws templates for JSCs and LLCs (collectively the Constitutional Documents).

In that case, JSCs and LLCs shall be required to amend their Constitutional Documents to be in compliance with the Amendments. MoCI did not announce any information and we are currently in discussions with the officials to confirm the implications and required actions to be taken following the implementation of the Amendments.

Below are explanatory and comparison tables outlining the Companies Law Amendments (underlined)

General Amendments

Article No

Previous Article

New Article

12
  1. Except for joint ventures, the company's articles of association and any amendments thereto shall be in writing and authenticated by the competent authority, otherwise the articles or the amendment shall be deemed void.
  2. The directors or the board of directors (as appropriate) shall be jointly responsible for damages sustained by the company, shareholders or third parties as a result of failure to record the articles of association or any amendment as indicated in paragraph 1 of this article.  

Except for joint ventures, the company's articles of association and any amendments thereto shall be in writing, otherwise the articles or the amendment shall be deemed void. The incorporation of the company and amendment of its articles of association shall be after the completions of the mandatory requirement in accordance with the Companies Law or as determined by MoCI.

Summary of Key General Amendments

  1. The articles of association and its related amendments and authentication procedures shall now be subject to MoCI's regulations and requirements; and
  2. Section 12 (2) is revoked. Accordingly, liabilities on board of directors and/or director(s) of companies (as the case may be) resulting from the failure of recording the company's articles of association and its related amendments are no longer applied.

JSCs Amendments

Article No

Previous Article

New Article

71 (1)
  1. A board member may not have any direct or indirect interest in transactions or contracts made for the company, except with a prior authorisation from the ordinary general assembly. Such authorisation shall be renewed annually. The board member shall notify the board of directors of any direct or indirect interest he may have in the transactions or contracts made for the company. Such notification shall be recorded in the minutes of the board meeting. Said member may not participate in voting on the resolution to be issued on this matter by the board of directors and the assembly of shareholders. The chairman of the board shall inform the general assembly, when it convenes, of transactions and contracts in which a board member has a direct or indirect interest, providing a special report from the company’s external auditor.
  2. If a board member fails to disclose his interest as provided for in paragraph 1 of this Article, the company or any shareholder may petition the competent judicial authority to invalidate the contract or obligate the member to return any profit or benefit realized therefrom.
  1. A board member may not have any direct or indirect interest in transactions or contracts made for the company, except with an authorisation from the ordinary general assembly and in accordance with the applied conditions by the competent authorities. The board member shall notify the board of directors of any direct or indirect interest he may have in the transactions or contracts made for the company. Such notification shall be recorded in the minutes of the board meeting. Said member may not participate in voting on the resolution to be issued on this matter by the board of directors and the assembly of shareholders. The chairman of the board shall inform the general assembly, when it convenes, of transactions and contracts in which a board member has a direct or indirect interest, providing a special report from the company’s external auditor.
  2. If a board member fails to disclose his interest as provided for in paragraph 1 of this Article, the company or any shareholder may petition the competent judicial authority to invalidate the contract or obligate the member to return any profit or benefit realized therefrom.
New added clauses 71 (3) and (4)
  1. The liabilities for damages resulting from the transactions or contracts indicated in paragraph 1 of this Article shall be upon the member that has an interest in the transaction or contract (including board members) if these transactions or contracts were in breach of this section, or if they were deemed unfair, contradict and/or affect the shareholders.
  2. Board members objecting such resolutions shall be exempted from the liability once they prove their explicit objection to such resolution in the minutes of the meeting. The non-attendance of the meeting in which the resolution was issued in shall not be a reason to waive the liability, unless the board member can prove that he was not aware of such resolution or his inability to object once he became aware of such resolution.   
72 A board member may not engage in any act or business that may compete with the company or with any of the categories of its activities. Otherwise, the company shall have the right to petition the competent judicial authority to claim appropriate damages, unless such member has a prior authorisation, annually renewed, from the ordinary general assembly. A board member may not engage in any act or business that may compete with the company or with any of the categories of its activities. Otherwise, the company shall have the right to petition the competent judicial authority to claim appropriate damages, unless such member has an authorisation, from the ordinary general assembly and in accordance with the applied conditions by the competent authorities.
New added article

This article was added, to be named as "Article 80" and indicated the following:

The company might be liable to cover the incurred expenses by the shareholder for filing a claim against the company (irrespective of the claim's result) and in accordance with the below conditions:

  • If the shareholder filed the claim in good faith;
  • If the shareholder has informed the company of the request/reason that made him file the claim, and did not receive any respond from the company to such request/reason within 30 days;
  • If the claim was for the benefit of the company in accordance with article 79 of the Companies Law; and
  • the claim must be based on legitimate and valid reason.
91 The call for the general assembly's meeting shall be published in a daily newspaper distributed in the region where the head office of the company is located, at least 10 days prior to the date set for the meeting. However, a call sent by registered mail at the said time shall suffice. A copy of the call together with the agenda shall be sent to MoCI, and the Capital Market Authority in the case of a listed company, within the period specified for publication. The call and agenda for the general assembly's meeting shall be published in a daily newspaper distributed in the region where the head office of the company is located, at least 21 days prior to the date set for the meeting. However, a call sent by registered mail at the said time shall suffice. A copy of the call together with the agenda shall be sent to MoCI, and the Capital Market Authority in the case of a listed company, within the period specified for publication.
104 The audit committee shall review the company’s financial statements, and auditor’s reports and comments, and shall provide its opinion thereon, if any. The committee shall also prepare a report of its opinion concerning the efficiency of the internal control within the company, and about any other activities it has undertaken within its powers. The board shall deposit a sufficient number of copies of such report at the head office of the company at least 10 days prior to the general assembly's meeting to be available for interested shareholder(s) who would request a copy. Said report shall be read during the meeting of the general assembly. The audit committee shall review the company’s financial statements, and auditor’s reports and comments, and shall provide its opinion thereon, if any. The committee shall also prepare a report of its opinion concerning the efficiency of the internal control within the company, and about any other activities it has undertaken within its powers. The board shall deposit a sufficient number of copies of such report at the head office of the company at least 21 days prior to the general assembly's meeting to be available for interested shareholder(s) who would request a copy. Said report shall be read during the meeting of the general assembly.
126 (3) Documents provided for in paragraph 2 of this Article (i.e. financial statements and report of the company's financial position during the last fiscal year) shall be signed by the chairman of the company’s board, chief executive officer and chief financial officer, and a copy thereof shall be kept at the company’s head office to be available to shareholders at least 10 days prior to the general assembly's meeting. Documents provided for in paragraph 2 of this Article (i.e. financial statements and report of the company's financial position during the last fiscal year) shall be signed by the chairman of the company’s board, chief executive officer and chief financial officer, and a copy thereof shall be kept at the company’s head office to be available to shareholders at least 21 days prior to the general assembly's meeting.

Summary of JSCs Key Amendments

  1. General assembly's authorisation related to the direct or indirect interest of board members in transactions made for the company may be obtained prior or post the engagement in such transactions. However, the board must be notified of such involvement and its authorisation must be in accordance with the applied conditions by the competent authorities;
  2. board of directors in JSCs may be liable for losses and damages caused to the company as a result of actions, contracts and transactions made for the company, provided that such liability may be waived in certain cases where the director(s) proves his inability of rejecting the adopted actions by the board of directors;
  3. shareholders in JSCs may take legal actions against the company provided that certain conditions must be satisfied; and
  4. the duration of submitting the general assembly's agenda, financial records and reports in JSCs was extended to 21 days, giving the shareholders additional time to review the documents, understand the financial position of the company and its operations (more transparency).

LLCs Amendments

Article No

Previous Article

New Article

157 (1) Without prejudice to Article 14 of the Law, a limited liability company may not be incorporated until after all cash and in-kind shares of the shareholders are determined and are fully paid. Cash shares shall be deposited with a licensed bank which may not allow disbursement therefrom except upon publication of the company's incorporation and its registration in the commercial register.

Article 157 (1) is revoked.

161
  1. A shareholder may assign his share to another shareholder or non-shareholder in accordance with the conditions stipulated in the company’s articles of association. If a shareholder wishes to assign his share, with or without consideration, to a non-shareholder, the other shareholders shall be informed of the assignment conditions through the company’s director. In such case, each shareholder may request pre-emption of the share at its fair value within 30 days from the date of being notified, unless the articles of association provide for a different valuation method or period. If the right of pre-emption is invoked by more than one shareholder, such share(s) shall be divided among them in proportion to their share in the capital. The right of pre-emption provided for in this Article shall not apply to transfer of ownership of shares by inheritance or bequest or pursuant to a judgment by the competent judicial authority.
  2. If the period prescribed for invoking the right of pre-emption expires without being used by any shareholders, the shareholder shall be entitled to assign his share to a third party.
  1. A shareholder may assign his share to another shareholder in accordance with the conditions stipulated in the company’s articles of association.
  2. If a shareholder wishes to assign his share, with or without consideration, to a non-shareholder, he must notify the other shareholders through the company’s director of the name of assignee and/or buyer and the assignment conditions. The company's director must notify the other shareholders once he receives the assignment notice. Each shareholder may request pre-emption of the share within 30 days from the date of notifying the company's director of the agreed assignment amount, unless the articles of association provide for a different valuation method or a longer period. If the pre-emption is invoked by more than one shareholder, such share(s) shall be divided in proportion to their share in the capital. If the period prescribed for invoking the right of pre-emption expires without being used by any shareholders, the shareholder shall be entitled to assign his share to a third party.
  3. The right of the pre-emption request provided for in this Article shall not apply to transfer of ownership of shares by inheritance or bequest or pursuant to a judgment by the competent judicial authority.
167 (3) The general assembly may be called for a meeting at any time upon the request of the directors, supervisory board, auditor or shareholder(s) representing at least half of the capital. The general assembly may be called for a meeting at any time upon the request of the directors, supervisory board, auditor or shareholder(s) representing ten percent of the capital.

Summary of LLCs Key Amendments

  1. Companies were previously required to submit a bank deposit certificate to MoCI in order to issue the Commercial Registration Certificate. However, the payment of capital is not required on the incorporation of LLCs noting that the deposit of the capital amount in one of the licensed banks in the Kingdom of Saudi Arabia must in all cases be completed within 90 days following the issuance of the Commercial Registration Certificate;
  2. the procedures of assigning shares and pre-emption rights in LLCs were amended and further clarified. For example, the transferor shareholder must notify the company’s director of the name of the potential assignee and/or buyer. In addition, the evaluation of shares will now be based on the agreed amount between shareholders and not restricted to the fair value; and
  3. shareholders meetings in LLCs may be convened upon the request of shareholders representing 10% of the company's capital.

Ministerial Resolution Relating to New Regulations Applicable on LLCs

Following the announcement of the Amendments, the Minister of MoCI according to article 225 of the Companies Law, has issued a Ministerial Resolution dated 02/08/1439H (corresponding to 18/04/2018G) (the Resolution) governing the shares transfer procedures and shareholders resolutions in LLCs, in addition to the requirement of shareholders' dispute resolution in the LLCs' articles of association as well as adding to articles 161, 169, and 174 of the Companies Law.

The Resolution has become into effect since its publication date in the official gazette (Um Al Qura) on 24 April 2018 and replaced the Ministerial Resolution number 32565 dated 26/06/1438H (25/03/2017G). The key points of the Resolution are:

  1. the distribution of dividends among the shareholders in LLCs should be pursuant to the issued shareholders resolution in this regard, provided that the distribution of such dividends must be within 30 days starting from the date of issuing the relevant shareholders resolution;
  2. the unanimous shareholders' approval must be obtained in order to have a new shareholder entering into the LLCs with new additional shares;
  3. the manager(s) and/or board of managers (as the case may be) in LLCs are obligated to obtain the shareholders' approval concerning the selling of more than 50% of the company's assets (whether the selling was through one or multiple transactions). If the selling of the assets was through multiple transactions, the transaction through which the excess of 50% such happen shall be the one that requires the shareholders' approval. The calculation of the 50% should commence from the date of having the first transaction occurring within the previous 12 months; and
  4. shareholders in LLCs must include in their articles of association specific procedures governing the settlement of disputes between them that affect the company's operations. Such procedures must include its means, scope and the situations to be applied on.

Next Steps

Existing and new companies must take into consideration the requirements of the Companies Law, the Amendments, the Resolution and all of the subsequent regulations when preparing their Constitutional Documents and operating their day-to-day businesses. Further details regarding the implications of the Amendments and the Resolution should be announced soon by the government officials, following which we highly advise the concerned entities to ensure their compliance with the applied regulations and contact us for advisory and legal assistance.