Saudi New Companies Law 2022: The company law in the Kingdom of Saudi Arabia (KSA) shows certain limitations to foreign as well as domestic investors, when compared with the structures, concepts, and processes commonly seen across the US, Europe, and Asia. This feature is not only in KSA but throughout the Middle East. This creates a hurdle in the way of foreign direct investment (FDI) in the region including Saudi Arabia. This is the reason why the Saudi Council of Ministers approved the long awaited “New Companies Law” on June 28, 2022 (Tuesday).
Highlights of Saudi Arabia New Companies Law 2022
The New Law of Saudi Arabia consists of 281 articles enacted by Cabinet Resolution No. 678, dated 29/11/1443H (corresponding to June 28, 2022) and ratified by Royal Decree No. (M/132), dated 01/12/1443H (corresponding to June 30, 2022). In pursuance of Royal Decree it was published on July 4, 2022 in the official gazette (Umm Al Qura newspaper). The New Law 2022 is a step forward to make Saudi Vision 2030 working and successful.
To achieve the objectives set in Vision 2030 the New Law incorporates changes in old laws, introduces safeguards of business interest, allows flexibility in process, empowers the private sectors, follows international business practices, and creates an ease of doing business atmosphere in the Kingdom.
Enforcement of Saudi Arabia New Companies Law 2022
The old Companies Law issued by Royal Decree No. (M/3) dated 28/01/1437H (October 10, 2015) and the Professional Companies Law issued pursuant to Royal Decree No. (M/17) dated 26/01/1441H (September 25, 2019) will be replaced by the New Companies Law 2022. It will also replace all those provisions of any other enforced law which are in conflict with New Law. The New Law 2022 will be enforced after 180 days, most probably on or around January 1, 2023, following its publication in the Official Gazette.
Features of New Companies Law 2022
The main features of New Companies Law 2022 are to enhance the business foreign direct investment in Saudi Arabia and develop ease of doing business ecosystem in all business segments. Its objective is to initiate shifting the Kingdom from the oil based economy to business oriented economy by 2030. In this direction the New Law will do the followings:
- It can regulate commercial, non-profit, and professional companies together.
- As a result investors will be able to incorporate any of the following types of companies:
- Joint Liability Company,
- Limited Partnership Company,
- Joint Stock Company,
- Simple Joint Stock Company,
- Limited Liability Company
3. It has introduced the “Simple Joint Stock Company” (SJSC), a new form of company. As a “Simplified Joint Stock Company (SJSC)” is given in Article 138 -155 of Saudi Arabia Cabinet Decision No. 678/1443.
- The SJSC can fulfill entrepreneurship as well as venture capital rising demands.
- It is such a flexible corporate entity that one or more persons can establish it.
- One or more persons can establish a SJSC and its capital can be divided into tradable shares with a structure given by the Article of Association.
- No minimum capital is required to incorporate a Simplified Joint Stock Company.
- Several classes of shares can be issued and managed by one or more persons or board of directors.
- Decisions of shareholders can also be made by a circular which will be an alternative to a general body’s decision.
- The chairman and board of directors have the widest powers in the management of the company similar to Limited Liability Companies to achieve purposes set in Saudi Arabia Cabinet Decision No. 678/1443
- Its purpose is to attract investment in businesses along with enabling non-profit companies to enter the private sector.
4. The article 11 of the New Law 2022 allows the binding of joint venture agreements and family charter in the company’s articles of association for the regulation of family owned businesses, their governance and administration policy, family members’ employment and the family business’ profits. As a result there is no conflict with the law, articles or the bylaws.
Analysis of Other Changes in the New Companies Law
Clarity and Transparency in Shareholders Agreement
The Saudi New Companies Law resolves the regulatory issue related to shareholders’ agreements. Under New Law a company can issue ordinary shares, preference shares and redeemable shares as per Article 108(1) of Saudi Arabia Cabinet Decision No. 678. It also allows a company’s Articles of Association which can provide other types or classes of shares and grants or restricts certain rights or privileges to attract investments. These types of provisions are not available in the old company’s Articles of Association which can govern the relationship between the shareholders. This issue was also not properly recognized by courts and court practices.
Auditor’s Appointment Exemption in Micro and Small Companies
The New Law Article 19 exempts the appointment of a certified auditor to micro (up to 5 employees) and small companies having 6 to 49 employees with an annual turnover of SAR 3 to 40 million to encourage and speed up start-ups into the Saudi business market. However, foreign micro and small companies will be required to have auditors.
Squeeze-out Right of Shareholders
Article 113 of New Law authorises the shareholders having 90% or more of the total voting shares will be able to force the owners of the remaining 10% to sell their shares to a buyer who agrees to purchase the entire issued share capital. If the same is permitted in the company’s Articles of Association for making companies more attractive to investment opportunities in the region. But the minority shares will be sold at the same price and on the same terms and conditions as the sale of majority shares.
More Choice of Company Names
The New Law provides a wider choice of company name to those who want a specific name in the business market. This company name may be in languages other than Arabic and can be derived from:
a) Purpose of company
b) Its current or former shareholders, or
c) A combination of both
d) Other name which complies with Royal Decree No. M15/1420 approved by the Trade Names Law.
Encourage Employees to Buy Shares
Under Article 72 (2) (b) of Saudi New Companies Law there is a provision of incentivisation of talent within companies. Under this policy shareholders do not have pre-emption rights when a company issues shares that are allocated to employees.
New Company Merger and Restructuring Provisions
The New Law’s Chapter 10 makes rules for the merger, restructuring, and division of companies. The rules under New Law provide more clarity and transparency in comparison to Old Law on the rights and obligations of shareholders on the merger, conversion, or dissolution of a company.
Limited Liability Companies Financing Policy
The New Law 2022 allows Limited Liability Companies (LLCs) to issue Sukuks, negotiable debt instruments or financing instruments under the KSA Capital Market Law. Thus, it broadens the scope for financial capabilities and enhances the stability of business entities.
Interim Dividends Distribution
The rule under the New Companies Law 2022 has deleted the reference to Sharia Law and allowed shareholders to agree on whatever percentages that suit them. As a result, dividends can be declared annually or on an interim basis from distributable profits to shareholders of companies leading to modernisation of the distribution of profits in such companies.
Companies General Managers and Board Directors’ Fiduciary Duties
Under the New Law the general manager or board director or members will not be responsible for the adverse effects of a decision suffered by the company, if he/she/they:
a) does/do not have personal interest in the decision that causes negative effects,
b) aware of all matters in reasonable belief of situation and circumstances, and
c) believe the decision is reasonably in the best interest of the company.
Lock-in Periods of Share
Under the Old Law of Saudi Arabia the founders of a company who have shares in a Joint Stock Company can not transfer their shares before the publication of financial statements for 2 full years. This provision saves the other founders of the company or their beneficiaries in case of death. Now in the New Law this restriction has been removed.
Arbitration is Allowed in Shareholders’ Disputes
Under the New Companies Law the arbitration is allowed to be agreed on any matter of disputes among shareholders and for this the relevant provisions in the Articles of Association or by-laws of the company should be written.
The Saudi Arabia New Companies Law 2022 is innovative and flexible. It simplifies the management of companies and encourages investment from local visionaries as well as foreign inventors in different levels of enterprises in the Kingdom. It will open a new era for business momentum by establishing companies under a new regulatory framework that is more in line with well-established international standards. We at Fahad Al-tamimi recommend the old companies be prepared to review their bylaws and Article of Association in the context of the New Law. However, the Ministry of Commerce has not given any deadlines for amending bylaws or articles of association of Old Companies.
FAQs Related to Saudi New Companies Law 2022
Q. How can I start a small business in Saudi Arabia?
Ans. You can start a new business either small or big by registering a company in Saudi Arabia under company establishment rules.
Q. How much money is needed to start a business in Saudi Arabia?
Ans. The minimum capital investment required to establish the common type of busines entity like LLC is SR 500,000 with 2 to 50 shareholders managed by one or more managers.
Q. Can a foreigner open a company in Saudi Arabia?Ans. Yes, a foreigner can open a company in Saudi Arabia by having an investment license issued by the Ministry of Investment in Saudi Arabia (MISA).