Companies Law and their Governance in Saudi Arabia

The governing laws, as do the trade systems, differ from one country to another. In light of the economic development witnessed by the Arab countries, we can observe that the Saudi trade system has undergone a huge economic transformation, through the new Saudi Companies Law, which facilitates business procedures for Saudi and foreign investors. 

Royal Decree promulgates the Saudi Companies Law No. (R/132) by His Highness King Salman bin Abdul Aziz Al Saud dated 01/12/1443 AH. The Saudi Ministry of Commerce published the new Companies Law and its Executive Regulations, and below we shall highlight the most important corporate governance controls therein:

Definition of the Company 

The company is a legal entity established under the provisions of the Law whereby two or more persons undertake to get involved in a for-profit business venture through contributing in the form of cash payment or service or a combination of both, to share the profits or losses of such business venture based on the Articles of Association. As an exception, however, the Company may be incorporated unilaterally by a single person, and nonprofit Companies may also be incorporated.

The Company incorporated by the provisions of the Law shall be labelled a Saudi Company, and its headquarters shall be located in the Kingdom.

The Company to be incorporated by the provisions of Law shall have any of the following legal forms: 

General Partnership, Limited Partnership, Joint Stock Company, Simple Joint Stock Company, Limited Liability Company, Nonprofit Company, Professional Company, Holding Company or Subsidiary.

To choose the name of the Company incorporated pursuant to the Saudi Law, the conditions specified in Article (5) of the Royal Decree No. (R/132) dated 01/12/1443 AH shall be observed:

1. The Company's name shall either be in Arabic or any other language, and is derived from the Company's objects, or from the name of one or more of the Company's partners or shareholders, provided that any such name does not violate the Saudi laws and regulations.
2. The Company's name shall be accompanied by an indication of its legal form.
3. The Company's name may be changed in accordance with the controls prescribed for amending in its Articles of Association. Such change shall not affect its rights or obligations. 

Incorporation and Registration Documents of the Company, in addition to controls for amending Memorandum or the Articles of Association:

Articles (6/7/8/9) of Royal Decree No. (R/132) dated 01/12/1443 AH, and Article (2) of the Executive Regulations discussed the Company incorporation pursuant to the Saudi Companies Law, which are:

1. Whoever gets actually involved in the incorporation of the Company and makes cash or in-kind contribution to its capital shall be deemed a founder of the company. 
2.  The founders shall submit the application for incorporation and registration of the Company to the Commercial Register, accompanied by the Memorandum or Articles of Association, along with the necessary data and documents.
3. The commercial register shall decide on the application, if the application is rejected, the rejection shall be reasoned, in which case, the founders shall have the right to file a grievance within sixty days following the date of their notification of the rejection. In the event that the grievance is either dismissed or not decided on within thirty days following the date of its submission, the founders may file a grievance to the Competent Judicial Authority.
4. Each company incorporated pursuant to the provisions of the Law shall have a Memorandum of Association, while the Joints Stock Company, Simple Joint Stock Company and Limited Liability Company shall each have its own Articles of Association; provided that it includes the data and conditions required by the Law, in a manner consistent with the legal form of the Company.
5. The Company's Memorandum or Articles of Association shall be in Arabic, and may be accompanied by translation into any other language.
6. The Saudi Ministry of Commerce shall create reference templates for the Memoranda and Articles of Association of companies in accordance with their legal forms.
7. The Company's Memorandum or Articles of Association, as well as all amendments introduced thereto, shall be issued in writing; otherwise, the same shall be null and void. They also shall take effect after the data and documents stipulated by the Saudi system and regulations are fulfilled.
8. The founders, partners, managers or board members of the Company, shall have the Company's Memorandum or Articles of Association, as well as all amendments introduced thereto, registered with the commercial register. The commercial register shall publicise the necessary data or documents in accordance with the provisions of the Saudi Law and Regulations. 
9. Failure to register data and documents in the commercial register by the abovementioned persons results in joint liability for compensation for damages incurred by the company, shareholders, partners or third parties as a result of such failure.
10. Third Parties shall have the right to get access to data and documents of the Company at the Commercial Register; which shall have the probative force of evidence vis-à-vis the Company and third parties. The Company's Memorandum or Articles of Association or any amendment thereto may only be invoked vis-à-vis third parties after being recorded at the Commercial Register. If any single or more information is not recorded in the commercial register, only such information shall not take effect vis-à-vis third parties.
11. The identity of the founders or partners at the time of establishment or amendment shall be verified through the data documented at the National Information Center, the Commercial Register, or the authority responsible for documentation in cases determined by the Ministry in coordination with the Ministry of Justice.
12. To amend the Articles of Association of a joint-stock company or a simple joint-stock company, it is required to submit to the commercial registry a copy of the Extraordinary General Assembly or shareholders' Resolution approving the amendment along with the necessary documents and requirements.
13. The Company acquires the legal personality once it is registered in the commercial register. However, within the incorporation period, the Company shall have the legal personality insofar as required for its incorporation, provided that the incorporation process is completed.
14. As a result of the Company’s registration with the commercial register, all contracts and businesses conducted by the founders for the company’s account shall be transferred to the Company, and the Company shall bear all the expenses incurred for incorporation.
15. If the Company’s incorporation procedures are incomplete, those who act in the name or on behalf of the company shall be held jointly liable vis-à-vis the third parties for any actions and practices during the incorporation period.

• The Company shall carry on its business activities only after its registration in the Commercial Register and obtaining necessary relevant licenses from the competent authorities, if any.
• Documents, contracts, clearances and other documents issued by the Company shall indicate the Company's name, headquarters, e-mail, registration number, the Company capital and the paid-up amount thereof, except for the General Partnership and the Limited Partnership companies. The phrase "under liquidation" shall be annexed to the company’s name throughout the liquidation period.

Partners’ Agreement and Family Charter:

Article (11) of Royal Decree No. (R/132) dated 01/12/1443 AH, and Article (4) of the Executive Regulations stipulates the following:

1. The founders, partners or shareholders may - whether during the incorporation period of the company or after the completion of the incorporation procedures - perform the following acts: 

• Enter into one or more agreement that regulates their relationship with each other or with the company, including the mechanism for the engagement of legal heirs, whether in person or through a company to be established among themselves for such a purpose; 
• Enter into a Family Charter that regulates the family's ownership of the company, its governance, management, business policy, family employment policy, dividends distribution, disposition of equity stake or shares, dispute settlement mechanism and other relevant matters. 
• The family agreement or charter shall be binding, and it may be part of the company’s Articles of Association or Memorandum, provided that it does not violate the provisions of the Law, Memorandum or the Articles of Association.
• The quorum for amending the partners’ or shareholders’ agreement or the family charter, if it is part of the company’s articles of association or Memorandum, shall be in accordance with the conditions prescribed for amending such items, according to the legal form of the company.

Partners' or Shareholder’s Contribution and Delay:

Articles (13, 14 and 15) of Royal Decree No. (R/132) dated 01/12/1443 AH, and Article (3) of the Executive Regulations stipulates the following:

1. The partner or shareholder may provide a cash contribution or in-kind contributions or a combination of both. Only the cash and in-kind contribution shall make up the company’s capital.
2. Except for the Joint Stock Company and the Simple Joint Stock Company, the partner’s contribution may be a particular service against a profit share, the amount of which shall be determined by the company’s Memorandum of Association; however, the contribution may not be partner’s own reputation or influence.

• If the partner provides a contribution in the form of service, the same shall perform the duties assigned thereto, and each gain arising from such a service shall be the property of the Company, while the partner concerned may not perform such a service for his own benefit. The partners shall not, however, be under an obligation to provide to the company the intellectual property rights arising from such a service, unless otherwise agreed.

3. The founders, partners or shareholders may provide allow any person to have capital shares or contribution against performing particular work or services that are beneficial to the company and help achieve its objectives, without prejudice to the provisions of Law.
4. If the contribution provided by any partner or shareholder takes the form of an ownership interest, beneficial interest or any other right in-rem, he shall be held liable – according to the provisions of the sale agreement – for warranting the contribution provided thereby in the event that such contribution ceases to exist, and shall also provide warranty against disturbance of possession, If the contribution provided involves only beneficial interest of a personal right over the property, the provisions of the lease agreement shall apply to the relevant matters, unless otherwise agreed.
5. Each partner shall be indebted to the company with the value of contribution undertaken by him. In case of delay, the company may either demand that such a partner fulfils its obligations or suspend the effectiveness of the rights associated with his capital contributions, such as the right to receive dividends or to vote in the General Assembly Meetings. In all cases, the Company shall reserve the right to make a claim against the defaulting partner for the damage sustained as a result of such delay.
6. Subject to the provisions governing the valuation of in-kind contributions stipulated in the Law, the period between issuance of the Accredited Valuer’s report on the fair value of in-kind contributions to the capital of joint-stock companies, simple joint-stock companies and limited liability companies, and the issuance of the corresponding interests or shares, shall not exceed six months.

• The Company manager or board member shall comply with the duties of care and loyalty, particularly exercising his duties within the limits of the powers vested in him to serve the interest of the company and promote its success; making or voting on decisions independently, avoiding situations involving conflict of interest directly or indirectly, in the business transactions and contracts executed on behalf of the company, and not accepting any benefit granted to him by third parties in relation to his position in the company

Conclusion:

The Saudi Royal Commission has taken into account all governance controls by promulgating this new Companies Law. This law aims to achieve Saudi Vision 2030, maintain economic development, and promote investment incentives for investors.

 As a legal institution with legal expertise in the Saudi system and its provisions, we always work hard to facilitate regulations related to company governance within the Kingdom of Saudi Arabia for Arab and foreign investors. Therefore, Sadany & Khalifa Legal Consulting is always pleased to be your partner in success and continuous development.