SAUDI LEGAL UPDATE
By Fadi A. Daher, International Partner Published in May 2018
Saudi Arabia office
New Amendments to the Saudi Companies Law
The new Companies Law was enacted by Royal Decree No (M/3) dated 28/1/1437H (i.e. 10/11/2015G) (was published in the Official Gazette on 22/2/1437H (4/12/2015G) and came into force on 2 May 2016 (referred herein as the “CL”). Two years later the Saudi government resolved to amend certain provisions of the CL based on the recommendation of the Ministry of Commerce and Investment (“MoCI”) through telegram number (32389) dated 13/06/1439H. (corresponding to 01/03/2018G.) issued by his excellency the Minister of MoCI. The new amendments which we will discuss in this article came into force following the issuance
of Royal Decree No. (M/79) dated 25/07/1439H. (corresponding to 11/04/2018G.).
Summary of key changes:
- Article 12 of CL [Notarization of Articles of Association (“AoA”)] – the notarization of the AoA and any subsequent amendments is no longer required. Instead applicants shall comply with MoCI’s requirements to effect the incorporation of their companies and any subsequent amendments
to their articles of associations. [We expect further guidelines to be issued by MoCI/the CMA in this regard]
- Article 71 of CL [Conflicts of interest] – The new amendment removed the requirement of obtaining the approval of the Ordinary General
Assembly (OGM) [in relation to JSC board members who have a direct or indirect interest in a transaction or contract which are made for the account of
the joint stock company JSC] on an annual basis. Instead, the JSC’s Board of Directors of (“Board”) shall comply with new additional restrictions as may be imposed by the regulators [eg. MoCI/ the CMA]. [We expect further guidelines to be issued by MoCI/the CMA in this regard].
Further, two new sections are included under this article to address the consequences of:
- non-disclosure of an interest in a
transaction or a contract by a board member; and
- non -compliance with the requirements [provided under sub-paragraph 1 of Article 71];
- the related parties’ contract or transaction being unfair or trigger conflicts of interest issues causing damages to the JSC’s shareholders.
Where a board member fails to disclose that he/ she has an interest in a transaction, the relevant contract could be deemed to be void and the
conflicted Board member may be required to repay any profits received from such contract.
Under the new amendment, the responsibility extends to other member of the Board who will also be required to indemnify the shareholders if any of the above items (ii) and (iii) applies.
With the exception of the Board member(s) who objected the execution of such contract or arrangement provided that his/their objection(s)
is/are clearly indicated in the minutes of meeting of the Board which voted on this matter. It should also be noted that the absence of any member of the Board during such meeting is
not considered a valid reason to circumvent the liability towards the shareholders unless he proves that (a) he was not aware of such Board resolution [which approved the related party contract and/or arrangement] or (b) he was not able to object such Board resolution after being aware of it.
- Article 72 of CL [Non-compete provision] – a Board member shall not compete with JSC in any business, or rival it in any of its commercial activities; otherwise, the JSC shall have the right to claim the appropriate damages from such member before the competent judicial authority unless a prior authorization is obtained from the OGM permitting him to do The new amendment replaced the condition of obtaining the OGM’s consent on annual basis with other conditions that will be imposed by the regulators [eg. MoCI/the CMA]. [We expect further guidelines to be issued by MoCI/the CMA in this regard].
- Article 80 of CL [Claims filed by a shareholder on behalf of the JSC against its Board] – the shareholder of a JSC can now request the JSC to reimburse him for all the expenses spent on the claim he filed against the Board regardless of the results of his This is subject to the below conditions:
a. Claim should be filed in good faith
- Shareholder should have informed the JSC without receiving feedback within 30 days from the date of the notification letter including the subject of his
- If it was in the interest of the JSC to file the claim against the Board in accordance with Article 79 of the
- The Claim shall a valid legal
- Article 91 of CL [Convening shareholder
meetings] – the notice period to convene an OGM has been extended from 10 days to 21 days,
providing shareholders with sufficient time to review the agenda of the meeting and greater degree of participation in OGM.
- Article 104 of CL [Audit report] – copies of the report shall be available at the JSC’s head office within a period not less than 21 days prior to the date of
- Article 126 of CL [Accounts and Board reports]
– copies shall be available at the JSC’s head office within a period not less than 21 days prior to the date of OGM.
- With respect to the Articles concerning the Limited Liability Companies (“LLCs”), we note the below changes:
- The following paragraph in Article 157 of CL was deleted – [With consideration to the
provisions contained in Article (14) of the CL, the LLC shall be incorporated when all in- cash and in kind shares are allocated to all shareholders thereof and fully paid; and in
cash shares shall be deposited in an authorized bank whereas such bank may not release the same before the completion of the procedures of publication and registration of the LLC in the commercial registry].
- Article 161 of CL [Transfer of shares] – The new amendment retains pre-emption rights for
LLC shareholders. A new provision which allow a shareholder to transfer its shares to another
shareholder as per the terms of the AoA. Where a shareholder intends to transfer his shares to a third party, then he must notify the other shareholders via the LLC’s manager who shall inform the shareholders immediately upon being informed of the proposed transfer of shares. Each shareholder shall have the opportunity to purchase the shares within 30 days form the date of notification by LLC’s manager at the agreed price of shares unless the AoA provides a different valuation methodology and time period in the AoA. The previous text provided that the valuation will be conducted at a fair price. If the period defined for the practice of the pre-emption right with no shareholder practicing the same, the selling shareholder is entitled to transfer his shares to third parties.
- Article 167 [Shareholders meeting] –
shareholders holding 10% or more may convene the shareholders meeting. The previous text provides a higher percentage (50%). This amendment shows the direction of the legislator to offer more rights to minority which now may call shareholders meetings to convene at any time upon their request.
Ministerial Resolutions issued pursuant to new CL
- The NCL consists of 227 articles and will be applied for new companies from the effective date of the new Law (ie 2 May 2016). Article 225 provides that the Minister of Commerce will issue the models
by-laws and articles of associations for each type of companies recognized under the CL within 120 days following the publication of the NCL. The Minister and the Board of the Saudi Capital Market Authority (“CMA”) will each issue, in due course, the implementing regulations to provide further guidance in a number of areas.
- Pursuant to Ministerial Resolution number (18379) dated 01/06/1437H. (corresponding to 10/03/2016G.) New models have been issued by MOCI for the following forms of Saudi company:
- General partnership – AoA;
- Limited partnership – AoA;
- Joint stock company (JSC) – AoA;
- JSC – Bylaws;
- Holding company – AoA;
- Holding company JSC – Bylaws;
- Single shareholder JSC – AoA ;
- Single shareholder JSC – Bylaws;
- Limited liability company (LLC) – AoA;
- Holding company LLC – AoA;
- Single shareholder LLC – AoA
- The MoCI’s AoA and/or By-laws models are currently available in Arabic from the MoCI website (ww.mci.gov.sa). Compliance with the new provisions is subject to a grace period of up to one year which ended by April All
existing Saudi companies are required to amend their constitutional documents in light of the new templates prior that date to avoid any penalties that may be imposed by the relevant regulators [eg. MoCI or CMA (public JSC or companies licensed to undertake securities business, known as the
authorized persons) or SAMA (insurance companies and banks or any other corporations licensed by SAMA)].
- On 14 November 2017 MoCI issued a new resolution on the requirement for Limited Partnership, LLC, and CJS to organise, hold and keep shareholders register at their headquarters. This resolution supplements articles 109, 162 and 225 of the Companies’ managers and directors have the ultimate responsibility and liability of creating the register and ensuring that it is being updated to reflect any changes in the company. Each shareholders is responsible to provide the company with the required shareholders details and additional details relating to the register and any amendments to these information within a period
not exceeding ten (10) working days. Companies should update/amend their register/Articles of Association through the MoCI’s website and should provide the MoCI with a copy of their register within fifteen (15) business days from the date of
updating/amending the shareholders details and the additional details relating to the register and within three (3) months from the date of publishing the resolution.
- On 18 April 2018 MoCI issued a new resolution on the requirement of dividends distribution in LLCs which shall be allocated to shareholders within
30 days from the date of shareholders resolution approving the distribution of dividends. The same resolution provides clearly that unanimous consent is required by the LLC’s shareholders to admit a new incoming shareholder following the issuance of new shares. Further, the sale of assets of a LLC which exceeds (50%) of total assets value of the LLC requires the approval of shareholders. The MoCI requires the shareholders of a LLC to stipulate in the AoA the mechanism for settlement of disputes or disagreements which may disable the business operations of the LLC. Deadlock events and other related provisions can be now stipulated in the AoAs of LLCs.
CMA rules issued pursuant to new CL
Following the issuance of the CL, the CMA has issued guidelines and rules in relation to certain provisions (listed below).
- The Regulatory Rules and Procedures issued pursuant to the Companies Law relating to Listed Joint Stock Companies issued the Board of the CMA pursuant to Resolution 8-127-2016 dated 16/1/1438H corresponding to 17/10/2016G based on the CL and as amended by Resolution of the Board of the CMA Number (5-33-2017) Dated 24/6/1438H (corresponding to 23/3/2017G).
- Remunerations of the board of directors;
- Holding of General and Special Assemblies meetings of Shareholders and their Participation therein through Contemporary Technology;
- Share Buy-back Rules;
- Effect of a Buy-back Transaction;
- Rules of Company’s Sale and Pledge of Shares;
- Issuance, Buy-Back and Conversion of Preferred Shares by the Company;
- Dividend Distribution to Shareholders of the Company;
- Issuance and Sale of Pre-emptive Rights Resulting from Capital Increase;
- Proxy Procedures for Attending General and Special Assemblies
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