The new Saudi Companies Law came into effect on 2nd May 2016 (“the Effective Date”).
Implementing Regulations clarifying the operation and effect of a number of the provisions of the new law have recently been through a consultation phase and are due to be issued in the coming months.
The renamed Ministry of Commerce and Investment (“MoCI”) and the Saudi Arabian General Investment Authority (“SAGIA”) are having to get to grips with the significant changes under the new law affecting how entities in Saudi Arabia are formed and regulated, against a background where Saudi Arabia is seeking to encourage more foreign investment in line with the National Transformation Plan 2020 and the Saudi Vision 2030, which are Saudi Arabia’s roadmap to diversify its economy and address the challenges brought by low global energy prices.
As with many new pieces of legislation it may take a while for the regulators and others to understand fully the new law and for it to be fully implemented in practice.
This article highlights some key issues relating to the implementation of the new law, signposts some new and impending regulations that Saudi, GCC and foreign investors need to be aware of and some of the steps that existing companies and managers now need to be considering.
The New Law
The important changes in the new law from the position under the old Saudi Companies Law are listed in the tables below.
Interim Period
Article 224 of the new law gives existing companies 12 months from the Effective Date to bring their affairs into compliance with the new law. However, this does not mean that existing entities do not have to comply with the new law until the end of the 12 months because penalties can be applied from the Effective Date. MoCI and the Capital Markets Authority (“CMA”) can also determine certain provisions of the new law which are effective during this interim period.
Template Constitutional Documents
MoCI has recently published template articles of association (“AoA”) and bylaws for the different forms of entity including LLCs and joint stock companies (“JSCs”).
Whilst it is not mandatory for a company to have constitutional documents in this format, it is likely to be easier, certainly for any companies formed after the publication of these templates, to obtain MoCI approval using constitutional documents based on this format and they should also be considered when existing companies are considering changes to their constitutional documents.
The new template AoA for LLCs reflect , for example, the following changes under the new law:
- Financial statements to be prepared within 3 months of year end and filed within a further 1 month (previously 4 months and 2 months);
- Suspension of set aside of statutory reserve when it reaches 30% of capital (previously 50%);
- Changes to statutory pre-emption process including added flexibility on valuation;
- New procedures and effects where losses reach 50% of capital.
JSCs-MoCI and Capital Markets Authority Statements
In April and May 2016 MoCI and the CMA issued two joint statements dealing with the implementation of the new law in relation to JSCs (and holding companies) and specifying certain provisions of the new law that must be implemented immediately and others which fall within the 12 month grace period.
Examples of provisions to be complied with are:
- Article 90 – regulating shareholders meetings;
- Article 95 – cumulative voting for board elections and certain situations where directors are prohibited from voting.
Examples of provisions where an extension can be granted are:
- Article 68.1 – the number of directors;
- Article 76 – directors’ remuneration;
- Article 81.1 – the functions of the Chairman, Deputy Chairman and Managing Director;
- Articles 101 – 104-certain provisions relating to Audit Committees;
- Article 150 – dealing with losses of JSCs (although listed companies have to make a monthly announcement of their plans and actions to comply if losses incurred equal or exceed 50% of capital in the interim period);
- Articles 182 – 186-dealing with holding companies.
However the MoCI/CMA statements make clear that any new action intended by a JSC must comply with the new law eg on appointing a new director Article 68.1 must be complied with.
Accordingly as well as bringing their procedures and affairs into line with the new law, all existing Saudi companies will need to review their existing constitutional documents and consider the changes required to be consistent with the New Law.
Foreign Investment
The Saudi Arabian General Investment Authority (“SAGIA”) announced in 2015 that international companies were being encouraged to establish 100% foreign owned trading companies. Shortly after the announcement of the Saudi Vision 2030, the Saudi Council of Ministers approved rules to implement this change in June 2016. Initial indications suggest that only very large international companies (who amongst other things will employ significant numbers of Saudi nationals) will qualify for 100% foreign ownership
On implementation of the new law, SAGIA has yet to clarify if, when and on what basis it will license foreign owned holding companies and foreign owned single shareholder LLCs.
These clarifications are likely to have a significant impact on foreign investors structuring their investments in Saudi Arabia.
New Implementing Regulations
The draft implementing regulations (“Implementing Regulations”) for the new law have also been through a consultation phase which was completed in May 2016. The final version is expected in the next few months.
The draft Implementing Regulations cover areas such as:
- Use of technology at JSC meetings;
- Buy-back of JSC shares;
- Pledge of JSC shares;
- Preference shares
Corporate Governance
In April 2016 MoCI and the CMA issued a draft of proposed new Corporate Governance Regulations (“the CG Regulations”) which again have just been through a consultation phase. The CG Regulations will apply to both Saudi listed companies and on a best practice voluntary basis to closed JSCs (favoured by many Saudi Family owned groups). Once approved the CG Regulations will replace the existing CMA Corporate Governance regulations which apply to Saudi listed companies. Saudi family-owned groups will want to consider the CG Regulations and to adopt some or all of their provisions to reflect best practice, which as well as for family governance purposes may also be important in dealings with third parties.
