NEWS & INSIGHTS

The Kingdom of Saudi Arabia (“KSA”) is the largest country in the Arabian Peninsula and is primarily known as a petroleum-based economy. Saudi Arabia’s Vision 2030 aims to diversify the Saudi economy and to enhance the business environment for the private sector. The growth of the private sector relies on progressive legal reforms which set important pillars for a strong and reliable Saudi legislative framework. Most recently, key reforms include the 2021 Private Sector Participation Law (PSP) which regulates partnerships between the private sector and the Saudi government on joint transactions, divestments, and projects such as the public-private partnerships (PPP). Significant legal reforms also include a new Personal Data Protection Law ^[1] and employment regulations which abolished kafala (sponsorship) system for most employees. ^[2]  

Very recently, on 28^th June, 2022, the Council of Ministers ^[3] promulgated a new Companies Law ^[4] (the New Companies Law) which replaced the current 2015 Companies Law as well as the 2019 Professional Companies Law. ^[5] The New Companies Law aims to attract foreign investment into KSA’s market by modernizing the Saudi corporate legal framework and enhancing the ease and flexibility of operating in KSA for existing businesses.

Types of Companies under New Companies Law in KSA

The New Companies Law defines 5 types of companies that can be incorporated under the new legislation. Article 4 of the New Companies Law enumerates the following forms of corporate entities:

a) General Partnership (شركات التضامن);

b) Limited Partnership (شركات التوصية البسيطة);

c) Joint Stock Company (شركات المساهمة);

d) Simplified Joint Stock Company (شركات المساهمة المبسطة);

e) Limited Liability Company (شركات المسؤولية المحدودة).

In addition to the forms of companies enumerated under Article 4, Section VII of the new law is dedicated to Non-for- Profit Companies, Section VIII is consecrated to Professional Companies, and Section IX regulates Holding companies and Subsidiaries. 

Key Changes introduced by the New Companies Law in KSA

Some of the key changes introduced by the New Companies Law are as follows:

Flexibility in auditing requirements for Small and Very Small companies

According to Article 19 of the New Companies Law, Saudi-owned “small” [6] and “very small” [7] companies are in principle no longer required to have certified auditors. Foreign companies however are still bound to have a certified auditor even if they qualify as “small” or “very small” according to KSA regulations.

A new form of company, the SJSC

The New Companies Law introduces a new form of corporation denominated “Simplified Joint Stock Company” (SJSC). Articles 138-155 of the New Companies Law regulate the legal framework of this new form of corporation. The establishment of an SJSC does not require a minimum capital. The specificity of an SJSC resides in the fact that it can be incorporated by a sole shareholder.

This new type of company is a closed form of Shareholding Companies. The SJSC combines the advantages of both a Limited Liability Company and a Closed Shareholding Company. On one hand, the SJSC is similar to an LLC in terms of the lack of minimum share capital requirement. In addition, it offers flexibility in terms of incorporation and management, and ease in issuing shareholders’ resolutions. The shareholders of an SJSC can also restrict the transfer of shares in the bylaws. The shareholders can agree on restricting the sale of shares for a period not exceeding 10 years or agree on an open-ended restriction requiring the prior approval of remaining shareholding approving the selling of shares. On the other hand, the SJSC offers the benefits of a Closed Shareholding Company in terms of flexibility in creating and issuing any type of special shares such as premium shares or non-voting shares. Furthermore, the SJSC provides flexibility and ease in trading shares similar to a Closed Shareholding Company.  

Legal consecration of Shareholders’ Agreements

Article 11 of the New Companies Law clarifies the standing of Shareholders’ Agreements and allows for the shareholders to enter into a binding shareholders’ agreement. Prior to the New Companies Law, Saudi courts have been inconsistent and did not fully recognize such types of agreements. With the new legislation, this type of agreement among shareholders is valid and enforceable provided it does not contradict the New Companies Law or the Articles of Association.

Ability for LLCs to issue negotiable debt and financial instruments

The New Companies Law broadens the financing capabilities and enhances the regime of Limited Liability Companies. Article 179 of the new legislation confers to LLCs the ability to issue negotiable debt or financial instruments. An LLC can now pledge its own shares, issue Islamic bonds or other debt securities.     

Declaring dividends to shareholders on an interim basis

The new legislation modernizes the regime regulating the distribution of profits. Under the New Companies Law, dividends can now be declared annually or on an interim basis to shareholders in Limited Liability Companies, Simplified Joint Stock Companies, and Shareholding Companies.  

For further information, please contact our Legal Operations Department at [email protected]  to help you navigate the Saudi corporate legal framework and outline the process to establish a local legal entity or foreign branch of your business.