On November 9th 2015 the Saudi Cabinet approved the text of the new Company Law, a move warmly welcomed by both the business and legal communities. The long-awaited piece of legislation (the previous Company Law had been enacted by Royal Decree No. M/6 dated 22/3/1385 H corresponding to G) introduces several major changes, filling many gaps that were seen as obstacles by foreign and Saudi investors and is a commendable attempt by the Saudi Government to keep apace with the best international practices and streamline the processes and procedures for the establishment and management of companies in the Kingdom.
The key changes introduced by the new law affect several areas and are summarised below:
1. The new law introduces the sole partner limited liability company. This is seen as a means of addressing the fraudulent scheme resorted to by investors whereby they persuade another person to act as an apparent partner for them to meet the minimum two partner requirement provided for in the old law. It also aligns the new law with foreign legislation that long recognised this type of vehicle (e.g. the French Entreprise Unipersonnelle a Responsabilite Limitee "EURL" introduced by virtue of a law enacted on July 11, 1985). Similarly, the new law allows the establishment of a sole shareholder joint stock company.
2. Under the new law, joint stock companies may be formed by two shareholders instead of five as was the case under the old law. The share capital of the company is brought down to SAR500,000 (equivalent to US$133,334) from SAR2,000,000.
3. The new law introduces principles of sound corporate governance in joint stock companies by prohibiting the concurrent holding of the position of chairman of the board of directors with any executive position. The new law also mandates the adoption of the cumulative vote in the election of the Board of Directors. It further allows the use of new communication technologies for holding and conducting shareholders' meetings (to be specified in the implementing regulations to be adopted by the Minister of Commerce and Industry).
4. The new law allows joint stock companies to purchase and pledge their shares subject to conditions to be specified by the Minister of Commerce and Industry in the implementing regulations, and shares purchased by companies shall have no votes in shareholders' meetings. Joint stock companies may also issue debt and financing instruments. These instruments may only be converted into shares with the approval of the extraordinary meeting of shareholders.
5. The new law devotes provisions to holding companies. A holding company is defined as a "joint stock company or a limited liability company whose objects are to control other joint stock or limited liability companies which are called subsidiaries, through the ownership of more than fifty percent (50%) of the share capital of those companies or the control over the composition of their Boards of Directors. The name of the company shall include a mention to the fact that it is a holding company".
The objects of a holding company shall be limited to the following activities:
- Management of and provision of assistance and support to its subsidiaries or of other companies in which it owns shares.
- Investing its monies in shares and other securities.
- Purchase of movable and immovable properties for the purpose of carrying out its activities.
- Provision of loans, guarantees and funding to its subsidiaries.
- Ownership of patents, trademarks, industrial marks, and other intellectual property rights, exploit the same and license their use to its subsidiaries or third parties.
- Any other lawful purpose consistent with the nature of this company.
The new law will come into force 150 days from its approval by the Saudi Cabinet on 9th November 2015. It represents a major milestone in the efforts of the Saudi government to modernise the Kingdom’s legal framework in an attempt to align its commercial legislation with the best regional and international practices and become an attractive destination for foreign investors in search of a straightforward and investor-friendly business environment.
We will be in a better position to assess the impact of the new law once the implementing regulations are issued and the relevant provisions undergo the judicial test to gauge their effectiveness and the extent to which Saudi courts are prepared to fully enforce them.