The Highlights of the New Draft of Companies Law in Saudi Arabia

The most prominent features of the new draft of law of companies, compared to the companies’ law currently in force from the year 1437H to find out the points and locations of difference, which the project adopted:

1. Cancelation of restrictions imposed on company names to allow all forms and types of companies to take innovative names or derive a name from their purpose and also to allow their name to be taken from the name of a partner or shareholder or more than one of the partners or shareholders.

The law is currently in force:

The company’s name is limited. The current law provides that the name must be registered in the name of one or more partners and according to the presence of the company. The new draft cancels these limits to be more extensive, comprehensive and flexible than the law currently in force.

2.

Cancelation of the joint venture company.

The law is currently in force:

The joint venture is a form of company, recognized by law and also allowed to be

established.

3.

Canceling the text of the expiry of the general partnership company as a result of

the death of one of the partners.

The law is currently in force:

It states that the death of one of the partners is one of the legal reasons that lead to the expiration of the partnership company.

4.Allowing the joint partner to be legal.

The law is currently in force:

The joint-partner (general-partner) is limited to natural persons only.

5.Creating a new form of company, which is a simple joint stock company, is one of the supporting and stimulating steps for the business and investment sectors.

The law is currently in force:

The companies recognized in the provisions of the current companies’ law are the general partnership companies, joint-venture companies, special-limited-partnership companies, limited-liability companies and joint-stock companies. Any other types or forms of companies are not recognized by law.

6.Reinstating the form of partnership-limited-by-share companies.

The law is currently in force:

The current law has deleted the form of partnership-limited-by-share companies from the types and forms of companies recognized by the law.

7.Permission to include the articles of association or the articles of incorporation of the company, the provisions to be established by agreement between the partners which shall not violate the requirements of the law or the regulations.

The law is currently in force:

It stipulates that the partners and shareholders are obligated to include articles of incorporation, articles of association, statutory provisions that each of the rules and regulations stipulate for them and do not deviate from those provisions. It is not permissible according to the current provisions, to include the articles of association or articles of incorporation of the company any provisions of an agreement till the new draft permitted the inclusion of the provisions of an agreement and also provided that the requirements of the law and its executive regulations shall not be violated.

8.Facilitating the procedures and regulatory requirements for establishing companies by reducing the costs of these procedures and requirements, in order to stimulate the business environment and support investment.

9.The new draft of the Companies Law allows the company to be of indefinite duration.

The law is currently in force:

It stipulates that the expiry of the period specified for the existence of the company is one

of the legal reasons that lead to the expiry of the company.

10.

Promoting the use of modern technology to use it for various purposes including

for extending an invitation to hold general assemblies to shareholders or partners in

various companies as well as participate in deliberations and vote on decisions and

others.

11.Allowing the establishment of a one-person company, without any restrictions, whether in the form of a limited-liability company or a joint-stock company.

The law is currently in force:

1. Limited Liability Company: Established by one person or if all shares belong to one person: There was a restriction stipulating that the founder of the company or the owner of

all its shares should be banned from owning more than one limited-liability company and even banning the company itself, the establishment from one individual or its shares are owned by one person, who owns another limited-liability company, which means that

pluralism is prohibited according to the requirements of the current law.

2. Joint-Stock Company: The law in force currently stipulates that the state, persons with public legal capacity, state-owned companies and companies whose capital is no less than 5 million riyals may establish a joint-stock company by one person and ownership of the shares of the joint-stock company may be attributed to that person also provided that these conditions or restrictions are met. If these conditions are not met, then the company may not be established by one person. The new draft once enforced cancels these restrictions and permits to establish a one-person company, whether in the form of a limited-liability company or a joint-stock company, without any of the restrictions mentioned above.
3. Regulating the provisions for converting debt instruments or financing instruments into shares in a joint-stock company, when certain conditions are fulfilled and achieved or when a certain period of time has passed.

The law is currently in force:

It provides for prohibiting the issuance of debt instruments or financing instruments in the joint-stock company, except after the issuance of a decision by the extraordinary-general assembly,

specifying the maximum number of shares that will be issued against those tools or bonds, and it is required that the conversion of those tools or instruments to shares, the availability of two conditions. The first is the inclusion in the conversion decision of the conditions for the issuance of debt instruments and financing instruments and the second is the requirement for the approval of the debt instrument holder or the financing instrument, to this transfer, so that the new draft when enforced organizes that issue more accurately and clearly, given that the provisions of the applicable law were brief in relation to that

issue.

13. Making the issuance and trading of shares more flexible and permitting the issuance of many types and categories of shares, with different rights in joint-stock companies and not requiring a maximum number of members of the Board of Directors.

The law is currently in force:

The number of members of the Board of Directors shall be determined, also provided that the number shall be no less than 3 and no more than 11 members, additionally, the number shall be specified in the company’s articles of association.

14.The new draft limits membership of the Board of Directors to natural persons only in the joint-stock company bearing in mind that the system is in force.

The law is currently in force:

It stipulates that a natural or a legal person is allowed to be a member of the Board of Directors of a Joint Stock Company.

15. Cancelation of the statutory reserve requirement, which is set aside from net profits and for dealing with losses in Joint-Stock Companies and Limited Liability Companies.

The law is currently in force:

It provides that, the statutory reserve percentage is estimated at 10% of the net profits and it is permissible to stop the appropriation of the allocated percentage of the profits as a statutory reserve when the reserve percentage reaches 30% of the paid-up capital in Joint-

Stock Companies or with Limited Liability Companies. The law currently in force stipulates that Joint-Stock Companies and Limited Liability Companies may be required to comply with that statutory requirement until the new draft is enforced, which will cancel that requirement. Additionally, the statutory reserve may be allocated as mentioned in the

company’s Articles of Association of the Company.

16. Repealing the provision for the expiration of Joint-Stock Companies as a result of taking losses and debts of half of the company’s capital by 50%, or more.

The law is currently in force:

It stipulates that taking losses of the company’s capital is one of the legal reasons that lead to the expiry of the company legally.

17. Set no specific nominal value as required for the issuance of shares in a joint-stock company.

The law is currently in force:

It provides that, the nominal value of the share is set at 10 riyals. The minister of commerce and investment has the right to amend that value after agreeing with the president of the joint-stock company.

18.Regulating and developing the provisions related to the company’s management especially with regard to cases of conflict of interest and competition as the new draft mandated the management of the company which is represented by the director, members of the board of directors and linking management decisions to achieving the interests of the company, partners or shareholders.

The law is currently in force:

According to the latest amendments to the law, it provides that the company’s management is prohibited from taking any decision by the company’s director or members of the board of directors who has any direct or indirect interest in it. The decisions shall be taken by the company’s director or members of the board of directors, in the interest of the company, partners, or shareholders.

19. Clarifying the duties and obligations of company directors and members of the board of directors, in order to ensure the efficiency and effectiveness of the company’s administrative apparatus and to preserve the rights of partners or shareholders.

The law is currently in force:

According to its latest amendments, company directors and members of the board of directors are required to take all decisions away from their direct or indirect personal interests in a manner that achieves the interests of the company, partners or shareholders and also to achieve effectiveness in the decisions taken to strike a balance between the

company’s stakeholders. The new draft includes a statement of duties and obligations of the directors of the company and members of the board of directors to ensure the quality and efficiency of the company administratively and financially and to ensure its continuity as well as achieve a balance between the partners or its shareholders.

20. Setting the conditions for the sharing of the profits and losses between the partners or shareholders. All partners and shareholders share the profits and they bear equally all the losses.

The law is currently in force:

It stipulates that, the partner who provides nothing but only his work as a share has also contributed to the company and he is exempted from bearing the losses incurred.

21. Excluding micro and small companies from recording the appointment of an auditor licensed to work in the Kingdom to reduce administrative and financial burdens on those types of companies.

The law is currently in force:

It stipulates that companies of all types and forms must abide by the appointment of an auditor by the company upon its incorporation and the new draft cancels this statutory restriction for micro and small companies.

22. Allowing holding companies to engage in any economic activity.

The law is currently in force:

It specifies the forms of the holding company, as it can be a joint-stock company or a limited-liability company and its objectives are to manage its subsidiaries, invest its money in stocks and other securities, possess real estate and movables necessary for its activity, provide loans, guarantees and financing to its subsidiaries and owning intellectual

property rights such as patents, trademarks, industrial and franchise rights and other moral rights, and developing and leasing them to its subsidiaries or others, until the new draft opens the way for holding companies and enables them to carry out any economic activity as per their requirement and objectives.

23. Set special provisions for the subsidiary company of the holding company, in the case of its ownership, shares or shares, in the holding company, which it is a subsidiary of.

The law currently in force:

It stipulates that the subsidiary company of the holding company is prohibited from holding any shares or shares in the holding company, and any action that would transfer ownership of the shares or shares from the holding company to the subsidiary is void.

24. Repealing the provision for the expiry of the limited-liability company, by force of law, as a result of taking losses of half of the company’s capital, and amending with an additional clause to granting everyone with an interest the right to request the competent judicial authority to dissolve the company.

The law is currently in force:

It stipulates that, the limited-liability company shall expire by the power of the law, as a result of taking out debts or losses, for half of the company’s capital, where if the debts or losses take half of the company’s capital i.e. by 50%, or more. The company will expire and dissolve, with the power of the law, while the new draft comes to add an amendment related to this point to cancel that provision, in addition to granting everyone with an interest in the right to approach competent judicial authority to issue a ruling to dissolve the company. This means that it is not permissible to dissolve the company legally but, according to a court decision, when the losses are half of the company’s capital.

25. Allow limited-liability companies to issue debt instruments or negotiable Sukuks(bonds) and convert them into shares, according to financial market law.

The law is currently in force:

The limited-liability company is prohibited from doing any banking business, financing, savings, insurance, or investing money for others, or to resort to public subscription to form its capital, increase it, or obtain any loan, and also prevent it from issuance of any negotiable Sukuks (bonds). The new draft cancels these restrictions and allows the limited liability company to issue debt instruments or negotiable skuks (bonds).

26. Developing provisions relating to the merger of companies and converting them into another form, and organizing matters and aspects related to the exit of the partner or shareholder who objects to the merger or converting decision.

The law is currently in force:

1. The merger of the companies: one or more companies may get merged into another existing company, or two or more companies may get merged into one company. The law provides for determining the terms of the merger in the merger contract, and the contract shall show the evaluation of the merging company, the number of shares and their shares in the capital of the merging companies. Results from the merger and the merger will not be valid until after the net assets of both the merging companies are evaluated, and in all cases a decision to merge shall be issued from all the companies involved, and it is worth noting that the merger of the companies is one of the general and legal reasons for their termination, according to the provisions of the applicable law. The new draft authorized the merger even though the company was in the liquidation stage.
2. The transformation of the companies: The company may be converted to another form by a decision issued in accordance with the requirements of the founding contract or the articles of association of the company, and to fulfill the conditions of incorporation, publication and registration in the commercial register which is prescribed by law for the type to which the company has been transformed. In all cases, the general-partnership company, Limited-partnership company and Limited-Liability Company shall be converted to a joint-stock company, in accordance with the requirements of the current law regarding the merger and transformation of companies.
3. Partner or Shareholder Objection: The partners or shareholders who object to the merger or transformation decision have the right to submit an exit application from the company in accordance with the requirements of the current law.

27. Adoption and inclusion of provisions related to public and private non-profit institutions in a manner that guarantees the growth and development of non-profit work through community service.

The law is currently in force:

It divides non-profit companies into public companies whose form is joint-stock companies and private companies whose form is limited-liability companies. In both cases, non-profit companies or institutions are not-for-profit institutions but rather to serve and develop society. These have been authorized by the new draft, practicing any economic activity that may accrue to it through profit or cash and in-kind returns, to spend it to achieve its purposes, as it was permitted to accept, manage or invest gifts, bequests and endowments in cash and in kind granted to them. The new draft emphasized what was included in the current law in force, as it is prohibited for those institutions to strive for

profit, and if they have made a profit, they must use it for the purposes stipulated in its articles of incorporation or articles of association.

28. Allowing the group of founders, partners or shareholders, in the period prior to the establishment of the company, or subsequent to it, to conclude an agreement included in the articles of incorporation of the company, through a partner agreement, to regulate the relationship between them, or between them and the company itself, or to conclude a family charter that includes the regulation of

family ownership in the company, its governance, and its company.

The law is currently in force:

1. The articles of association and the articles of incorporation of the company: determines and organizes the relationship between the partners or shareholders among them, or between them and the company, after defining all matters and aspects related to the company, by collective agreement between the partners, and including them in the articles of association or articles of incorporation. As for the new draft, it authorizes the identification and organization of those aspects of the company, and the relationships between the partners, even before the establishment of the company’s contract and not just after   only.
2. Family Charter: The current law recognizes the articles of association or the articles of incorporation to establish the company only, which specifies the ownership of shares and shares in the company in general, regardless of the family ownership of the company, until the new draft made it possible to conclude a family charter, based on strong family ties between family members. It determines the terms and conditions for family ownership of shares and shares in companies, which are based on strong family considerations such as general-partnership companies.
3. Clarify the provisions and procedures required to file cases with the company and place them before the court or the competent authority.

The new draft requirements to file a case:

The lawsuit will be filed by the company itself or one of its partners or shareholders on behalf of the company against the members of the board of directors, as a result of making harmful decisions in the company and in violation of the rules and regulations. Partners

and shareholders shall make claims jointly.

It is not permissible for the partner or shareholder to file his claim, if the company’s right to lawsuit file still valid. The partner or shareholder shall inform the company of his intention to file the case on its behalf, thus limiting his right to claim compensation for the damage. The private affiliation that he has joined personally or with the partners or

shareholders, finally, the case may be filed by the company itself, or by a partner or shareholder, or by many partners or shareholders on behalf of the company, due to wrong decisions taken by the members of the Board of Directors that have caused damage to the company, partners or shareholders.

The law is currently in force and requires you to file a case:

 It stipulates these cases shall be filed within 3 years from the date of the discovery of the decision violating the regulations and which is harmful to the company, partners, or shareholders. Additionally, the claim should not be after the passing of 5 years after the end of the fiscal year of the company. It will also not be heard after 3 years since the expiry of membership of the members of the Board of Directors who made the wrong and harmful decision. Current applicable law exempts fraud and forgery from harmful acts on which the case may be heard, no matter how long ago.

30. Organizing all matters related to interim profits (mid-term or quarterly) in joint stock companies and limited-liability companies and distributing them to partners or shareholders.

The law is currently in force:

1. Profit distribution in joint-stock companies: The shareholder is entitled to his share of the profits according to a decision issued by the General-Assembly stating the due date and date of distribution of the profits. Profit eligibility for shareholders who are registered in the shareholders’ records at the end of the day specified for the entitlement, as per the company’s articles of association, should indicate the percentage that must be distributed among shareholders out of net profit.
2. Profit Distribution in Limited-Liability Companies: The partner is entitled to his share of the profits according to a decision issued by the General-Assembly of Partners in the Limited-Liability Company. The decision should state the date the partner is due for his share of the profit and the date of distributing the net profits. It should also state the profits that are due to the owners of the shares in the company, who are registered in the company’s partners’ records, each according to the amount of his share in the company’s capital. The company’s articles of association should indicate the rates of profit distribution to the partners in the company. The new draft has set the effective and

accurate organization of this issue in order to achieve the optimum distribution between partners or shareholders in the companies.