Overview of the new Professional Companies Law in The Kingdom of Saudi Arabia

The new Professional Companies Law has come into being upon a resolution issued by the Saudi cabinet on September 26, 2019G, corresponding to Muharram 27, 1441H.

The new law, therefore, shall contribute to developing and enhancing the professional work environment in the Kingdom and shall drive the local economic wheel and support various professional sectors and prompt them to move forward on improving all local and professional activities. This new law shall expedite the progress in numerous activities and fields taken up by those undertaking the liberal professions in the KSA.

Major features of the new Professional Companies law:

• A professional company is a civil company having an independent legal personality, which is set up by one or more persons, subject to that the person/s is/are authorized to engage in and undertake a liberal profession or several liberal professions, whether he/she was practicing this profession alone by himself or along with others, who undertake the same.
  • If this person engaged in a liberal profession/s with others, then this practice must be for the purpose of pursuing a liberal profession and not for any purpose otherwise.
• The law has identified four legal types and forms of partnerships that could be adopted by those undertaking a liberal profession/s or those permitted to undertake the same when setting up a professional company so that the company shall be legally recognized. The four types and forms of companies are: General Partnership, Joint-Stock Company, Limited Partnership and Limited Liability Company.
• The law permits the person licensed to take up a liberal profession to set up a one-person professional limited liability company. If this person is engaged in more than one liberal profession, then that licensed person may pursue all or some of those liberal professions through the company he/she has set up.
• The law permits those licensed to engage in more than one liberal professions to establish a professional company and allowed them to set up a professional company in partnership with other non-Saudi professional companies whereas the implementing regulations shall specify the terms and rules that govern the process.
• The law permits the unlicensed natural persons to set up a company to undertake a liberal profession/s, based on which and where on they set up the company. The law also allows those persons to become partners or shareholders in the company. However, the law excludes and bars general partners in each of the following: general partnership and limited partnership from such a permission.
• The law allows partners and shareholders in a professional company to transform the company from one form of companies into another one that is recognized in the new law.
• The Ministry of Commerce and Investment (Ministry) is the only competent body tasked with granting license to set up a professional company, in accordance with the articles of the law and it’s implementing regulations subject to the provisions of the Foreign Investment law.
• It is restricted only for the licensed partners or shareholders to engage in a liberal profession/s in a professional company. The law also permitted a professional company to employ other persons permitted to undertake a liberal profession/s in order for them to fulfill the company’s business, provided that they are subjected to the supervision and responsibility of the company.
• A professional company shall practice a liberal profession/s, which is the subject of its activity, and the company is not allowed to go beyond or overstep it. The company is completely banned from engaging in all types of businesses or partaking in setting up commercial partnerships or establishing any other professional company, excluding from which, the company may possess financial and property assets in such partnerships to serve its objectives in line with the implementing regulations of the law.
• The law permits to name the professional company after one or more partners or shareholders therein and allowed to give the company an innovative name to pursue its business. The law obligates all the professional companies to stick to a legal clause which pertains to the name of the company that the name shall be followed by what could declare that it is a professional company.
• A partner or a shareholder in a professional company shall, in his/her personal capacity, be liable for his/her professional errors towards the company and towards the remaining partners and shareholders, excluding from which the professional company that is owned by one person.
  • A professional company shall be responsible for compensating others for the damages they sustain due to the professional errors committed by the partners or shareholders in the company, or even the company’s affiliates. The director and members of the board of a professional company shall be liable for any damages that may be inflicted upon the company, its partners or shareholders due to their wrong managerial decisions, or infringing provisions of the law or the regulations or the company’s articles of incorporation or its articles of association (statute). In case there were more than one director at the company the directors shall jointly bear the responsibility for the damages caused.
• The law invests the minister with powers to issue a decision to obligate a professional company, when undertaking certain activities or transactions to include such activities and transactions in an insurance coverage for the professional errors.
• The law permits the possibility to contain a clause in the company’s articles of incorporation or its articles of association, which allows a partner or a shareholder in the company to continue pursuing the profession in the capacity of being a partner unlicensed to undertake the profession in case he/she forfeits the license once and for all. This is to note that if the license is revoked/forfeited in a conclusive way, it shall render the partner as have withdrawn from the company.
• Under the articles of the law, the share of a dead partner in a professional limited liability company, and the shares of a dead shareholder in a professional joint-stock company shall be transferred to their legal heirs unless the company’s memorandum of incorporation or its articles of association stipulate otherwise. The same applies to the dead partner in a professional limited partnership unless they (the heirs) decide to stay and continue in the company as partners. They shall then have the capacity of being ‘Silent Partners’.
• The share of a dead partner in a professional general partnership shall be transferred to his/her legal heirs, and his/her share in such company shall be estimated by a certified evaluator so the evaluator could determine the fair value of the share of each partner in the professional general partnership and that is from the date of death of the partner. Moreover, the legal heirs of the dead partner shall collect their share in every latest company’s dues if such dues and rights were a result of previous transactions that preceded the death of the bequeathed, taking into account that the death of a partner in the professional general partnership would not affect the existence of the company, which shall remain and continue amongst the partners.
  • The law also allows the heirs of the dead partner in a professional general partnership to take the place of their dead bequeathed in the company, and they may transform it to a limited partnership, a joint-stock company, or a limited liability company.
  • The heirs shall then have the capacity of being ‘Silent Partners’ when they transform the professional general partnership to a professional limited partnership. In all circumstances, it should be stipulated in the company’s memorandum of incorporation or in a special agreement concluded between the heirs in the very beginning that transformation of the company is permissible.
• The law permits the transfer shares and stocks from the dead partners or stockholders in the professional company to their legal heirs. The law also permits the heir, who is unlicensed to undertake a profession, which is the subject of activity of the company, to be a partner or a shareholder undertaking the profession through the company, subject to the consent of majority of partners in the company or approval of the general assembly. In case of disapproval, the heir shall then serve as a non- practicing partner or a shareholder. Then, the heir may be allowed to engage in a profession by whatever way other than the company.
  • Meanwhile, the law permits the heir to be a partner or a shareholder undertaking the profession in any other professional company, which takes up the same liberal profession as the one pursued by the company in which the heir became a partner or a shareholder following the death of his/her bequeathed, and to possess/hold shares and stocks he/she inherited as a non-practicing partner or a shareholder.

The law specifies some obligations, most importantly:

• The law obliges the professional company to stop engaging in the profession in case the company irrevocably forfeits the license where the partner or the shareholder in the company is the only practitioner of the profession, or is the sole owner of the company, or if the death of the partner or the shareholder, or the partner assigned his/her share or the shareholder assigned his/her stocks, have resulted in the company losing its only practitioner of the profession therewith.
  • The law grants the company a six-month grace period so it could amend its status. This grace period is extendable for a similar period of time by virtue of a decision to be issued by the minister.
  • If the company fails to amend its status within such grace period, then the company shall be terminated by the force of law.
• The law obligates the partner or shareholder in the professional company to completely and immediately cease work if he/she forfeits the license temporarily, until the license is retrieved. If he/she was the only practitioner of the liberal profession/s, or was the only owner of the company, then the company shall be forced to halt the engagement in its activity until the license is got back. Generally, the company’s certificate of incorporation or articles of association show how the profits and losses are distributed and shared upon the occurrence of either of the said circumstances.
• The law makes it mandatory that the professional company be run/managed by the licensed partners, in which case if the company is managed by one person. Should the company be run/managed by more than one person, then the number of licensed partners, who are charged with running and managing the company shall not be less than half.
  • Meanwhile, the law permits that the professional joint stock company be run and managed by a board of directors comprising a number of the shareholders or others, provided that half of the board members be at least of the licensed shareholders.
• The law forces the professional company, which is named after one of the partners or shareholders, or included in its name the name of one of the partners or shareholders, to obtain a written consent of the partner or shareholder, who pulled out of the partnership if the company is willing to keep naming the company after him/her, or including his or her name in the company’s name.
• In the event that the partner or shareholder dies, the law obligates the company to obtain a written approval of heirs of the deceased, if the company wants to keep naming the company after him/her, or including his or her name in the company name.
• The law forces all professional companies to register in the registry of the professional companies with the Ministry. To underline the same, the law prohibits the professional companies from earning the legal personality and prevented them from pursuing and engaging in any work of the liberal profession unless the company is registered in the registry with the Ministry.
• The law bans partners or shareholders, who engage in a liberal profession, from holding shares or being partners in another professional company that undertakes and practices the same liberal profession.

The law bans the following:

• The law prohibits the director of the company from getting any powers or authorities, which may infringe the independence of partners in pursuing their liberal profession in the following companies: the professional general partnership, professional limited partnership and the professional limited liability company, which are owned.
• The law bars each of the partners or shareholders in the professional company from engaging in and practicing a liberal profession/s by himself/herself or singlehandedly, yet obligates him/her to undertake the profession through the company, subject that he/she secures a written consent from the remaining partners or the approval of the general assembly.
  • If a partner of a shareholder was engaged in the profession without meeting such legal conditions, then the company would be entitled to all the fees and financial benefits that a partner or shareholder has collected, due to breaching the provisions of the law. A partner of a shareholder shall not be committed to all the said conditions if the company is owned by one person.
• The law bans protesting against others by taking advantage of the memorandum of incorporation or articles of association of the professional company that was published with the Ministry unless the company is registered in the Ministry’s registry. The law also prohibits partners or shareholders in the company from dissolving the company before expiry of its term unless they inform all customers, who deals with the company, thereof in writing.
• The law prohibits acquiring the capacity of a merchant with respect to the partner as per the partnership in the company, or the shareholder as per the shares he/she holds in the professional company, so in all circumstances, a partner or a shareholder will never acquire the capacity of a merchant.

Penalties:

• Upon a decision by the minister, a committee shall be formed to review the violations of the law, and the minister shall lay out the rules of the committee’s functions and specify its remunerations and name its members and secretary. The committee comprises three members, one atleast of whom shall be specialized in laws.
  • The committee is tasked with imposing the penalties stipulated in the law.
  • The law allows whoever received a verdict (of a penalty) to challenge such a verdict before the administrative court.
• The law imposes a fine of no more than SAR 500,000 on: every company owned by one person and engage in more than one liberal profession, in violation of the regulations; on every director or board member of the professional company due to breaching the clauses of articles of the incorporation of the professional company and the publication mechanism provided in the regulations, or for his/her infringement of the rules and regulations governing the activity of the professional company, or for breaking the general rules respecting the way how the professional company is run.
  • This penalty is levied as well on: every person, who held shares or was a partner in more than one professional company that undertakes the same liberal profession; on every director or board member, who dissolved the company before expiry of its term; on every company that breached the provisions of the law; on every company that engaged in a liberal profession without procuring an insurance coverage against the professional errors, just in case a decision was issued by the minister to obligate the company to secure such an insurance coverage.
  • The penalty is also imposed on every person, who practiced a liberal profession by away other than that of the professional company and on every director, board member or sole partner in the professional company if the company is engaged in a liberal profession with no one among the partners or shareholders licensed to practice the profession.