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Company Law Reform in Saudi-Arabia

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published on 17 February 2021 | reading time approx. 3 minutes

  

​Since the Saudi Arabian Capital Market Authority (CMA) has published a draft of a new Company Law in cooperation with the Ministry of Commerce, the Saudi Arabian Commercial Law could soon face significant changes. If the new draft would come into force, the old Royal Decree No.M/03 dated 28/01/1437H, which came into force in March 2020, would be replaced. Therefore, far-reaching changes in the Company Law would have been made within very short time.

  

  

 
In addition, the Ministry of Commerce and Investment (MOCI) has also announced a draft bill regulating the sales and agency activities in the Kingdom, which is intended to replace the Royal Decree No. M/11 dated 20/02/1382H and thus modernizes the current regulations in order to further increase the attractiveness for foreign investors.

Major changes for corporate forms

The draft of the Company Law contains a significant restructuring of the corporate forms. Although the limited liability companies (LLCs) and the joint stock companies (JSCs) remain in their current forms, the possibility of a partnership company would no longer exist in the future. However, in addition to these existing corporate forms, a simple joint stock company will be established, which will be subject to easier regulatory procedures than the conventional JSC. Such a company can be found by a single shareholder with no minimum capital required. The draft law also does not, for instance, prescribe any requirements for resolutions at the shareholders' meeting but accepts separate regulations within a company agreement.

The draft law also contains far-reaching changes with respect to conventional corporate forms. Agreements between shareholders in the form of a partnership agreement are now accepted. This gives shareholders the option to intervene decisively in the management of the company and to regulate the rights and obligations of other shareholders themselves. Furthermore, there is no requirement of a fixed term of the corporate form, so that such can also be established for an indefinite period of time. According to the draft, dissolution of the company shall no longer occur if the liabilities exceed 50% of the share capital and at the same time a certain period of time has elapsed without contrary action by the shareholders. 

On the other hand, any party with an interest in the dissolution of the company shall be able to apply to the competent court for such dissolution as soon as the liabilities exceed the threshold of 50% of the equity. Whereas the directors' duty of care while acting on behalf of the company was previously regulated by law only in the case of the JSC, this regulation has now been extended to all corporate forms.

According to the draft law, LLCs and JSCs may also distribute interim dividends under certain conditions. These conditions, such as the requirement that the company must be able to meet its financial obligations in the next twelve months, are intended to ensure the company's liquidity despite the distribution of dividends.

Special regulations on the LLC

In addition to the fundamental changes that relate to all corporate forms, the draft law also introduces changes that only affect the LLC. One key element is that it is now possible for a member of an LLC to be the sole shareholder of another member of the LLC at the same time.

Special provisions on the JSC

Another highlight of the new draft is the restructuring of the formation procedure for JSCs. In the future, already one single shareholder is sufficient for the formation of a JSC. Furthermore, the requirement of a certain minimum capital and the maximum number of directors, which is currently set at eleven, have been abolished. 

Commencement of the amendments 

As of today, it is unclear when the draft will be passed. It is not unlikely that parts of the law will be amended and extended shortly after its adoption. Once the amendments came into force, the affected companies will have a grace period of one year to implement the new requirements. 

Significant changes to sales and agency activities

For the first time, the new draft law of the Ministry of Commerce and Investment (MOCI) on the provisions of distribution and agency activities allows non-Saudi nationals as distributors. Although sales activities with non-Saudi Arabian nationality are subject to certain conditions, this represents a fundamental change as well as a significant modernization of the current legal situation, which will surely further increase the attractiveness for foreign investors. However, the draft law requires the distributor to be registered in the commercial register and to keep a domestic license and, in the case of foreign distributors, a foreign license additionally. Furthermore, a written copy of the agreements between the two parties in Arabic or a certified translation is required. In addition to the obligations of the distributor, it is also clearly specified upon which events the activity of the distributor ends in favor of its principal. These include, in addition to the death of the agent or distributor, the commencement of legal proceedings for liquidation and the occurrence of the distributor's incapacity to act due to illness, which would result into the non-fulfillment of the respective obligations.

According to the draft law, the parties may determine the procedure for dispute resolution within their agreements between the contracting parties in the event of such a dispute. In the case of disputes between the distributor and the principal, the draft law provides a limit of three years for the assertion of claims. Following this period, enforcement shall be excluded due to the occurrence of the statute of limitations. If the customer does not fulfill its payment obligation to the distributor, the distributor shall be entitled to retain the customer's goods until its obligation is fulfilled. After the law enters into force, further details and the issuance of implementing regulations are to be expected.
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