Saudi Companies Law
Overview of the New Saudi Companies Law and the Transformation of the Investment Environment
The issuance of the new Saudi Companies Law pursuant to Royal Decree No. (M/132) dated 01/12/1443H represents a qualitative shift in the legislative environment governing companies in the Kingdom. It reflects a strategic direction toward achieving the objectives of Saudi Vision 2030 by creating a more attractive and competitive investment environment. The law aims to facilitate procedures, stimulate the business environment, and support investment, thereby contributing to the sustainability of economic entities and attracting local and foreign investments.
⸻
Objectives of the New Saudi Companies Law
The objectives of the law are evident through the provisions and developments it introduced, which focus on enhancing flexibility, governance, and efficiency:
Business Environment and Investment Support
The Ministry of Commerce and the Capital Market Authority confirmed, as stated in the document “Mechanism for Implementing the New Companies Law,” that one of the main objectives of the law is to facilitate procedures and regulatory requirements to stimulate the business environment and support investment. This is reflected in simplifying company formation procedures and allowing all aspects of companies to be regulated through the articles of incorporation or bylaws.
Introduction of New Forms of Companies
The law introduced new forms of companies to keep pace with global developments and meet the needs of the entrepreneurship sector. Among the most notable is the “Simplified Joint Stock Company.” The law also reorganized the “Non-Profit Company” to enhance the role of the non-profit sector in economic and social development, as stated in the “Guidelines for Establishing Non-Profit Companies.”
Enhancement of Corporate Governance
The law paid significant attention to providing an effective and fair framework for corporate governance. For example, Article Twelve of its Executive Regulations stipulates controls that prevent managers and board members from exploiting the company’s investment opportunities for personal interests, which enhances transparency and protects shareholders’ rights.
Attraction of Foreign Investments
The law intersects with the “Investment Law,” which aims to develop and enhance the competitiveness of the investment environment. Article Two of the Investment Law provides for equal treatment between local and foreign investors. The new Companies Law works to enable this equality by providing flexible and reliable regulatory tools.
⸻
Impact of the Law on the Transformation of the Investment Environment
The new Saudi Companies Law has created a tangible transformation in the investment environment in the Kingdom through several key aspects:
Raising the Level of Transparency and Reliability
The law seeks to enhance transparency in the business environment, supported by other regulations such as the “Beneficial Owner Rules,” which aim to create an accurate database of the actual owners of companies. This approach increases investor confidence and reduces risks associated with investment.
Stimulating Entrepreneurship and Small and Medium Enterprises
By providing flexible legal forms such as the “Simplified Joint Stock Company,” the law facilitates the establishment and growth of projects for entrepreneurs, contributing to achieving one of the objectives of the “Strategic Plan of the Capital Market Authority,” which is to stimulate the growth of small and medium enterprises.
Alignment with National Strategies
The law is integrated with the Kingdom’s major economic directions. As stated in the “National Industrial Strategy,” providing an attractive investment environment is a crucial element for attracting foreign capital and transferring advanced technology. This is supported by the new Companies Law through updating regulatory frameworks.
Enhancing Global Competitiveness
The law contributes to raising the Kingdom’s competitiveness at the international level. By adopting global best practices in corporate legislation and facilitating procedures, the Kingdom advances in ease of doing business indicators, making it a preferred destination for global investments.
⸻
Top 10 Features of the New Saudi Companies Law to Stimulate Investment
The new Saudi Companies Law aims to enhance the attractiveness of the Saudi market and achieve Vision 2030 objectives through a set of features that stimulate the business environment and support investors. The most notable ten features include:
- Facilitation of Procedures and Regulatory Requirements
The law focused on simplifying procedures to stimulate the business environment. The document “Mechanism for Implementing the New Companies Law” issued by the Ministry of Commerce and the Capital Market Authority confirmed that one of the main objectives of the law is to “facilitate procedures and regulatory requirements to stimulate the business environment and support investment.” This includes easing company formation procedures and granting flexibility in regulating internal affairs through the articles of incorporation and bylaws.
- Introduction of New Forms of Companies
To keep pace with developments and meet the needs of entrepreneurs, the law introduced new forms of companies, most notably the “Simplified Joint Stock Company,” referred to in Article One Hundred and Forty-Three, which features simplified administrative requirements. The law also reorganized the “Non-Profit Company” to enhance the role of the non-profit sector in sustainable development and social responsibility, as stated in the “Guidelines for Establishing Non-Profit Companies.”
- Enhancement of Corporate Governance
The law placed great emphasis on strengthening governance to protect the interests of all parties. Article Twelve of its Executive Regulations provides strict controls preventing managers and board members from exploiting the company’s investment opportunities for personal interests, raising levels of integrity and transparency.
- Ensuring Equal Treatment of Investors
The law established the principle of equality and fairness among investors. This objective intersects with Article Two of the Investment Law, which aims to “ensure equal treatment between local and foreign investors,” creating a healthy and reliable competitive environment that attracts foreign capital.
- Raising the Level of Management Responsibility
The law significantly enhanced the responsibility of company management. According to Article Twenty-Eight of the Companies Law, managers and board members are jointly liable to compensate the company, partners, or third parties for damages resulting from violations of the law or the articles of incorporation, or due to errors or negligence.
- Empowering Minority Shareholders to Exercise Oversight and Accountability
The law granted effective tools to protect minority shareholders. Article Twenty-Nine allows a partner or shareholder representing 5% of the capital (or less as specified in the articles) to file a liability claim against management on behalf of the company, ensuring the existence of an effective internal oversight mechanism.
- Increasing Transparency and Disclosure
The law imposed strict requirements to enhance transparency. According to the “Instructions on Company Announcements” and the “Capital Market Law Handbook and its Executive Regulations,” companies must disclose all material information fully, accurately, and in a timely manner to enable investors to make decisions based on correct information.
- High Flexibility in Company Organization
The law granted unprecedented flexibility to partners and shareholders in organizing their relationships and managing their companies. Partners may include special provisions and conditions in the articles of incorporation or bylaws, allowing the design of governance structures suitable for each investment and its objectives.
- Providing Sustainable Financing Sources
One of the declared objectives of the law, as stated in the document “Mechanism for Implementing the New Companies Law,” is to “provide sustainable financing sources” for companies. The law opens new financing horizons suitable for different stages of company growth, supporting sustainability and expansion.
- Attracting Foreign Direct Investment
The law was designed to be a key element in attracting foreign investment. By facilitating procedures, ensuring equality, and adopting international best practices, the law creates an attractive investment environment. This is also supported by the Ministry of Investment through investor-oriented services, as stated in the “Investor Guide.”
⸻
Types of Companies in the New Law: From Establishment to Sustainability
The forms of companies under the new Saudi Companies Law have become more diverse to meet the needs of all investors.
Simplified Joint Stock Company: The Ideal Choice for Startups and Entrepreneurs
This type is the most prominent in the new law. It can be established by one person and does not require a minimum capital or necessarily a board of directors, granting full flexibility in management.
Fundamental Amendments to the Limited Liability Company
These companies are now allowed to issue tradable debt instruments or financing sukuk. The maximum number of partners has been removed, and they may be established by one person.
Joint Stock Company and the Development of Debt Instruments and Financing Sukuk
The law allows joint stock companies to issue multiple classes of shares with different rights and facilitates mechanisms for splitting or merging shares, increasing their attractiveness to investors.
Non-Profit and Professional Companies: New Investment and Development Arms
The law regulated non-profit companies for the first time as a possible investment arm to advance the third sector. It also integrated professional companies into the law to enhance the role of specialized competencies.
General and Limited Partnerships in Light of New Liability Standards
The law clarified the basic principles of these companies to reduce disputes and improved legal liability mechanisms to protect partners and investors.
⸻
Therefore, applying this law requires a deep understanding of linking its provisions to the reality of each company. At Al Othman Law Firm, we work as a strategic partner to review articles of incorporation, develop governance policies, and ensure full compliance with the Executive Regulations, which represent the backbone of this law.
If you are interested in establishing a company, you may find this useful: Establishing a Company in Saudi Arabia.
⸻
Corporate Governance and the Family Charter in the Saudi Companies Law
Governance under the new Saudi Companies Law is considered a strategic tool to enhance performance and reduce related risks, in line with international best practices. The law focuses on building a transparent relationship between management and stakeholders to ensure the sustainability of the business entity.
Regulation of Family Ownership and Employment of Relatives through the Family Charter
The law allows founders and partners to conclude a family charter regulating legal relationships within family companies. This charter includes the regulation of family ownership, mechanisms for employing relatives, how heirs enter the company, as well as policies for profit distribution and share disposal, reducing the likelihood of future disputes.
Duty of Care and Loyalty: Responsibility of Board Members and Managers
The law imposes strict obligations on board members and managers, including the duty of care and loyalty to the company and its interests. It prohibits the exploitation of company assets for personal benefit and obliges managers to maintain accounting records and submit financial statements on time. To enhance the work environment, the law allows providing insurance coverage for managers against liabilities arising from their positions.
Mechanisms for Protecting the Rights of Partners and Shareholders and Limiting Conflicts of Interest
The law strengthened shareholders’ ability to hold management accountable. It allows those representing 5% of the capital to file liability claims against management and requires full disclosure of any conflicts of interest. It grants general assemblies broader powers of oversight and removal of members for breach of legal duties.
Financial Oversight and the Role of the Licensed Auditor in the Kingdom
The appointment of a licensed auditor in the Kingdom of Saudi Arabia has become mandatory for most companies to ensure the accuracy of financial statements. The auditor has the right to access all records and documents to verify the company’s obligations and assets, enhancing transparency and integrity.
⸻
Explanation of the New Companies Law, the Executive Regulations, and Application Mechanisms
The Executive Regulations represent the “backbone” of the law, as they are the interpretative document that sets detailed application mechanisms from establishment to liquidation.
Rules for Interim and Annual Profit Distributions to Shareholders
The law granted great flexibility in financial policies, allowing companies to distribute interim (quarterly or semi-annual) or annual profits to partners and shareholders. It also abolished the mandatory statutory reserve requirement of 10%, providing greater liquidity for companies.
Provisions on Conversion, Merger, and Division of Companies
The law facilitated the business environment by developing rules for conversion and merger. It allows companies to split into two or more entities without complex procedures. This enables existing companies to adapt to market changes or prepare for public listing in the financial market.
Company Liquidation Procedures and Alignment with the Bankruptcy Framework
The law developed company liquidation provisions to be faster and clearer, while ensuring alignment with the Saudi Bankruptcy Law. These procedures aim to protect creditors’ rights and ensure an orderly exit from the market when necessary.
Dispute Resolution Methods: Arbitration and Alternative Means
To avoid lengthy litigation, the law encouraged dispute settlement through arbitration or alternative methods. These methods provide flexibility and speed in resolving commercial disputes, enhancing investor confidence in the Kingdom’s legal environment.