Chapter 3 Overview of New company Law_ce7d46400fb56f24436c7525ee1da8a1.pptx

Chapter 3 Overview of Saudi Arabia New Companies Law 2022 Dr.Rehana Parveen Assistant Professor College of Law Prince Sultan University Presenter : Dr.Rehana Parveen  The previous company law in the Kingdom of Saudi Arabia (KSA) shows certain limitations to foreign as well as domestic investors,...

Chapter 3 Overview of Saudi Arabia New Companies Law 2022 Dr.Rehana Parveen Assistant Professor College of Law Prince Sultan University Presenter : Dr.Rehana Parveen  The previous company law in the Kingdom of Saudi Arabia (KSA) shows certain limitations to foreign as well as domestic investors, when compared with the structures, concepts, and processes commonly seen across the US, Europe, and Asia. New Company Law  This feature is not only in KSA but throughout the Middle East. This creates a hurdle in the way of foreign direct investment (FDI) in the region including Saudi Arabia.  This is the reason why the Saudi Council of Ministers approved the long awaited “New Companies Law” 2022.  After two years of drafting, consultation and review the new law will usher in a number of significant changes and will also ensure that the legal position in relation to a number of key areas aligns with the approach that the Ministry of Commerce have adopted in practice in the past.  The Saudi Cabinet of Ministers on 28th June 2022, approved the New Companies Law, and it was published in the official gazette on 4 July 2022 pursuant to Royal Decree No. (M/132) dated 01/12/1443H (the “New Law”). New Company Law  This new Law came into effect on 1 January 2023, replacing the previous Companies Law issued in 2015 and the Law of Professional Companies issued in 2019.  The New Law largely unified KSA rules related to commercial companies, professional, and non-profit companies under one law.  This New Law removes restrictions on company names and now allows for greater flexibility on naming a company.  The New Law, which is in line with the Kingdom’s 2030 Vision, introduces new changes, allows greater flexibility, safeguards businesses’ interests, empowers the private sector and follows the best international practices.  The New Law also introduces several new changes to the rules of establishing and the governance of Joint Stock Companies, also introduces a new type of entity, being the Simplified Joint Stock Companies. New Company Law  current company law focused to offer more competence and precision to the regulatory setting in line with the development of the Saudi Arabian capital market authority, The Saudi Arabian General Investment Authority (SAGIA) and the influx of foreign investment in Saudi Arabia.  The New Law 2022 is a step forward to make Saudi Vision 2030 working and successful. Features of New Companies Law 2022  The New Law of Saudi Arabia consists of 281 articles.  The main features of New Companies Law 2022 are to enhance the business foreign direct investment in Saudi Arabia and develop ease of doing business ecosystem in all business segments.  Its objective is to initiate shifting the Kingdom from the oil based economy to business oriented economy by 2030. 1.It can regulate commercial, non-profit, and professional companies together. Types of Companies under new companies Law 2022 2.As a result investors will be able to incorporate any of the following types of companies: 1) Joint Liability Company 2) Limited Partnership Company 3) Joint Stock Company 4) Simple Joint Stock Company 5) Limited Liability Company Analysis of Saudi Arabia New Companies Law 2022 Partnership” companies are no longer recognized as a category of companies. The new law has introduced and regulated non-profit professional companies. The new law has introduced and regulated a new form of company – a Simple Joint Stock Company, which aims to meet the needs of entrepreneurs and attract venture capital. It is a flexible corporate entity, which can be established by one or more persons, managed by one or more managers or board of directors and issue several classes of shares. It can also serve as an investment arm for nonprofit companies enabling them to enter the private sector and generate returns and finance non-profit projects. No minimum capital is required to incorporate a Simplified Joint Stock Company. Its capital can be divided into tradable shares with a structure given by the Article of Association. Analysis of Saudi Arabia New Companies Law 2022 The chairman and board of directors have the widest powers in the management of the company similar to Limited Liability Companies to achieve purposes set in Saudi Arabia Cabinet Decision No. 678/1443 Its purpose is to attract investment in businesses along with enabling non-profit companies to enter the private sector. The article 11 of the New Law 2022 allows the binding of joint venture agreements and family charter in the company’s articles of association for the regulation of family owned businesses, their governance and administration policy, family members’ employment and the family business’ profits. As a result there is no conflict with the law, articles or the bylaws. Analysis of Saudi Arabia New Companies Law 2022 • Sole proprietorship owners are allowed to transfer their assets to any form of company. • Several restrictions on the company’s incorporation, business conduct, company name, and exit from the market have been removed. More Choice of Company Names  The New Law provides a wider choice of company name to those who want a specific name in the business market. This company name may be in languages other than Arabic and can be derived from: a) Purpose of company b) Its current or former shareholders, or c) A combination of both d) Other name which complies with Royal Decree No. M15/1420 approved by the Trade Names Law. Analysis of Saudi Arabia New Companies Law 2022 • The law offers increased flexibility to small and micro companies by easing their statutory requirements, incorporation procedures and offering extra flexibility in forming and setting out the company’s articles of association or bylaws. • Small and micro companies are exempted from audit requirements. Article 19 exempts the appointment of a certified auditor to micro (up to 5 employees) and small companies having 6 to 49 employees with an annual turnover of SAR 3 to 40 million to encourage and speed up start-ups into the Saudi business market. However, foreign micro and small companies will be required to have auditors. • The law provides for shares to be divided or split into shares of lower nominal value, or merging them to result in shares with a higher nominal value. Analysis of Saudi Arabia New Companies Law 2022 • It allows the distribution of interim and annual dividends to the partners and shareholders.  Encourage Employees to Buy Shares  Under Article 72 (2) (b) of Saudi New Companies Law there is a provision of incentivization of talent within companies. Under this policy shareholders do not have pre-emption rights when a company issues shares that are allocated to employees. Analysis of Saudi Arabia New Companies Law 2022 • Introduction of more developed and elaborate re-structuring and merger provisions. The New Law’s Chapter 10 makes rules for the merger, restructuring, and division of companies. The rules under New Law provide more clarity and transparency in comparison to Old Law on the rights and obligations of shareholders on the merger, conversion, or dissolution of a company. • The law simplifies the liquidation procedures in line with the KSA Bankruptcy Law. • It facilitates automation of processes by enabling attendance at general assembly meetings through electronic means, facilitating virtual voting using technology tools and automating establishment requests. • Extends a helping hand to companies to attract and motivate talent by allowing the issuance of different classes of shares with different rights, privileges or restrictions to employees. Analysis of Saudi Arabia New Companies Law 2022  Squeeze-out Right of Shareholders  Article 113 of New Law authorizes the shareholders having 90% or more of the total voting shares will be able to force the owners of the remaining 10% to sell their shares to a buyer who agrees to purchase the entire issued share capital. If the same is permitted in the company’s Articles of Association for making companies more attractive to investment opportunities in the region. But the minority shares will be sold at the same price and on the same terms and conditions as the sale of majority shares. Analysis of Saudi Arabia New Companies Law 2022  Limited Liability Companies Financing Policy The New Law 2022 allows Limited Liability Companies (LLCs) to issue Sukuks, negotiable debt instruments or financing instruments under the KSA Capital Market Law. Thus, it broadens the scope for financial capabilities and enhances the stability of business entities.  Interim Dividends Distribution The rule under the New Companies Law 2022 has deleted the reference to Sharia Law and allowed shareholders to agree on whatever percentages that suit them. As a result, dividends can be declared annually or on an interim basis from distributable profits to shareholders of companies leading to modernization of the distribution of profits in such companies. Analysis of Saudi Arabia New Companies Law 2022  Companies General Managers and Board Directors’ Fiduciary Duties  Under the New Law the general manager or board director or members will not be responsible for the adverse effects of a decision suffered by the company, if he/she/they:  a) does/do not have personal interest in the decision that causes negative effects,  b) aware of all matters in reasonable belief of situation and circumstances, and  c) believe the decision is reasonably in the best interest of the company.  Lock-in Periods of Share Analysis of Saudi Arabia New Companies Law 2022  Under the Old Law of Saudi Arabia the founders of a company who have shares in a Joint Stock Company can not transfer their shares before the publication of financial statements for 2 full years. This provision saves the other founders of the company or their beneficiaries in case of death. Now in the New Law this restriction has been removed.  Under the New Companies Law the arbitration is allowed to be agreed on any matter of disputes among shareholders and for this the relevant provisions in the Articles of Association or by-laws of the company should be written.  Share buy back permitted  Conversion from one class to another class of share is possible. New company Law inline with vision 2030  The new Companies’ Law is considered to be instrumental in further stimulating and developing the Kingdom’s commercial system.  It aims to empower the private sector, enhance the sustainability of companies, support investment in small and medium enterprises through facilitating procedures and regulatory requirements, boost entrepreneurship and promote investment.  With the new law, the government of Saudi Arabia is trying to stay inline with the best international practices to address the existing concerns and challenges of the business sector and safeguard their interest.  Amendments in the new company Law, which is in line with the Kingdom’s 2030 Vision, brings number of significant changes to modernize the Saudi corporate law framework and enhance the flexibility and ease of doing business in Saudi Arabia for existing businesses as well as attract foreign investments in the country thus creating greater diversity in the market.  In conclusion, the New Law increases business sustainability, encourages investments in small and micro companies, simplifies procedures and regulatory requirements, increases market diversity by introducing new company types, protects shareholders and reduces potential disputes. Conclusion  The Saudi Arabia New Companies Law 2022 is innovative and flexible. It simplifies the management of companies and encourages investment from local visionaries as well as foreign inventors in different levels of enterprises in the Kingdom.  It will open a new era for business momentum by establishing companies under a new regulatory framework that is more in line with Saudi Vision 2030 and well-established international standards. Rizvi, L.J. and Hussain, Z. (2022), "Review of Saudi Arabia company law reforms and its implications on corporate governance framework- an evidence from emerging market“ , International Journal of Law and Management, Vol. 64 No. 1, pp. 49-58. https://doi.org/10.1108/IJLMA-01-2021-0015 https://intuitconsultancy.com/saudi-arabia-approves-new-companies-law-2022-promote-in vestment-and-smes/ https://www.vision2030.gov.sa/v2030/overview/ https://www.tamimi.com/news/saudi-arabia-new-companies-law-2022/ References: https://www.natlawreview.com/article/new-saudi-companies-law-2022-key-changes-andnext-steps-companies-ksa https://www.pwc.com/m1/en/services/tax/me-tax-legal-news/2022/ksa-companieslaw.html