Regulations of Professional Companies Under Saudi Arabia's New Companies Law 2020 PDF

Law 342 Research Paper Sample Regulations of professional companies under the new companies law in Saudi Arabia Student Name.................... College of Law, Prince Sultan University E-mail: [email protected] Abstract The new company’s law put some procedures and regulations for professional companies...

Law 342 Research Paper Sample Regulations of professional companies under the new companies law in Saudi Arabia Student Name.................... College of Law, Prince Sultan University E-mail: [email protected] Abstract The new company’s law put some procedures and regulations for professional companies in Saudi Arabia. This is concerned with the shareholder in the professional company. Besides, there are some Provisions of the Professional Company’s Memorandum of Association and this contains loss of the license or the death of a partner. Finally, the new companies law is different from the old one and solves many issues related to professional companies and others. Keywords: Memorandum of Association, Professional Companies, Companies Law. to adopt higher regulatory matters as long as they suit them. It also obligates companies to change their founding documents as a result of the fact that a conflict may occur between the provisions of the new law and the current constitutional documents since the new law has exceeded many requirements in order to provide financing, flexibility and management of entities (Tarek Antaki, 2022). It also allows companies to determine their priorities besides requirements and develop future plans for them, avoiding any risk factors. Accordingly, the provisions contained in the constitutional documents may be amended. Also, all government authorities within Saudi Arabia have been assigned to improve the business ecosystem to be consistent with the Kingdom’s vision 2030. The Ministry of Commerce was the initiator as this law is expected to have a significant impact on the foreign investment climate. 1. Introduction Regulatory and legislative change in the Kingdom of Saudi Arabia has accelerated making all investors interested in implementing it after understanding or giving advice through large groups of innovations. However, the recent change has a direct impact on investors as the new companies law that has been approved in 2020 (“PCL”) made a radical change in terms of giving professional companies the opportunity to establish their businesses as the new corporate system in the Kingdom of Saudi Arabia began its implementation in the year 1443 AH and required companies to change their founding documents. This law provides appropriate guarantees and protection for all stakeholders and at the same time gives the opportunity for industries and companies to structure their entities in a way that suits their needs. In addition, the law sets minimum requirements and allows shareholders and partners xxxx-xxxx/xx/xxxxxx 1 © xxxx IOP Publishing Ltd required only one profession provided that none of those professions violate professional and legal standards. This requires fulfilling all the conditions and requirements stated without any objection from the Authority which supervises the profession from practicing it with any other profession. It is also permissible for a person holding a license to practice one free profession provided that he establishes a limited liability company consisting of at least one individual in order to practice that profession through it. The company is private and is subject to supervision by the relevant authorities and bodies. The Minister has the right to link the company’s practice of specific transactions or activities to obtaining compensatory insurance after obtaining the approval of the competent authorities to supervise the practice of those professions (Matthew Powell, 2022). 1.1 Research Methodology This research is considered exploratory as it is one of the important parts of business strategies and focuses primarily on innovative ideas and visions by providing statistics that provide accurate data. Information also is collected from many sources via the internet. So, this makes this type research the best start for any plan related to comprehensive analysis in order to collect information revolving around the new law in Saudi Arabia. 2. Discussion The new company’s law defines a professional company as: A civil company carries out work independently and is established by an individual or group who obtain a legal license in order to carry out this company. This is done with the presence of a number of general provisions of the new Companies Law that are applied to companies to exercise free governance as well as provisions that are related to the professional companies . There are a number of specific conditions that govern those companies. Also, in 1441 AH, with regard to the system of professional companies, there are no fundamental changes that have occurred with regard to the provisions with the companies concerned. The focus is on the concept of the profession according to Saudi law which requires the necessity of obtaining a professional license in order to practice commercial activities from the regulatory body recognized in accordance with the law. This includes auditing, legal, engineering and accounting activities and any activities of a similar nature. Partner/Shareholder in a Professional Company: Any person who has the legal or natural capacity has the right to be a shareholder or partner in any of the professional companies with the exception of limited partnership or partnership companies, as he is a general partner if he does not have the required license to practice that liberal profession provided that the total shares do not exceed the number of licensed individuals. It does not exceed 30% of the total capital. It is not permissible for anyone who does not have a professional license to have control whether directly or indirectly, over the company or its management with the aim of providing protection for the independence of the company that has been licensed to practice that function. It is not possible for the number of partners who do not have a license to be greater than the number of licensed partners.In addition, a Regarding Free Professions: shareholder or partner in any company regardless It is possible for a professional company to be of its specialty is not entitled to obtain the status of granted a license to practice more than one liberal a trader as a result of his ownership of shares or profession in contrast to the old law which partnership. He is also not permitted to practice 2 any type of liberal profession except through that company if the professional company is not an individual institution. Without any exception, professional companies with sole ownership are made as each shareholder or partner is considered to have personal responsibility for any professional errors that may occur towards any other company or towards the rest of the shareholders or partners. The professional company is also obligated to provide compensation for any damages caused to others as a result of the occurrence. So, the errors committed by shareholders, partners or any of the companies are affiliated and the company’s partners or shareholders have the right to convert them to any form of compensation. than ninety days before the solution is reached. There must also be a guarantee of a mechanism for completing the work in question for clients by referring it to another company licensed in the same field. Specialty of the Professional Company: The professional company is competent to practice its activity only as no professional company is encouraged to practice any commercial business or even participate in establishing professional or commercial companies. However, the company has the right to own assets whether real estate or financial in order to serve itself, provided that the ownership of those assets is not Provisions of the Professional Company’s jeopardized. The company does not pose a serious risk and that ownership is prohibited in accordance Memorandum of Association: with professional standards, laws and regulations The provisions of the Companies Law apply to taking into account any provisions related to the the mechanisms for publishing the articles of ownership system for foreigners in the field of real incorporation of professional companies and their estate. articles of association and they also apply to any bet which amendments or changes affecting their Provisions Pertaining to the Management of percentage or shares. Objections to others shall be on the part of the professional company and it is the Professional Company: not possible to draw up by laws or carry out the The management of the professional company is articles of incorporation unless the professional by an individual or a group of partners. If the company is registered in the new companies’ management is by one individual, one of the registry in accordance with the provisions of the partners must possess the required professional law. However, if the matter depends on one or license and if the management is by several more conditions, the mentioned conditions will not individuals, at least half of the partners must be considered in order to confront others. possess the required license and at least one Moreover, shareholders or companies in any licensee must be provided for each profession. It is professional company do not have the right to freely exercised by the company and voting must dissolve that company before the expiry of the be in favor of the Board of Directors and its period mentioned in the license except through decision by at least half of the licensed partners or legitimate means affiliated with the Ministry of shareholders who hold membership in the Board of Commerce .It should also comply with the errors Directors, unless there is something in the of the body responsible for supervising the company’s regulations stating the necessity of company’s profession in accordance with the obtaining a percentage higher than half in voting standards determined by the body and inform all and in the articles of law. owners. The interests and those concerned with this matter must be written in writing and everything must be completed within it no less 3 profession through the company. Hence, if the approval of the majority of shareholders or partners is obtained besides the approval of the General Assembly, the heir in this case does not become a shareholder or a partner in which case he has the right to practice his profession in any way without the company. Also, any of the papers, whether he is a shareholder or partner, urges him not to own a percentage of the shares that he inherited as a non-practicing shareholder if he practices his profession in another company. Loss of Professional License: In the event that a shareholder or partner in any professional company loses his temporary license, he must stop practicing work immediately until he regains the license. If he is the sole owner or the only practitioner of that profession in the company, then the company must stop working in that profession until license is obtained. If the shareholder or partner loses his permanent license, he is considered to have withdrawn from the partnership as long as the articles of law do not stipulate otherwise. If he is the owner or sole practitioner of the profession and the company is a sole proprietorship, the company must stop working for a period of not less than six months in order to restart its legal status and if this is not done the company will be closed. Liquidation Procedures: The articles of incorporation for any professional partnership whether general or limited as a result of the exclusion of any of the shareholders or partners are clarified in that contract and are carried out based on liquidation procedures in accordance with the bankruptcy law. Also, any individual institution that practices more than one liberal profession that violates the terms of the law is punished with a fine. It shall not exceed half a million Saudi riyals. The same fine shall also be imposed on any director or member of the board of directors of the professional company who violates any of the conditions of the company’s law or its publishing mechanisms and controls or who violates any of the conditions of the organization for the company’s activity or the general rules.in this case, the law imposes a fine on any individual who is a shareholder or partner in several companies that practice the same professions as well as on every board member or manager in any professional company which closes down Al-Sharq before its licensed term is expired without prior warning or written notification. Also, any company that practices a profession or several professions whose activity is carried out by people other than shareholders or partners holding a license must be fined according to the new companies’ law. Hence, any company which has practiced commercial businesses or professions or participated in the establishment of professional or commercial companies or Death of a Partner: In the event of the death of any of the shareholders or partners in the professional company, his share or percentage is automatically transferred to the heirs in the event that the company’s articles of incorporation do not stipulate otherwise. In the event of the death of any partner in professional joint-liability companies, the company continues among the remaining partners. The deceased's share and the resulting rights are transferred to the paper. In addition, it is permissible for any conditions to be added to the articles of incorporation in the event that there is an agreement between the partners and the heirs of the deceased partner that the heirs take the place of partners within the company. This can be applied by converting to a joint-stock company with a simple recommendation or that the company transforms into a limited liability company, even if that is the case. Also, any of the heirs holding a license to practice the profession to which the company’s activity is subject becomes entitled to be a practitioner or a partner who practices the 4 continued to work in the name of any withdrawn or deceased shareholder besides partner without obtaining written approval from him or his heirs is also fined. Any company that practices any of the liberal professions without paying professional compensation insurance will also be punished in the event that any ministerial decision is issued requiring it to do so. Any partner or shareholder who practices any liberal profession will be punished as long as the company is not professional or individual or is not one of the partners or shareholders in the company. In addition, a committee consisting of several members no less than three will be formed in order to look into any legal violations that may occur and impose penalties. Anyone who is subjected to any penalty has the right to appeal before the administrative court and the penalty will be doubled if it is repeated within a period of not less than three years from date of first penalty (Insights into Saudi Arabia’s Evolving Laws & Regulations , published on Mar1 2023). As for insurance, the Minister of Commerce link compensation insurance as a result of oversight or error to any professional activity. Moreover, any partner who loses his license will be outside the company as long as the articles of law do not stipulate otherwise and he will continue without being a partner as the percentage of persons who do not hold a license does not exceed 30% of the total board. Drawbacks in the old law The old law had few options regarding the structure of professional companies as the only structure that was permitted was a partnership, and liability was shared. So, direct and multiple partners were necessary. Moreover, individuals did not have the right to work as long as there was no professional license and only one activity was permitted. There was also an area related to participation and profitable investment. These conditions restricted investment options and limited the ability to innovate for service offerings. Hence, this old law did not solve the problems related to investors. The newly approved company’s law addresses these problems and Management provisions provides a platform for investment, innovation and In cases related to the management of the growth. professional company by one person, that person must hold a professional license and if the management is between more than one parties, half A new dawn of the board of directors must have the license The new company’s law addresses many issues required in order to practice the profession. Also, if that were obstacles in the past and also provides the company practices several professions, it must many advantages including innovations such as include the board of directors consists of one establishment through joint stock companies or person as a minimum who holds a license to limited liability companies with many fundamental practice the profession as long as the company’s changes in terms of activities and shareholders. bylaws do not stipulate otherwise, and the The new law provides the opportunity for licensed percentage of shareholders holding a license is not professional companies to enter into partnerships less than half the number of the board. The with institutions or individuals. This increases members are responsible for errors and omissions investment opportunities in the professional side as and the partners holding the license are responsible this was prohibited in the past. All the various to the unlicensed partners. The company is fully professional activities can be integrated into one responsible if it is responsible towards others as a company that helps enhance competition and result of any error committed by any professional. innovation. For example, any professional 5 company has the right to work in two or more professions under legal cover such as auditing and legal activities and this innovation has a significant impact on the market in terms of increasing the complexity and diversity of services and accordingly, competition increases. According to the old law, the trade name for any company was based on the names of the partners, and creating innovative names was extremely difficult. This matter was amended in the new law and it became possible to create innovative names. In addition, the new law addresses all scenarios related to cancellation or suspension of the license in detail and it also contains the consequences that occur as a result of temporary or complete closure within a period not exceeding six months in situations where one individual is the sole practitioner and in the case of the presence of partners, there is the ability to trade within professional companies. Saudi professional company provided that the share of each of them is not less than the share of the Saudis in the capital (25%). This is required to obtain approval from the company’s supervisory body if the law requires it. Also, one of the conditions that professional company must be distinguished in its field of work, its representative must have a professional license and the foreign company must provide expertise to the Saudi partner company. Finally, there are some regulations for professional companies in KSA under the new company’s law. References Tarek Antaki(12 Dec 2022), Saudi Arabia introduces new Companies Law. https://www.roedl.com/insights/saudi-arabia-newcompanies-law-economic-system Saudi Arabia: Recent updates on the New Companies Law Legal Development published on 31 January 2023; https://www.clydeco.com/en/insights/2023/01/saudiarabia-recent-updates-on-the-new-companies 3.Conclusion Matthew Powell, (Aug 2022) the New Saudi Companies Law: What Is New? https://www.squirepattonboggs.com/en/insights/publ ications/2022/08/the-new-saudi-companies-law-whatis-new The new company’s law aims to improve many general options for the legal structures of professional companies. It also aims to provide many options for investors. This law also introduces a new methodology for companies seeking change. The new law also has an impact on the corporate market. In addition, there will be significant long-term implications for practitioners working equally with greater levels of oversight over firms and many choices for clients to choose from them. Also, practitioners will have investors who will provide support to their companies, not only financial support but also providing an external understanding of the market which will have positive effects. It has been indicated in the new system that it is necessary to take the provisions of the foreign investment system into account in order to obtain a license for professional companies from the parties. The Ministry of Commerce especially when establishing a non- Insights into Saudi Arabia’s Evolving Laws & Regulations , published on Mar1 2023 , https://www.ghazzawilawfirm.com/insights/provisions -for-professional-companies-under-new-saudi-arabiancompanies-law 6