Series #2 – Key Changes of the New Saudi Companies Law
Article two: Non-compulsory Provisions
Introduction
This article is part of a series regarding the New Companies Law (“NCL”) which was enacted by Royal Decree No (M/132) dated 01/12/1443H (corresponding to 30/06/2022G), and published in Umm Al-Qura, Official Gazette) on 23/12/1443H (corresponding to 22/07/2022G). The NCL entered into effect on 26/06/1444H (corresponding to 19/01/2023G).
In our previous article dated January 23rd 2023, we highlighted the provisions which should be implemented immediately on the effective date (19/01/2023G) and which require urgent actions from companies to amend their Articles of Association (“AoA”) and bylaws.
It is agreed that one of the notable features of the NCL is the flexibility provided for the establishment and management of companies which contribute in the encouragement of domestic and foreign investment. This flexibility is reflected in the non-compulsory provisions, which allow to the shareholders to stipulate differently in their bylaws and AoA as follows:
| Articles | Matters | Comments |
| Paragraph (1) of Article (23) | Sharing Profits and Losses |
General Provision All partners share the profits and losses in proportion to their interests in the capital. If an agreement is made to deny any partner of profit or exempt him/her from losses, such agreement shall be deemed null and void. However, the company’s AoA may provide for a different profit and loss sharing ratio. |
| Paragraph (2) of Article (29) | Legal Action Initiated by Companies, Partners, or Shareholders |
General Provision A single partner or shareholder, or more, representing (five percent) of the company’s capital, unless the company’s AoA or bylaws stipulate a lower percentage, may initiate a derivative action on behalf of the company if such action is not initiated by the company, provided the action serves the interests of the company and is based on valid grounds, and the claimant is acting in good faith and is a partner or shareholder in the company at the time of initiating the action. |
| Paragraph (1) of Article (37) |
Management Powers |
Provision related to General Partnership Companies A general partnership shall be managed by its partners, and a partner of legal personality shall designate his representative in the management. The partners may, in the company’s AoA or in a separate contract, agree to appoint one or more managers from among themselves or others. |
| Article (38) | Decisions of Partners |
Provision related to General Partnership Companies Partner decisions shall be passed by the majority vote of partners, except for decisions relating to amendments to a company’s AoA, which shall be passed by the unanimous vote of partners, unless the company’s AoA stipulate otherwise. |
| Paragraph (1) of Article (42) | Removal of Manager |
Provision related to General Partnership Companies If the manager is appointed as a managing partner in the company’s AoA, he/she may not be removed except pursuant to a unanimous decision issued by the other partners, and if he/she is appointed as such in a separate contract, he/she may be removed pursuant to a decision issued by the majority vote of partners, unless the company’s AoA stipulate otherwise. |
| Article (42) | Resignation of Manager |
Provision related to General Partnership Companies
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| Paragraph (1) of Article (46) | Withdrawal and Removal Procedures |
Provision related to General Partnership Companies Unless the company’s AoA stipulate otherwise, a partner may unilaterally withdraw from the company, provided that he notifies the other partners at least (Sixty) days prior to the date set for withdrawal. |
| Paragraph (1) of Article (47) | Partner’s Interests in Profits and Losses |
Provision related to General Partnership Companies Profits and losses and the interests of each partner therein shall be determined at the end of the company’s fiscal year pursuant to financial statements prepared in accordance with accounting standards approved in the Kingdom. Upon determination of partners’ interests in the profits, each partner shall be deemed a creditor of the company to the extent of his/her interests, unless the company’s AoA provide otherwise. |
| Paragraph (1) of Article (50) | Cases of Termination |
Provision related to General Partnership Companies A general partnership shall not terminate upon a partner’s death, interdiction, removal, or withdrawal, or upon the initiation of any liquidation proceedings under the Bankruptcy Law against such partner, unless the company’s AoA stipulate otherwise. In such cases, the company shall continue to exist between the other partners and said partner or his/her heirs shall have only his/her interests in the company’s assets. Said interests shall be determined pursuant to Article 49 of CL. |
| Paragraph (1) of Article (55) | Decisions of Partners |
Provision related to Limited Partnership Companies Unless stipulated otherwise in the company’s AoA, partner decisions shall be passed as follows:
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| Paragraphs (2,5) of Article (55) | Assignment of Interests |
Provision related to Limited Partnership Companies A limited partner may assign all or part of his/her interests to non-partners upon the approval of general partners and the limited partners owning majority interests in the capital, unless the company’s AoA stipulate otherwise. General or limited partners may join a company upon the approval of all general partners; the approval of limited partners shall not be required, unless the company’s AoA stipulate otherwise. |
| Article (57) | Cases of Termination |
Provision related to Limited Partnership Companies A limited partnership shall not terminate upon a limited partner’s death, interdiction, withdrawal, insolvency, or upon the initiation of any liquidation proceedings under the Bankruptcy Law against such partner, unless the company’s AoA stipulate otherwise. |
| Paragraph (4) of Article (68) | Election of Board Members |
Provision related to Joint-Stock Companies Board members may be re-elected, unless the company’s bylaws provide otherwise. |
| Paragraph (4) of Article (69) | Expiration of the Term of Board of Directors or Resignation of its Members |
Provision related to Joint-Stock Companies Please refer to section one of this Article |
| Article (74) | Conclusion of Loans and Disposition of Company Assets |
Provision related to Joint-Stock Companies The board of directors may conclude loans, regardless of their term, sell or pledge the company’s assets or place of business, or relieve the company’s debtors from their liabilities, unless its powers to carry out the same are restricted by the company’s bylaws or a general assembly decision. |
| Paragraph (2) of Article (79) | Company Representation |
Provision related to Joint-Stock Companies The chairman of the board of directors of a joint-stock company may, pursuant to a written decision, delegate certain powers to other board members or to others to carry out certain acts, unless the company’s bylaws stipulate otherwise. |
| Article (82) | Issuing Decisions on Urgent Matters |
Provision related to Joint-Stock Companies The board of directors of a joint-stock company may issue decisions on urgent matters by circulation to all members, unless a member submits a written request for a board meeting to deliberate such matters. The decisions shall be passed by the majority vote of members, unless the company’s bylaws stipulate a higher percentage or number. Such decisions shall be presented to the board of directors at its subsequent meeting to be recorded in the minutes of said meeting. |
| Paragraph (1) of Article (92) | Quorum of Ordinary General Assembly Meetings |
Provision related to Joint-Stock Companies Please refer to section one of this Article |
| Paragraph (1) of Article (93) | Quorum of Extraordinary General Assembly Meetings |
Provision related to Joint-Stock Companies Please refer to section one of this Article |
| Article (94) | Effectiveness of General Assembly Decisions |
Provision related to Joint-Stock Companies Please refer to section one of this Article |
| Paragraph (1) of Article (101) | Quorum for Issuance of a Decision by Circulation |
Provision related to unlisted Joint-Stock Companies The issuance of general assembly decisions of unlisted joint-stock companies by circulation shall be as follows:
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| Paragraph (1) of Article (141) |
Valuation of In-Kind Contributions |
Provision related to Simplified Joint-Stock Companies If the total value of in-kind contributions provided upon the incorporation of the company or upon the increase of its capital does not exceed (half) of the company’s capital, the valuation of said contributions by an accredited valuer shall not be required, unless the incorporators or shareholders agree otherwise. |
| Paragraph (4) of Article (146) | Call for Shareholder Meetings |
Provision related to Simplified Joint-Stock Companies If shareholders are called for a meeting to consider matters provided for in Article 145(1) of the CL, each shareholder shall have the right to access and review the information and documents related to such matters at any time during the (five_ days prior to the date set for the meeting, unless the company’s bylaws specify a longer period. |
| Paragraph (2) of Article (149) | Issuing Decisions by Circulation |
Provision related to Simplified Joint-Stock Companies Unless the company’s bylaws provide for other means of notification, the proposed decision and the relevant documents may be sent to shareholders using any of the following means:
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| Article (152) | Obligatory Assignment of Shares |
Provision related to Simplified Joint-Stock Companies The company’s bylaws may provide for the conditions under which a shareholder is obligated to assign his shares. The purchase price of such shares shall be determined on the basis of their fair value, unless the company’s bylaws stipulate otherwise. The company’s bylaws may provide for the suspension of the rights associated with his/her shares, excluding financial rights, until assignment of his/her shares is completed. |
| Paragraph (2) of Article (171) | Partners’ Rights and Obligations |
Provision related to Limited Liability Companies A partner may designate in writing another partner to act as his/her proxy to attend partner meetings and vote therein, unless the company’s AoA stipulate otherwise. A stipulation may be included in the AoA permitting a partner to designate in writing a non-partner to act as his proxy to attend partner meetings and vote therein. |
| Paragraph (1) of Article (172) | Amendment of AoA |
Provision related to Limited Liability Companies The company’s AoA including any increase or decrease to the capital may be amended upon the approval of one or more partners, representing at least (three-quarters) of the capital, unless the AoA provide for a higher percentage. |
| Article (174) | Amount of Capital |
Provision related to Limited Liability Companies Partners shall determine the capital of the company in its AoA. Such capital shall be divided into indivisible and untradeable interests of equal value. If an interest is owned by multiple persons, the company may suspend the use of rights associated therewith until the owners of such interest select one person from among themselves to act as the sole owner of such interest against the company. The company may set a deadline for the owners to make the selection. If the owners fail to make the selection before such deadline, the company may sell the interest on behalf of its owners. In such case, the interest shall be offered to the other partners and then to non-partners in accordance with Article 178 of the CL, unless the company’s AoA stipulate otherwise. |
| Paragraph (1) of Article (175) | Distribution of Dividends |
Provision related to Limited Liability Companies Interests shall entail equal rights to net profit and liquidation surplus, unless the company’s AoA stipulate otherwise. |
| Paragraph (1) of Article (183) | Extension of Company Term |
Provision related to Limited Liability Companies If the company is incorporated for a fixed term, said term may be extended prior to its termination for another term pursuant to a decision issued by the general assembly of partners which comprises any number of partners owning (half) of the represented capital interests, unless the company’s AoA provide for a greater majority. |
| Article (184) | Cases of Termination |
Provision related to Limited Liability Companies A limited liability company shall not terminate upon a partner’s death, interdiction, withdrawal, insolvency, or upon the initiation of any liquidation proceedings under the Bankruptcy Law against such partner, unless provided for in the company’s AoA. |
| Article (201) | Being a Partner or Shareholder in More than One Company |
Provision related to Professional Companies A partner or shareholder in a professional company who practices a profession may not be a partner or shareholder in another professional company practicing the same profession, unless permitted under the company’s AoA and bylaws and without prejudice to relevant laws. The regulations shall specify the provisions and rules permitting a licensed partner or shareholder to be a partner or shareholder in another professional company. |
| Paragraph (2) of Article (211) | Loss of Liberal Profession License |
Provision related to Professional Companies If a partner or shareholder in a professional company permanently loses the license to practice his/her liberal profession, he/she shall be deemed to have withdrawn from the company, unless the company’s AoA and bylaws stipulate that he/she will continue as a partner or shareholder who is not licensed to practice the profession in the company, provided that the set conditions, requirements and rules are met. |
| Paragraphs (1,4) of Article (212) | Death of the Partner or Shareholder |
Provision related to Professional Companies If one of the partners in the professional limited liability company or one of the shareholders in the professional joint-stock company or the professional simplified joint-stock company dies, his/her shares will devolve to his/her heirs, unless the AoA and bylaws stipulate otherwise. If one of the partners in a professional limited partnership company dies, his/her shares devolve on their heirs, unless the AoA stipulate otherwise. |
| Paragraph (4) of Article (220) | Conversion of Companies into another form |
Provisions Related to Conversion, Merger and Division of Companies Unlimited liability companies, limited partnerships, and limited liability companies may be converted into a joint stock company if requested by the partners or shareholders who own more than (half) of the capital, unless a lesser percentage is stipulated in the AoA. |
| Paragraph (1) of Article (221) | Non-profit Companies Conversion |
Provisions Related to Conversion, Merger and Division of Companies Private non-profit companies – without the public non-profit companies – may be converted into any form of companies, unless the company’s AoA and bylaws stipulate otherwise. |
| Article (222) | Objection to the Conversion Resolution |
Provisions Related to Conversion, Merger and Division of Companies Without prejudice to the provisions of assignment of shares determined according to the form of the company, the partners or shareholders who object the conversion resolution may withdraw from the company based on a written request submitted within (fifteen) days from the date of issuance of the resolution. In this case, the value of their shares shall be fulfilled according to the agreed value or according to a report prepared by one or more accredited valuers showing an estimate of the fair value of their shares on the date of conversion, unless the company’s AoA and bylaws provide otherwise. |
Conclusion
The Kingdom of Saudi Arabia, the heart of the Arab and Islamic worlds, the investment powerhouse, and the hub connecting three continents, this is Saudi Vision’s 2030 motto. In this Vision, targets are set to diversify and improve competitiveness of the KSA market and workforce. The three main themes in this context are: a vibrant society, an ambitious nation and a thriving economy. It is in the latter theme that we can define the new NCL, for it aims to attract foreign investments by providing a regulatory environment. Particularly, the article herein underlines the NCL flexibility vis-a-vis shareholders and their companies’ businesses.
In our following article, we will be focusing on the NCL provisions which are not effective unless stipulated in the companies’ AoA and bylaws.
This article provides the reader with an overview of key provisions of the new Saudi Companies Law and its Implementing Regulations. For brevity purposes, certain legislative provisions and definitions have been paraphrased. Therefore, this article does not, and is not intended to, constitute legal advice.
Our team would be delighted to assist you in ensuring that your company is complying with the new Companies Law and its Implementing Regulations in the Kingdom of Saudi Arabia.
Authors: Sarah Lahoud, Senior Associate and Layal Yacoub, Associate.
For further information, please contact Fadi Daher (fadi.daher@glaco.com) and Amr Hammad (amr.hammad@glaco.com).