Next month the old Saudi companies law (the Old Law1) will be repealed and a long-awaited new companies law (the New Law2) will take its place. The Ministry of Commerce and Industry (MOCI) recently issued template articles of association (AOA) and bylaws (collectively, the Constitutional Documents) for all types of companies regulated by the New Law to supplement its implementation. The managers/directors of any company that is incorporated in the Kingdom of Saudi Arabia (KSA) should start to consider what changes may need to be made to the company's Constitutional Documents to bring it in line with the New Law. The article highlights the key differences between the Old Law and the New Law with respect to limited liability companies (LLC) and joint stock companies (JSC) and the impact the New Law will have on existing companies in the KSA. This article also sets out some of the required next steps managers/directors need to take to ensure their companies comply with the New Law.
The New Law
The New Law was published on 4 December 2015 and stated that its provisions will take effect 150 days after such publication, i.e. towards the beginning of May 2016. Article 224 of the New Law allows existing companies a 12 month grace period after the New Law comes into force in which the companies must adjust their positions. However, it is important to note that this grace period does not mean that companies do not need to comply with the New Law for a year. Where a new corporate action is to be taken which is not the subject matter of the company's existing Constitutional Documents, that action must be taken in compliance with the New Law. Therefore, from 2 May 2016, companies will need to implement important amendments, in practice, such as having the managers of a LLC call for a shareholders' meeting within 90 days if the losses of a LLC reach 50% or else the LLC will be dissolved by force of law.
The New Law contains 227 provisions, as opposed to the Old Law which contains 234 provisions, and introduces two new types of companies, namely the holding company and the single-shareholder company. Set out below is a table highlighting the key differences between the Old Law and the New Law with respect to companies in general and LLCS and JSCs in particular.
Further to the issuance of the New Law, all companies are required to amend their existing Constitutional Documents to comply with the New Law by the beginning of May 2017. Therefore, it is expected that the MOCI will require companies to begin filing their applications to amend their Constitutional Documents as soon as possible before the deadline especially that the MOCI has already issued the template Constitutional Documents for companies to use as a guideline.
The MOCI has issued 11 new templates of Constitutional Documents to cover all types of companies regulated by the New Law such as those relating to JSCs, holding companies and single-shareholder companies. Such templates are issued by the MOCI only in Arabic however a company may elect to have dual format (Arabic/English) Constitutional Documents.
We do not expect that the MOCI will require companies to redraft their entire Constitutional Documents to reflect their templates rather they may only require that a shareholders' resolution reflecting the changes in the New Law is issued instead. However, it is advised that new consolidated Constitutional Documents are issued to comply with the MOCI templates especially if the company has various previous amendments made to its Constitutional Documents.
As with many new, important pieces of legislation, it may take some time for the whole impact of the New Law and its interpretation to be understood by the market and to be fully reflected in practice. However, managers/directors are well advised to think about the changes which may need to be made, not only to the existing Constitutional Documents, but also with respect to how they conduct their corporate affairs.
This article contains general statements in relation to the New Law and should not be construed in any way as legal advice. Formal legal advice should be sought on a case by case basis when interpreting the provisions of the New Law.
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1 The Old Law was issued by Royal Decree No. M/6 dated 22/03/1385 H (corresponding to 22 July 1965 G).
2 The New Law was issued by Royal Decree No. M/3 dated 28/01/1437 H (corresponding to 10 November 2015 G).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.