One of the most attractive markets for Islamic finance investors is the Kingdom of Saudi Arabia (the Kingdom), which is taking further significant legislative, social and economic steps to encourage regional and international investments. The Saudi Arabian regulatory and legislative system continued to witness substantial reforms in 2022 and reflect the new-found confidence Saudi Arabia is experiencing from attracting some of the leading investment groups for the first time. These reforms were aimed at the social and economic domains in a serious endeavor to diversify from oil, but also to take advantage of the high oil prices currently. The Kingdom is achieving record revenues in terms of both its oil and non-oil revenues, with a 43% increase in the first half compared with the first half of 2021.
Global investors have made investments or announced planned investments including GLD, Reef Technology, BlackRock, EIG, Western Union, Air Products and many others. The Kingdom has also continued to invest through the Public Investment Fund in various sectors, including real estate, aviation and entertainment, while announcing the newly established Saudi Downtown Company, RIA Airlines and Savvy Games Group. Most recently, the Kingdom’s Crown Prince and Prime Minister Mohammed Salman Al-Saud announced the ‘National Gaming and Esports Strategy’ under which the Kingdom had invested in global video gaming companies.
Review of 2022
The Kingdom has issued many laws and regulations and in the following we highlight some examples in the Saudi market in 2022:
Evidence Law: The Ministry of Justice has launched the new Evidence Law (the Evidence Law) which came into an effect on the 8th July 2022. The Evidence Law applies to both civil and commercial dealings by allowing the parties to agree on specific means and procedures of evidence on different subject matters or agreements. The Evidence Law aims to limit judges’ discretion in determining matters relating to evidence. Most importantly, the Evidence Law allows and recognizes electronic and digital evidence submissions with the same statutory recognition as written evidence. Thus, parties will have more confidence when entering into contractual arrangements governed by Saudi Arabian law.
Companies’ Law: The new Saudi Companies Law (the Companies’ Law) has been enacted by Royal Decree (M/132) dated the 30th June 2022, which will come into full force in January 2023. The Companies’ Law introduced a new form of companies called the simple joint stock companies, which enjoy the flexibility to accommodate increases in share capital to facilitate the needs of entrepreneurs and venture capital investments.
Additionally, the Companies’ Law permits companies to consider as binding the shareholders’ agreements, joint venture agreements and/or family charters to regulate such companies’ governance system as long as they do not conflict with the principles of the Companies Law, articles of association or bylaws of such companies. Furthermore, the Companies’ Law allows the split of a company into two or more companies as per the terms of its articles of association or bylaws.
The Companies’ Law has set out three categories of punishable actions related to white-collar crimes including gross felonies and violations. In general, gross felonies are related to the willful misconduct by a board member, corporate director, auditor or trustee of a company for their interest directly or indirectly, and punishments can reach up to SAR5 million (US$1.33 million) and five years’ imprisonment.
Judicial Costs Law: Historically, the judicial system has provided litigants with free-of-charge adjudication and litigation services. Recently, the Kingdom issued the Judicial Costs Law (the Costs Law) to regulate the expenses of lawsuits filed before Saudi Arabian commercial courts to raise the efficiency of the judicial system, promote alternative dispute resolution mechanisms and reduce frivolous claims. The Costs Law came into force on the 17th March 2022.
The general principle of judicial costs on lawsuits is that it will equal 5% of the value of a lawsuit, with a cap of SAR1 million (US$266,295). Nevertheless, the Saudi Arabian courts will allow lawsuits to be brought before them and make their decisions, whether such costs have been paid or not. Certain lawsuits have been exempted from the Costs Law including (on a high-level) administrative and bankruptcy cases and personal status and criminal lawsuits.
Preview of 2023
The level of confidence only continues to grow in the Kingdom at all levels. Saudi Arabia is further investing in sports with further excitement following the World Cup victory over Argentina and Shariah compliant entertainment options. The Kingdom appears to continue investing in various sectors in evident efforts to diversify the economy and create new sectors within the Kingdom. Sponsored by a strong economy, the country will continue to invest in traditional sectors such as real estate including the giga-projects such as Neom, Alula and Red Sea and through entities such as Roshn, Al-Akaria and others.
There is a continuing focus on middle-income housing to ensure the average Saudi national can acquire a home. The Kingdom is also aiming to invest in new arenas such as e-gaming, automotive, circular economy, entertainment, tourism and aviation. We also expect noticeable capital market activity, including IPOs and other financial products, during 2023. Despite the growth, we also are seeing parties taking advantage of the new Saudi Bankruptcy Law and are often using Shariah compliant instruments in relation to a successful restructuring.
Conclusion
Despite the global economic slowdown and increased interest rates in 2022, the Kingdom saw considerable economic activity and continued to carry out multiple legal and social reforms in the last year to enhance the market attractiveness for foreign investments. We expect the Kingdom to witness further growth in 2023.
Nabil A Issa is the managing partner of the Middle East offices at King & Spalding. He can be contacted at [email protected].
Osama Zaid is an associate at the Law Office of Mohammed Al-Ammar (in cooperation with King & Spalding) in Riyadh in the Corporate, Finance and Investments practice. He can be contacted at [email protected].