One of the most important markets for Shariah compliant investors is the Kingdom of Saudi Arabia which continues to evolve its regulations to encourage further investment. Approximately one month has passed since the Saudi cabinet signed off on the new Saudi Companies Law (the Law) which further encourages entrepreneurs and aligns with international practices. The Law was promulgated on the 30th June 2022 and will come into effect six months after publication in Um Al-Qura, the Official Gazette of the Kingdom. Historically, investors have been frustrated with the currently available corporate forms. Due to the extent revision of the Law, this article is only meant to highlight some of the most salient features.
Four key aspects to consider are the following:
1. Corporate structures
The Law governs all forms of enterprises, including profit or non-profit companies and professional firms, and regulates them under one Law. The Law has added a new form of corporation: the simple joint stock company. The Law now permits a sole investor to own several joint stock companies and limited liability companies (LLCs).
2. Shareholders’ agreements
One of the significant transformations in the Law is it enables the shareholders to control their businesses, including the relationship among themselves, pursuant to the articles of association, bylaws, family charter and shareholders’ agreement, or through a combination of the documents mentioned earlier (without prejudice to any provisions of the Law or Shariah principles). Previously, it was quite common to disregard a shareholders’ agreement as a ‘side’ agreement with limited enforceability. The Law stipulates provisions on the put and call option, tag and drag along if 90% of shareholders with voting rights approve the same. The Law permits the shareholders to choose arbitration as an alternative dispute resolution mechanism and to pre-agree on the procedures and conditions of such arbitration.
3. Share classes
It is worth mentioning here that the venture capital environment has witnessed exponential growth in the past two years in the Kingdom. The Law permits employee stock option plans, which help entrepreneurs retain and motivate their top employees. The Law also permits the issuance of multiple share classes, which are commonly used in venture capital investment rounds. It is possible to have bespoke restrictions, obligations and rights in relation to each class of share.
4. Finance and debt instruments
The Law added a new chapter relating to the issuance of tradable and convertible debt securities or Sukuk by joint stock companies and LLCs. It stipulated that any tradeable securities or Sukuk must comply with the regulations of the Capital Market Authority. LLCs previously could not issue debt instruments.
The Law is expected to promote the economy’s development and growth of SMEs under the Kingdom’s Vision 2030.
Nabil A Issa is a partner at King & Spalding. He can be contacted at [email protected] Osama Zaid, an associate with the Law Office of Mohammed Al Ammar in Riyadh (in cooperation with King & Spalding), assisted in authoring this report.