The New Corporate Law in Saudi Arabia

Saudi Arabia, one of the largest economies in the Middle East, is actively striving to enhance its business environment and attract both national and international investments. In this context, Saudi Arabia has launched a series of reforms and structural changes to improve the business climate and support small, medium, and large enterprises. Among these reforms, the new Corporate Law was issued under Royal Decree No. (M/132) on 1/12/1443 AH, corresponding to 30/6/2022.

The primary goal of this law is to enhance the regulatory environment for corporations, simplify procedures and regulatory requirements to stimulate the business environment, support investment, balance the interests of stakeholders, provide an effective and fair framework for corporate governance, institutionalize operations, contribute to the sustainability of economic entities, attract local and foreign investments, provide sustainable financing sources, and meet the needs and requirements of the entrepreneurship sector, thus stimulating the growth of small and medium enterprises.

This amendment aligns with the developments of Vision 2030, aiming to advance all sectors, particularly the investment sector, due to its positive impact on other sectors. Elevating the economic environment effectively enhances all other fields, which is the approach adopted by Saudi Arabia in its Vision 2030 to create a modern, distinguished, and exemplary environment across all domains. It is evident that this development relies on newly updated legal systems that meet contemporary economic requirements, hastening the amendment of most systems, including the Corporate Law, which came into effect along with its executive regulations on January 19, 2023. This law serves as a catalyst for the commercial ecosystem, promoting its growth and flexibility to protect corporations, enabling the private sector to play a significant role in achieving the objectives of Vision 2030.

Key Features of the New Corporate Law in Saudi Arabia

The new Corporate Law came into force in Saudi Arabia on January 19, 2023, accompanied by executive regulations reflecting a new vision for developing the commercial sector, encouraging investment, and establishing an economic outlook that aligns with Vision 2030.

The law is a strong driver for developing commercial infrastructure, characterized by its flexibility in protecting corporate rights and empowering the private sector to play a key role in achieving the goals of Vision 2030. It facilitates the establishment of corporations, supports their continuity and growth, encourages bold investments that contribute to creating large-scale projects, opens avenues for job opportunities, and addresses the challenges faced by family businesses and entrepreneurship comprehensively and effectively.

Under the new law, corporations established according to its provisions can take the following forms: Limited Liability Company, Simplified Joint Stock Company, Simple Commandite Company, Joint Stock Company, and General Partnership.

The law exempts micro and small corporations from the requirement to appoint an auditor, considering their novelty and size. For joint-stock corporations, it stipulates that there will be no maximum limit on the remuneration of board members, granting the ordinary general assembly the authority to determine these remunerations based on fair and incentivizing standards proportional to the member’s and corporation’s performance.

Definition of a Corporation

According to Article 2 of the Corporate Law, a corporation is a legal entity established under the law based on a foundation contract or articles of association, whereby two or more persons commit to contributing to a profit-oriented project by providing a share of money or work, or both, to share the resulting profit or loss. Exceptionally, a corporation can be established by a single person and can also be set up as a non-profit organization under the provisions of Chapter Seven of the law.

Major Developments in the New Corporate Law

1. Simplifying Establishment Procedures: The new law aims to simplify the process of establishing corporations and reduce bureaucracy, encouraging more investments and economic activities.
2. Enhancing Transparency: It includes requirements to enhance the transparency of corporate operations, protect shareholder rights, and provide clear and transparent financial information.
3. Protecting Shareholders: The law includes mechanisms to protect shareholder rights and enhance their participation in important corporate decisions.
4. Encouraging Innovation and Investment: The new law aims to create a suitable environment for innovation and investment by providing flexibility and support for start-ups and innovative corporations.
5. Stimulating Economic Growth: The law works to stimulate economic growth and create new job opportunities by supporting corporations and enabling them to expand and grow.

Content of the New Corporate Law

Saudi Arabia’s interest in updating the regulatory framework for corporations is driven by its commitment to keeping pace with global developments and rapid changes in the financial and business sectors. Hence, the new Corporate Law was issued, adopting a contemporary vision encapsulated as follows:

• The new law is characterized by the development and arrangement of provisions and titles, making them easily accessible and searchable.
• It eliminates the Joint Venture Company as a corporate type to emphasize transparency and stability in the economic sector, considering the secretive nature of such corporations does not align with the principle of transparency emphasized by the new vision.
• For general partnerships, the new law ensures their continuity after the death of a partner unless otherwise stated in the foundation contract, reflecting the current trend towards continuity and stability in commercial operations according to Article 50 of the new law.
• Each type of corporation has a foundation contract, except for joint-stock corporations, limited liability corporations, and simplified joint-stock corporations, which have articles of association.
• The law allows the drafting of family charters to regulate family ownership in corporations, aiding in corporate governance and management.

Notable Amendments in Corporate Management

1. Appointment of Supervisors: The law permits any interested party to request the appointment of a supervisor to manage the corporation if a new board is not elected, according to the amendments in Article 69.
2. Approval for Asset Sales: It requires the approval of the general assembly of a joint-stock corporation before selling assets exceeding 50% of the corporation’s total assets, as stipulated in Article 75.
3. Modern Technology in Meetings: The law allows board meetings to be held using modern technology according to Article 80.
4. Expanded Powers for Extraordinary General Assemblies: The law broadens the powers of extraordinary general assemblies, including decisions on the corporation’s continuity, dissolution, or approval of share buybacks, according to Article 85.
5. Shortened Period for Nullity Claims: The period for filing nullity claims is reduced to 90 days from the decision date instead of one year, enhancing corporate stability, according to Articles 99 and 170.
6. Flexibility in Financial Management: The mandatory previous provision requiring the allocation of 10% of annual net profits as reserves for joint-stock and limited liability corporations is abolished, granting corporations greater freedom in financial management, according to Articles 123 and 170.

Conclusion

The new Corporate Law in Saudi Arabia aims to enhance and develop the commercial environment, protect corporations, and empower the private sector to play a significant role in achieving the objectives of Vision 2030. This comprehensive update to the legal framework governing corporations is designed to promote economic growth, encourage investment, and support the development of a robust and transparent business ecosystem in Saudi Arabia.