New KSA Companies Law – Significant Changes to JSCs and LLCs

Saudi Arabia’s new Companies Law (1437H / 2015G) was published on November 9^th, 2015 by the Ministry of Commerce and Industry (MoCI). It was distributed in the Saudi Gazette on December 4^th, 2015, and came into effect on May 2^nd, 2016. The new Companies Law has completely replaced the old Companies Law that was launched over fifty years ago in 1965.  It provided companies with a period of one year from its effective date to make necessary changes to comply with the new Companies Law.

Key innovations made by the new Companies Law are:

• Partnerships limited by shares, Cooperative Companies and Variable Capital Companies have been removed from the Companies law and are no longer permitted as they were rarely used. Principal forms of commercial entity used will remain to be Joint Stock Company (JSC) or Limited Liability Company (LLC).
• The most substantial change in the new Companies Law is that Limited Liability Companies (LLCs) can now be established with a single shareholder, replacing the current requirement for a minimum of two shareholders.
• There are certain provisions introduced to administer the formation of a holding company for regulating LLCs or JSCs holding more than 50% of their capital. Such a holding company is required to consist of the word “holding” in their name and produce annual consolidated monetary accounts.
• A minimum of two shareholders is needed to form a JSC, which is reduced from the previous law’s prerequisite of five shareholders. JSCs can be formed with a single shareholder provided that it is established by the government or government-owned entities with a minimum capital of SAR 5 million.
• JSCs share capital requirement has been reduced to SAR 500,000 when compared to the old law’s required minimum of SAR 2,000,000. LLCs remain to have no minimum capital requirement. There are certain exceptions when an LLC or JSC is foreign invested, the Saudi Arabian General Investment Authority (SAGIA) may implement a higher minimum share capital requirement.
• Another significant change in LLCs is the removal of the provision when shareholders are mutually liable for the debts exceeding 50% of the capital’s losses, and no action is taken to recapitalise or liquidate the establishment. The new law provides termination of the corporation if the managers or directors take no action.
• Confidentiality is imposed on shareholders in regards to any information they obtain in their capacity as investors of a Limited Liability Company.
• LLCs and JSCs are required to set aside 10% of net profits, although this is no longer mandatory once the statutory reserve achieves 30% of the share capital. This has been reduced compared to the previous law’s 50% share capital requirement.
• If the number of an LLC’s shareholders increase beyond fifty, then the LLC will be required to undertake conversion to a JSC.
• Joint Stock Companies will be authorised to acquire or pledge their total shares.
• Negotiable debt instruments are allowed to be issued by JSCs.
• Recognition of modern methods of communication is present for the intention of running shareholder meetings.

With several new procedural and regulatory changes affecting KSA corporations, it is imperative that prevailing businesses and new investors ensure they are fully aware of the changes. Companies have to evaluate how they are conducting their undertakings and procedures to carry them in line with the new law.