Explore our New Companies Law Series Below:
- About Saudi Arabia’s New Companies Law
- Provisions for LLCs under the New Companies Law
- New Foreign Investment Guidelines Under New Saudi Arabian Companies Law
- Regulatory Frameworks of Companies Under Saudi Companies Law
- Provisions for Professional Companies under the New Companies Law
- Provisions for Joint Stock Companies Under the New Companies Law
- Provisions for Simplified Joint Stock Companies Under the New Companies Law
- Provisions for Not-For-Profit Companies Under New Companies Law
- Provisions for Debt Instruments & Financing Sukuk Under New Companies Law
- Responsibilities of Managers Under New Companies Law
- Closure of Companies Under New Companies Law
- Simplified Joint Stock Companies versus Limited Liability Companies Under New Law
Provisions for LLC’s under the New Companies Law
The new Companies Law of 1443 H. (Law) in Saudi Arabia became effective last month and companies will be required to change their constitutional documents (Articles of Association, Articles of Incorporation).
This note highlights major changes and new provisions concerning the limited liability company (LLC), which is the most common form of company in Saudi Arabia:
Family Charter / Partners’ Agreement:
The possibility to include family charter and partners’ agreements in the Articles of Incorporation (AoI) provides added security and assurance to partners in regard of fulfilment of obligations, smooth management, and transition.1
Single Person LLCs:
Unlike the old Law, there are no provisions in the Law restricting a natural person from owning several single person LLCs. The constitutional document for single person LLCs will be referred to as Articles of Association (instead of Articles of Incorporation).
Term of the Company:
The Law does not mandate LLCs to fix a term or period in the AoI. However, they will be at liberty to fix a term. At the same time, partners may resolve to liquidate their company voluntarily at any time through a resolution adopted by partners representing half of the capital, unless the AoI provides for a higher percentage.
The Law doesn’t require evaluation of in-kind shares by an accredited evaluator if the valuation of such shares does not exceed 50% of the capital, unless agreed otherwise by the partners. In case of in-kind contribution exceeding 50% of the capital, the evaluation should have been done in the past six months before the date of formation or increase in capital.2
Powers of Manager:
the Law stipulates that the manager shall have the power to represent the company before the judicial agencies and he will have the right to delegate powers to others. It is like an express mandate to the manager.3
Removal of Manager:
If a partner is appointed as manager of the company in the AoI, unless otherwise stated in the AoI, he cannot be removed except by a unanimous vote of all other partners. However, if he is appointed under a separate agreement, he could be removed by resolution issued with a simple majority vote. If a non-partner is appointed as manager of the company, whether in the AoA or separate agreement, he could be removed by a resolution passed with a majority vote. The partners representing at least 25% of the capital may approach the competent judicial agency to request for removal of the manager or a member of the board or the entire board of managers.4
Exemption from Having a Statutory Auditor:
The Law does not require companies, including LLCs, which are classified as small or micro (executive rules define companies meeting any of the two criteria: annual turn-over of less than SR. 10 Million; assets less than SR. 10 Million; total employee strength lesser than 49 as small or micro companies) to appoint a statutory auditor or more. However, this exemption shall not be applicable regardless of the classification, to foreign entities, companies issuing debt instruments, if partners representing 10% of the capital require the company to appoint an auditor, or if the AoI stipulates appointment of an auditor.5
The companies which classify as small or micro may consider availing this exemption by amending the AoA.
No Supervisory Board:
Unlike the old law, the law doesn’t require companies comprised of more than 20 partners to appoint a supervisory board.
No Statutory Reserve:
The requirement of setting aside 10% of the net profits every year towards the statutory reserves until it reached 30% of the capital has been done away. However, the partners may include a provision in the AoI to maintain a reserve in the desired percentage. 6
The Law allows LLCs and other forms of companies to distribute dividends periodically (quarterly, half yearly basis) and the partners shall not be obliged to return any dividend distributed even if the company sustain losses in the subsequent period.7
Proxy for Partners’ General Assembly:
Unlike the old law which required a partner to nominate another partner to attend the general assembly and vote on his behalf, the Law stipulates that AOI may provide for a partner delegating a non-partner to attend the general assembly and cast vote on behalf of the partner.8
While the old law required a unanimous resolution for increasing capital of the company, the new Law provides for a resolution passed with votes representing 75% of the capital (unless a higher percentage is provided in the AoI). However, any increase of capital by raising the nominal of share will still require a unanimous consent.9
Nullification of Resolution:
Unlike the old law which provided for a one-year period to approach the judicial agency requesting nullification of a partners’ resolution, the Law reduced the period to 90 days from the date of passing of resolution. 10
Settlement of Disputes:
The AoI may include a provision for settlement of disputes among the partners or between the manager and any partner through arbitration or other alternative means of dispute resolution, a provision which was hitherto not present, and the commercial courts had the exclusive jurisdiction to hear such disputes. 11
Unlike the old law which prohibited LLCs from issuing debt instruments12, the Law allows LLCs to issue debt instruments and Sukuk in accordance with the Regulations of the Capital Market Authority, subject to passing of resolution with the majority vote stipulated in the AoI.13
Buy Back of Shares:
The law enables LLCs to buy back shares and create a pledge over them if such a provision is available in the AoI. However, the pledged shares shall not carry any voting rights. A partner may also pledge his shares and the pledgee will be entitled to the dividends, unless otherwise agreed in the mortgage agreement.14
Losses Exceeding 50% of Capital:
While the Law requires partners to resolve to continue and support the company in case of losses exceeding 50% of the capital within 60 days of learning about such losses (instead of 90 days in the old law), the provision of termination of company by force of law in case the partners did not resolve to continue and support the company has been done away with.15
Obliging the Minorities to Sell and Majority to Guarantee Purchase:
The partners may provide in the AoI a provision, with the consent of partners representing at least 90% of the capital, that in case of sale of shares by partners representing 90% or more of the capital, they may force the minority partners to also sell their shares to a purchaser having a good intent against the same price and conditions as applicable for the majority. Similarly, the AoI may provide that the minority will have the right to oblige the majority to guarantee the sale of their shares to the purchaser against the same price and conditions applicable to the sale of shares by majority.16
This provision addresses the issues faced by majority partners for the sale of company due to resistance or refusal by minority shareholders.
In short, while the Law has provided for proper safeguards to protect the interests of all stakeholders, it has enabled businesses and industries to structure their entities in the manner that suits their needs. As seen in different provisions, the Law prescribes minimum requirements, yet, it allows the partners and shareholders to adopt higher thresholds if they deem those percentages appropriate.
Moreover, the Law has removed several restrictions with a view to provide flexibility to set up, finance, invest, and manage entities. However, it will require companies, entrepreneurs, and investors to determine their own specific requirements, priorities, future plans, risk factors, etc. and accordingly amend the provisions in the AoI.
If you have any additional questions about the impact of the New Companies Law to your LLC, please contact us. Our team is happy to provide further assistance to you.
Download the New Companies Law Guide
It is imperative for businesses to keep informed about the changes to the Companies Law, and understand the differences between the provisions that apply to different company types. We encourage you to download our PDF guide for further information on the updates to the new Companies law, details about the changes in practice between different company types, and assist you in operating in accordance with the law.
To stay aware of these updates, we encourage you to follow us on social media to be informed of when they are posted. If you wish to discuss any of these changes or any impact this New Law may have on your business, please reach out to us for assistance.
AlGhazzawi & Partners
2 Article 141 and 159
3 Article 161
4 Article 164
5 Article 19
6 Article 177
7 Article 22
8 Article 171(2)
9 Article 172
10 Article 170
11 Article 173
12 Article 153(2) of the old law
13 Article 179
14 Article 180
15 Article 182
16 Article 181