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
Simplified Joint Stock Companies versus Limited Liability Companies Under New Law
One of the first steps that should be determined by investors and entrepreneurs when setting up a business is determining the right form of company from both the business and legal perspectives.
The new Saudi Companies Law that became effective as of 19 January 2023 (Law) provides for five distinct forms of companies, namely general partnership, limited partnership, joint stock, simplified joint stock, and limited liability.
This short article discusses the key differences between the simplified joint stock company (SJSC) and limited liability company (LLC) forms to help businesses understand the pros and cons of both forms, and provide a glimpse of the salient features of each business type.
The SJSC form is a recent concept being propagated in different jurisdictions, and Saudi Arabia too has added it as a separate form of company in the new Law. As the name suggests, SJSC is a joint stock company, but with a simplified form which makes it closer to an LLC from different legal aspects. It has been designed to suit small and medium-sized enterprises (SMEs) and provides them with greater flexibility to conduct their businesses while availing them of the benefits of a joint stock company form. In France, this form has become the most popular form in view of the flexibility offered by the company regulations of the jurisdiction.
Seen in the light of the provisions under the Law, the SJSC form combines the benefits that are available to limited liability companies. These include no minimum capital requirements, the possibility of having in-kind capital without the need for evaluation if such capital is less than half of the total capital, ease of management, ease of setting up, and ease of passing shareholders’ resolutions.
SJSCs also have the features of joint stock companies in terms of limitation of liability of shareholders to the extent of shares owned by them, the ability to increase capital to the extent of the authorized capital without the need to obtain separate consent by the extraordinary general assembly of shareholders, ease of transferring shares, and the ability to create different kinds of shares including redeemable shares.
In fact, if seen from a broad angle, the key difference between the two forms surrounds trading in shares which the SJSC permits; partners in LLCs are not able to trade in shares. It is easier for shareholders to assign, transfer and sell their shares in SJSC whereas in LLC, assignment, transfer and sale of interests require satisfying the first right of refusal by the existing partners in the company.
It is important to note that the Law enables an SJSC to provide for a lock-in period not exceeding 10 years for the disposal of shares as well as obtaining the consent of the company or the shareholders for disposal. The Law also enables shareholders to oblige a shareholder to assign his shares against a fair value or a value computed in the manner provided in the AoA. However, the Law requires the unanimous consent of shareholders to add all these restrictive provisions in the AoA.
Besides the easy transferability of shares, an SJSC may also issue different kinds of shares, including redeemable shares or convertible debt instruments. This enables an SJSC to tap the financial markets to raise funds without diluting equity simultaneously.
Moreover, an SJSC may restrict the involvement of some shareholders in decision-making by issuing preferential or preferred shares wherein the shareholders holding such shares will accept to have no voting rights in the ordinary and extraordinary general assembly of shareholders against higher dividends or other benefits and preferences than the normal shareholders.
The SJSC model is most suitable and preferable to accommodate venture capital required mostly by start-ups. Of course, both the LLC form and SJSC form allow companies to raise monies by means of debt instruments. However, an LLC will not be able to issue any convertible debentures.
If there is an intent to list the company on a stock exchange at any time, the shareholders will have the choice of either forming a joint stock company (JSC) or an SJSC.
SJSCs, unlike JSCs, are not subject to numerous regulatory restrictions and requirements related to the board’s strength, directors’ maximum tenure, board compensation methods, appointment and removal of directors, limitations on the board’s power to dispose or mortgage assets, the minimum number of annual board meetings, the powers of the ordinary and extraordinary general assembly, the required quorum for conducting general assemblies, and the voting percentage for adopting resolutions (with a few exceptions). Due to these advantages, businesses may prefer the option of an SJSC over a JSC.
In all cases, both forms will be subject to terms and conditions of listing as per the Capital Market Law and the Offers of Securities Regulations.
While LLCs have been the most common form of company in Saudi Arabia as they provided greater flexibility and were more or less devoid of numerous statutory restrictions when compared to JSCs, the introduction of the SJSC form is poised to garner greater interest amongst investors and the business community.
As the conventional JSC form carries certain statutory obligations and restrictions, the SJCS form will attract businesses and investors to structure their businesses to avail the benefits of ease in transferability, disposal or assignment of shares while determining on their own other aspects of the company in line with the operational requirements.
Are you interested in learning more about the different forms of companies under the new Law? Explore our guide, The Regulatory Frameworks of Companies Under Saudi Companies Law for more details.
AlGhazzawi & Partners