A brief on the Kingdom’s new draft companies law

Saudi Arabia's Ministry of Commerce and Investment (MCI) and the Capital Market Authority (CMA) recently called on the public to submit their opinion on the new draft companies law before August 13, 2020.
 

Under the new amendments, no certain nominal value was determined for the share issue; as article 108 of the draft law stipulates that the company’s articles of association should determine the stock’s par value. In case the company has shares at different nominal values, shares of the same class must have the same par value.
 

The establishment of a joint-stock company by only one person is now allowed and facilitated through a single approval, as corporate incorporation was previously restricted to the state, legal persons, state-owned entities, and companies with no less than SAR 5 million in capital.
 

Moreover, convening a founding meeting is no longer a condition under the proposed amendments.
 

The draft law maintained the minimum number of board members without requiring a maximum, so that shareholders have the right to determine their number in the company's articles of association. In addition, board members should be natural –not legal- persons.
 

Debt instruments and sukuk can be automatically converted into shares upon certain conditions or maturity.
 

Under the new amendments,  article 113 of draft law organizes the possibility of issuing multiple classes of shares with varying rights such as; ordinary shares, preferred shares, and redeemable preferred shares.
 

Companies can also state in their articles of association granting some classes of shares some rights, privileges or can impose some restrictions.
 

In the draft law, article 116 removes the restrictions related to trading prohibition. The Capital Market Authority (CMA) will have the authority to impose restrictions for share trading in the joint stock companies seeking bourse listing. Articles of association can also include restrictions on share trading, except for the absolute prohibition of trading.

Companies will be allowed to pay annual or interim dividend whether semiannual or quarterly under certain conditions, such as having sufficient cash or retained earnings at a value no less than the planned dividend. Companies should be also able to pay debts upon maturity in 12 months from the dividend distribution date. A company’s liabilities plus the planned dividend should not exceed its assets upon the dividend distribution date.

Companies can now cut capital either through a partial reduction of the stock par value at a percentage equal to the losses incurred, or through the partial refund of the stock par value to shareholders.

The new amendments also suggest canceling the statutory reserve for companies. No conditions will be set for the capital statutory reserve, while a certain percentage of net profit will be set aside for a consensual reserve for the objectives defined by the company’s articles of association.

Other reserves can be also formed to achieve the company’s interest or ensure distribution of dividends to shareholders.

Moreover, the new draft drops the provision relevant to corporate termination by force of law, when losses reach 50% of their capital. It also allows stakeholders to move the competent court to dissolve the company, unless measures for offsetting losses are taken.

E-services will be enhanced to invite shareholder meetings and encourage participation in e-voting.