Corporate Governance 2022

Last Updated June 21, 2022

Saudi Arabia

Law and Practice

Authors



Abdulaziz Alajlan & Partners Legal Advisors is a well-established Saudi firm that works in association with Baker McKenzie, a worldwide law practice. It has been working in the Kingdom for 43 years, advising on Saudi Arabian and international matters with on-the-ground experience and competence. Legal Advisors offers comprehensive legal assistance on a wide range of corporate and commercial, competition, merger control, real estate, capital markets, employment and compensation, banking and financial, project, litigation and dispute resolution, and administrative issues. Its practice is consistently listed as a Tier 1 in the Kingdom, and its attorneys are acknowledged as leaders in their fields by legal directories. The firm's lawyers are able to provide intelligent solutions and advice due to their extensive experience and familiarity with market trends.

The Saudi Companies Law recognises the following four basic types of business associations:

  • General Partnership;
  • Limited Partnership;
  • Joint Stock Company; and
  • Limited Liability Company.

In addition, businesses wholly owned by a single individual may take the form of a "personal establishment" or sole proprietorship. Special regimes apply to entities formed for charitable purposes or to pursue professional activities, such as consulting engineering, medical consulting, legal consulting and accounting, as well as banks, finance companies, and insurance companies, among others.

The legal regime governing foreign investors from countries that are not members of Gulf Cooperation Council (GCC) is somewhat different from the regime that applies to Saudi individuals and wholly Saudi-owned companies on the one hand and that which applies to nationals of other GCC countries and/or GCC companies wholly owned by GCC nationals on the other.

A non-GCC foreign investor (which would include any entity established under the laws of a non-GCC country or any entity established in GCC country but wholly or partially owned by non-GCC nationals or entities) wishing to engage in ongoing commercial activities in Saudi Arabia will ordinarily require a foreign investment licence issued by the Ministry of Investment (MISA) in order to form or participate in the formation of a legal entity in Saudi Arabia. MISA will only license the formation of legal entities to pursue commercial activities other than those set out on the so-called "Negative List" published by the Supreme Economic Council, which lists various activities in which foreign investment is prohibited or restricted. The general rule is that foreign investment is allowed in all fields except those in which such investment is specifically precluded by law.

The following is a list that covers the various ways in which a foreign firm could establish or participate in a local entity.

Limited Liability Company (LLC)

The locally incorporated limited liability company is one of the most common forms pursuant to which foreign companies do business in Saudi Arabia. A LLC may have as few as one or as many as 50 shareholders but typically is very closely held. MISA must approve the formation of a limited liability company in which a foreign party is to have an interest by granting a licence authorising the foreign party's investment in the company. MISA, in issuing the licence, will also specify the objects that the company will be authorised to pursue. The shareholder(s) must submit an application to MISA for this purpose. Prior to submitting the application it is customary to enter into a joint venture agreement (if the shareholders are unaffiliated with one another) and agree upon the company's Articles of Association. After MISA grants the above-mentioned licence, the Articles of Association must be submitted to the Ministry of Commerce ("MOC") for its approval. Any change in ownership of the company likewise requires approval of MISA and the amendment of the licence, articles and commercial registration. Moreover every shareholder has a statutory right to pre-empt the sale of shares by any other shareholder to a third party. Thus, ownership changes tend to be somewhat cumbersome. However, the shareholders have greater flexibility than in the case of a joint stock company to structure how the company is managed and introduce minority protections.

Joint Stock Company (JSC)

Similar to a LLC, MISA must approve the formation of a JSC in which a foreign party is to have an interest by granting a licence authorising the foreign party's investment in the company. Then the application for the formation of the JSC must be submitted to MOC along with the proposed articles of association and by-laws of the company. A JSC may be formed by a single founding shareholder or several and there is generally no limit on the number of shareholders such a company may have. The Companies Law is more prescriptive regarding a JSC's management structure and shareholder voting percentages than in the case of a LLC, and they are subject to greater regulatory control and scrutiny. For example, MOC representatives can attend shareholder meetings. However, shares are freely transferable (save that MISA approval may be needed to alter the foreign shareholding), corporate financing options are more varied (JSCs can issue bonds and preferred shares). JSCs are generally considered the most suitable vehicles for large, capital intensive projects or businesses. Only JSCs may be listed on the Saudi stock exchange (Tadawul).

Branch

The Companies Law and the Foreign Investment Regulations permit a foreign company to establish a branch in Saudi Arabia, subject to approval by MISA. In order to obtain a license to form a branch, a foreign company must submit an application to MISA. The formation process is generally similar to that of a limited liability company except that there are no Articles of Association to be approved. However, MoC, under the Companies Law, must issue a decision approving the formation of the branch. The capital requirements are the same as that of a limited liability company and dependent on what type of activity the proposed branch will undertake.

Technical Scientific Office (TSO)

Only foreign pharmaceutical companies are legally required to establish a TSO. Non-pharmaceutical companies, however, have been able to form TSOs at the discretion of MISA and MOC. The process of forming a TSO is similar to that of forming a branch; however, it would also require the foreign company to enter into a distributorship agreement with a Saudi distributor, which is required to be registered as such with MOC under the Commercial Agencies Law. Moreover, approval from the Saudi Food and Drug Administration (SFDA) is required in order to establish a TSO in the pharmaceutical field. A TSO serves, in essence, as a liaison between a foreign company, its Saudi distributor and the local market. A TSO cannot engage in commercial activities or earn revenue. Its activities are limited to (i) providing technical information and assistance regarding the foreign company's products to the distributor and to end users of the products, including analysing and assisting the distributor to handle technical service problems; (ii) studying the market and preparing reports to the company's head office; and (iii) conducting technical research in connection with the products.

Temporary Commercial Registration (TCR)

A TCR permits a foreign company to do business in Saudi Arabia in only a very limited sense and has only been available to companies having a government contract. TCRs have not in most cases been available in connection with subcontracts on government projects, although some exceptions have been made. If a foreign company is a prime contractor it must first obtain a Temporary Licence from MISA, before it files an application for a TCR with MOC. In general the formation process is similar to that of a branch. The TCR will enable the foreign company to perform the government contract, but the company may only engage in activities directly related to the performance of that contract. The foreign company may not engage in the general promotion or solicitation of business. Moreover, the term of a TCR is limited to the term of the contract with regard to which it is granted.

Of the above, branches (including TCRs and TSOs) and proprietorships are managed by a single manager and thus "corporate governance" is quite straightforward. As discussed further in 3. Management of the Company, LLCs may have a single manager or a board. JSCs are governed by a board of directors. Rules governing the conduct of managers of general and limited partnerships are generally similar to those applicable to managers of LLCs. All of the sections that follow will therefore focus on LLCs and JSCs.

The principal sources are:

  • the Companies Law;
  • the Corporate Governance Regulations (the "CGRs") issued by the Capital Market Authority (CMA), which are applicable only to JSCs listed on Tadawul only; and
  • MOC's Corporate Governance Regulations for non-listed Companies.

Listed JSCs must comply with the requirements of the Companies Law (applicable to all type of companies) and the CGRs as further described under the questions below. While the requirements of the Companies Law are mandatory, the requirements of the CGRs are mandatory depending on the type of listed company in question:

  • for JSCs Listed on the Main Market of the Saudi Stock Exchange – the requirements of the CGRs are generally mandatory, except where stated otherwise in the CGRs;
  • for JSCs Listed on the Parallel Market of the Saudi Stock Exchange – the requirements of the CGRs are voluntary.

The substance of main corporate governance rules and regulations mentioned in 1.2 Sources of Corporate Governance Requirements is summarised in the sections that follow. It should be noted that corporate governance has become an issue of increasing interest and importance to the Saudi regulator, as evidenced by the proliferation of corporate governance rules in recent years and the increasingly active involvement of regulators, particularly but not necessarily in the case of listed companies, to ensure that the applicable rules are being applied.

Corporate governance and fiduciary duty compliance issues are also increasing becoming the subject of litigation and claims in the Saudi courts, for example where management are alleged to have favoured the interests of one shareholder or group of shareholders over another.

There are no specific ESG reporting requirements imposed in Saudi Arabia at the present time.

LLC

  • General Assembly consisting of the shareholders.
  • Board of Managers (if any).
  • General Manager/Manager(s).
  • Supervisory Board (only if there are more than 20 shareholders, which is rare).

All JSC

  • General Assembly of shareholders.
  • Board of Directors.
  • Audit Committee.

JSCs Listed on Tadawul's Main Market, in Addition to the Above Bodies

  • Remuneration Committee and Nomination Committee (these two committees may be combined in one).
  • Risk Management Committee (voluntary).

LLC

The general assembly/shareholders

The shareholders acting through the general assembly have the ultimate power to the company. However the only functions that they must perform under the Companies Law on an ongoing basis are those set out in the minimum agenda of the annual general assembly meeting as follows:

  • receive the board's/manager'(s) report on the company's activities and financial position in the fiscal year, the auditor's report and the report of the supervisory board, if any;
  • discuss and approve financial statements;
  • decide on the percentage of profits to be distributed to the shareholders;
  • appoint managers or members of the supervisory board, if any, and fix their respective remunerations; and
  • appoint the auditors and fix their fees.

Shareholder decisions are also required to amend the articles of association, which is necessary to raise or lower its capital or change its objects or management or shareholding structure, for example, to dissolve the company prior to the expiration of its term, or to merge it with another company. Other matters can be delegated to the board or manager(s) as the case may be, although the shareholders always retain the authority to overrule them.

The board of managers/GM

The managers have only those authorities over a company that are stipulated in a company's articles of association or otherwise in separate power of attorneys granted by or resolutions issued by the shareholders. The managers will typically be granted powers to run the day to day business of the company, such as representing the company vis-a-vis third parties including government agencies and courts, entering into contracts in the ordinary course of business, and hiring or appointing employees or independent contractors.

All JSCs

  • Ordinary General Assembly: makes decisions on all matters in relation to the company, except for those reserved to the Extraordinary General Assembly.
  • Extraordinary General Assembly: has the exclusive authorities to amend the bylaws of the company, except for any amendments to increase the financial burdens of the shareholders, move the company's head office outside Saudi Arabia, or change the company's nationality.
  • Board of Directors: without prejudice to the powers conferred on the general assembly, the board of directors has full power to manage the business of the company in a manner that achieves its objects.
  • Audit Committee: responsible for overseeing the company's businesses, ensuring the integrity and effectiveness of the reports, financial statements and internal control systems and submitting an annual report to the general assembly in relation to its duties.

Bodies Specific to JSCs Listed on Tadawul's Main Market

  • Remuneration Committee: prepare a policy for the remuneration of the board members, its committees and executive management for presentation to the board and approval of the general assembly, periodically review the remuneration policy and assess its effectiveness and recommend to the board the remunerations.
  • Nomination Committee: set the standards and policies for memberships of the board and executive management and recommend the nomination of candidates for the board, review the composition and structure of each committee of the board and ensure annually the independence of the independent directors and the absence of conflict of interests.
  • Risk Management Committee: oversee a company's risk management system and assess its effectiveness.

LLC

  • The shareholders: act by means of resolutions, which may be issued either during a duly convened meeting, or by circulation. The rules for holding meetings and issuing resolutions by circulation are set out in the Companies Law and the articles of association.
  • The board of managers: also acts by means of resolutions issued at a meeting or by circulation. The process should be set out in the articles of association in reasonable detail as there are no specific rules provided for in the Companies Law.

JSC

  • General Assembly: shareholders typically issue resolutions at meetings, as there are no provisions for the issuance of shareholder resolutions by circulation. Meetings generally require at last ten days' notice.
  • Board of Directors: the board will typically govern through resolutions issued at meetings, but resolutions may be adopted by circulation for urgent matters, provided that the resolution is submitted to the next board meeting.
  • Other Committees (if applicable): committees may issue resolutions at meetings or by circulation depending on the rules set out in the constitutive resolution of the relevant committee.

LLC

There is no requirement to have a board at all, nor any published rules that set its minimum or maximum size if one is appointed. However, in practice the MoC may not approve articles of association calling for a board of fewer than three members. It is possible to appoint two managers who manage jointly but not as a board per se.

JSC

The board must comprise not fewer than three directors and not more than 11 directors.

LLC

The managers in the board of managers of an LLC are not typically granted the power to represent the LLC severally in their capacities as managers in the board. The board as a body will have the powers stipulated for it in the company's articles of association. It is also common to specify certain representative authorities (eg, representing the company in court) that may be exercised by the chairman of the board or by the general manager individually.

JSC

  • Chairperson: by-laws determine the powers of the chairperson and include convening board meetings, representing the company before courts, governmental authorities and third parties.
  • Vice Chairperson (among members of the board): assume chairperson's responsibilities in his/her absence.
  • Managing Director (among members of the board): by-laws determine the powers of the managing directors.
  • Secretary (among member or outside of the board): take minutes of the meetings, sign them and enter them in a special register.

LLC

As noted above there are no specific requirements as to board composition but normally, if there is a board it is a relatively small one – in the range of three to seven members.

JSCs Listed on the Main Market

  • The number of the directors must be suitable for the size and nature of the company’s activities.
  • The majority of the board must be non-executive directors.
  • The number of independent directors must not be fewer than two members or one-third of the board members, whichever is greater.

The above requirements are only indicative for JSCs listed on the Parallel Market.

Non-Listed JSCs

MOC recommends the following:

  • the number of the directors must be suitable for the size and nature of the company’s activities;
  • the number of independent directors shall not be less than one-third of the board members (however, this is not recommended for SMEs).

LLC

The managers of an LLC are normally appointed and removed by resolutions issued by the shareholders, or through the company's articles of association, which can only be amended by the shareholders of the company. In practice, the MOC will approve articles of association that allow individual shareholders to appoint and remove board members by notice to the company and the other shareholders.

JSC

Directors are removed or appointed by resolutions issued by the general assembly.

It should be noted in respect of both LLCs and JSCs that managers or directors that the Companies Law provides that their removal from office "shall be without prejudice to their right to their right to damages if the removal is made without acceptable justification or at an improper time".

LLC

The Saudi Companies Law does not set out a comprehensive set of rules governing conflicts of interest by managers or board members of LLCs. However, it does impose penalties on managers who use the powers they enjoy or the voting rights they hold by reason of their office with the intent to achieve personal goals; act in favour of any other company or person; or gain a benefit from a project or transaction in which they may have a direct or indirect interest, knowing that such use is in conflict with the interests of the company. Moreover, managers, including members of a board of managers, incur liability to the company, the shareholders and third parties for damages resulting from any breach of the Companies Law or other misconduct in performance of their duties. This liability cannot be waived in advance.

JSC

Independent directors

Please refer to 4.3 Board Composition Requirements/Recommendations in relation to the required number of independent directors in JSCs.

Independent directors are non-executive members of the board who enjoy complete independence in their positions and decisions. Independent directors shall be able to perform their duties, express their opinions and vote on decisions objectively with no bias in order to help the board make correct decisions that contribute to achieving the interests of the company.

The CGRs have provided several examples that negate the independence requirement for an independent director, such as:

  • if they hold 5% or more of the shares of the company or any other company within its group, or are a relative of an owner of such percentage;
  • if they are relatives of any member of the board of the company, or any other company within the company’s group;
  • if they are an employee or used to be an employee, during the preceding two years, of the company, of any party dealing with the company or any company within its group, such as external auditors or main suppliers, or if during the preceding two years they held a controlling interest in any such parties;
  • if the member of the board receives financial consideration from the company in addition to the remuneration for their membership of the board or any of its committees exceeding an amount of SAR200,000 or 50% of their remuneration of the last year for the membership of the board or any of its committees, whichever is less; and
  • if they have served for more than nine years, consecutive or inconsecutive, as board members of the company.

Conflict of interest

Directors of JSCs must not:

  • have any interest, whether direct or indirect, in any transactions/contracts concluded by the company – the general assembly may authorise an exception to the foregoing, but any such declaration must be recorded in the minutes of the relevant board meeting and the interested director may not participate in the board's vote on the matter but he/she can count in the quorum; the chairperson must inform the next regular general assembly of the transactions/contracts in which any director has a personal interest, which must be accompanied by a special report from the auditor; or
  • participate in any business that competes with the activities of the JSC, or engage in any of the activities performed by the JSC, failing which the JSC will be entitled either to claim damages from the offending director or consider the activities conducted by such director as having been performed for the company's account.

LLC

In addition to any other duties assigned to them by the articles of association or the decision of the shareholders, the board/managers of a LLC must pursuant to the Companies Law:

  • within 30 days of the formation of the company or amendment of the articles of association, apply for the publication of an abstract of its articles of association on the website of the MoC and register the same in the Commercial Register;
  • convene the general assembly of shareholders at least once per year within four months from the end of the company's fiscal year;
  • within three months from the end of every fiscal year, prepare a financial statement and a report on the company's operations including their proposals for the appropriation of net profits and any dividend distribution;
  • send a copy of each of the above reports (together with a copy of the supervisory board report, if any, and the auditor's report) to the MOC and to every shareholder within one month of their preparation;
  • if the company's losses reach one half of its capital, the manager(s) must record this event in the Commercial Register and convene a shareholders meeting within 90 days from the date on which he/they became aware of the extent of such losses, in order for the shareholders to consider whether to continue or dissolve the company. If the company's manager(s) fail to do so or if the shareholder do pass a resolution to continue the company or dissolve it, the company is deemed to be "dissolved by the operation of law".

JSC

The principal statutory duties of the board of directors are to:

  • prepare a balance sheet, a profit and loss statement and a report on the company's operations and financial position as well as proposals for the appropriation of net profits and any dividend distribution;
  • submit a report to the ordinary general assembly containing a statement of all payments made to the board members during the fiscal year; the report shall also include the number of meetings held, and the number of meetings attended by each member from the date of the last ordinary assembly meeting;
  • convene general or extraordinary shareholder meetings in accordance with the by-laws; the board shall convene a meeting of the ordinary general assembly if requested to do so by the auditor, the audit committee, or by a number of shareholders representing at least 5% of the company's capital;
  • convene an extraordinary shareholder meeting within 15 days of being informed (by any company official or auditor) of the company's losses reaching one half of its paid-up capital. The extraordinary shareholder meeting must be convened within 45 days of the shareholders being informed of the losses, to decide whether to increase or decrease the company's capital to render losses equal to less than half of the paid up capital, or dissolve the company prior to the end of its term as defined in its by-laws.

LLC

The Companies Law provides that managers/board members of a LLC are liable to the company, the shareholders and third parties for damages they may incur as a result of the managers' violations of the Companies Law or acts of mismanagement. However this should not be understood as creating a duty to third parties other than to comply with the law and otherwise deal with them in a lawful manner. The managers' primary duties are to the company itself and its shareholders (as a body, rather than to any individual shareholder, even a shareholder who may have appointed the manager).

JSC

As with a LLC, directors of a JSC owe their primary duties to the company and its shareholders, although third parties may also have a cause of action arising from the board of directors' mismanagement of the affairs of the company, their violation of the Companies Law or of the company's by-laws, and may bring an action for liability against the directors.

As noted above, the Companies Law provides a private right of action to the company, the shareholders and third parties damaged by unlawful acts of managers/directors. In addition, the Companies Law provides for the imposition of penalties as follows.

LLC

Managers (including board members) of a LLC may be subject to imprisonment for a period of not more than five years and/or fined not more than SAR5 million in the following circumstances:

  • the manager enters any false or deceptive details in the financial statements or in the reports prepared by him for submission to the shareholders or fails to include in such financial statements or reports material facts with the intent to conceal the company’s financial position from the shareholders or third parties;
  • the manager uses the powers he/she enjoys or the voting rights he/she holds by reason of his office with the intent to achieve personal goals; act in favour of a company or person; or gain a benefit from a project or transaction in which he/she has a direct or indirect interest, knowing that such use is in conflict with the interests of the company; or
  • the manager fails to call a meeting of the company's general assembly, or fails to take such action as required therefor, as the case may be, upon becoming aware that the company's losses have reached 50% of its capital or who fails to record such fact in the Commercial Register within the period prescribed by the law.

LLC managers may be subject to imprisonment of not more than one year and a fine of not more than one SAR1 million in the following cases:

  • the manager announces, disseminates, or discloses, via any means of communication whatsoever, any information that would mislead others into believing that a company that is still unregistered has been registered;
  • the manager, for the purpose of inducing subscriptions or for collection of the value of shares, disseminates, contrary to fact, names of persons under the pretext that such persons are or will be connected to the company in any manner whatsoever;
  • the manager intentionally records in the company's articles of association or other documents, any application for incorporation or licence, or in the attachments to such applications false information or any information in violation of the provisions of the law; or
  • the manager employs the company for any object other than the objects for which the company has been licensed.

Managers may be subject to a fine of not more than SAR500,000 in the following cases:

  • the manager, in bad faith, distributes company profits in violation of the law or the company's articles of association;
  • the manager intentionally and contrary to the relevant provisions of the law prevents a shareholder from participating in a shareholders' meeting or from exercising the voting rights or other attached to shares in his capacity as a shareholder;
  • a manager who is a member of a board receives or is promised to receive or is given security to receive benefits in return for voting in favour of a certain matter or for abstaining from voting;
  • the manager breaches his/her duty to call a meeting of the shareholders within such timeframe as is set forth in the relevant provisions of the law;
  • the manager breaches his/her duty to cause the financial statements of the company to be published in accordance with the provisions of the law;
  • the manager does not make required documents available to a shareholder in accordance with the law;
  • the manager breaches a duty to provide the MOC documents as set forth in the law;
  • the manager does not cause minutes of meetings to be prepared and recorded in accordance with the provisions set forth in the law;
  • the manager impedes or causes to be impeded the duties of persons who are legally authorised to have access to the company's papers, instruments, accounts, and documents; or who refuses to enable such authorised persons to perform their duties;
  • the manager breaches a duty regarding publication of the company's articles of association or registration of the company in the Commercial Register, or publication of any amendment to the company's articles of association or any amendment of the details of the company's commercial registration in accordance with the law;
  • the manager fails to cause mandatory information (eg, legal status, capital) to be included on company letterhead or other official documents; or
  • the manager does not comply with the laws and decisions relating to the company’s business and does not comply with such instructions, circulars, or controls as may be issued by the competent authorities, without giving reasonable reasons for such non-compliance.

For managers who commit repeat offences within three years from the date of conviction of an offence, the applicable penalties may be doubled.

JSC

The Companies Law provides that directors of JSCs may be subject to the following sanctions:

Imprisonment for a period up five years and/or a fine up to SAR5 million in the following circumstances:

  • any director who wilfully inserts misleading information into the financial statements or reports prepared by him for the partners or the General Assembly; or who omits essential facts from such reports with the intention of concealing the financial position of the company from the shareholders or third parties;
  • any director who uses the company's monies in a manner that he knows to be damaging to the company's interests, in order to achieve personal gain, or to favour a company or person, or benefit from a project or deal in which he has a direct or indirect interest;
  • any director who uses the powers vested in him or the votes he holds, in a manner that he knows to be damaging to the company's interests in order to achieve personal gain or to favour a company or person, or benefit from a project or deal in which he has a direct or indirect interest; or
  • any director who fails to call a meeting of the company's general assembly, or fails to take such action as required therefor, as the case may be, upon becoming aware that the company's losses have reached 50% of its capital or who fails to record such fact in the Commercial Register within the period prescribed by the law.

A fine up to SAR500,000 in the following circumstances:

  • any director who deliberately interferes with the summoning or convening of a General Assembly;
  • any person who have been appointed a director, or remains a member thereof in violation of the provisions of the Companies Law, and any director of a company in which said violations occurred, if he knew of their occurrence; or
  • any director who has obtained a guarantee or loan in violation of the Companies Law, and any board chairperson who was aware of such fact.

LLC

As noted above, the managers of a LLC are jointly liable for damages sustained by the company or the shareholder or third parties as a result of the managers violating the provisions of the law or the company's articles of association or as a result of mismanagement committed by the managers in the performance of their duties. The law also provides that "[a]ny provision to the contrary shall be considered non-existent". Hence this liability cannot validly be waived.

Except in the cases of fraud and forgery, the statute of limitations for liability actions shall be five years from the end of the fiscal year during which the damage-causing act was committed, or three years from the end of the relevant manager's term of office, whichever is greater.

JSC

As noted above, any person who suffers a damage (ie, the company, the shareholders or any third parties) arising from the board of directors' mismanagement of the affairs of the company, their violation of the Companies Law or of the company's bylaws, may bring an action for liability against the directors.

As with limited liability companies "any stipulation to the contrary" shall be null and void, so a waiver would not be valid.

All directors assume joint liability if the wrongful act arises from a resolution adopted by unanimous vote.

In case of resolutions adopted by majority vote, dissenting directors shall not be liable if they have expressly recorded their objection in the minutes of the meeting. However, an absent director is not relieved from liability unless the director is not aware of the misconduct or was unable to vote on the action.

No action for liability may be brought against the directors after the lapse of three years from the discovery of the damage-causing act. With the exception of cases of fraud and forgery, the statute of limitations for liability actions shall be five years from the end of the fiscal year during which the damage causing act was perpetrated, or three years from the end of the relevant board member's term in office, whichever is greater.

LLC

There are no statutory restrictions on remuneration of managers of an LLC.

JSC

The by-laws must specify the manner of remunerating directors.

Remuneration of directors may consist of a salary, a meeting attendance fee, material benefits, a percentage of net profits, or a combination of two or more of these benefits.

If the remuneration is in the form of a percentage of the company's profits, it must:

  • not exceed 10% of the net profits after deduction of reserves as determined by the general assembly and after distribution of a dividend not less than 5% of the company's paid-up capital to the shareholders;
  • be proportional to the number of meetings attended by the director.

In all cases, the total remuneration of the board (including any rewards, financial or in-kind benefits) shall not exceed SAR500,000 per year.

LLC

There are no relevant disclosure requirements.

JSC

The annual board report to be submitted to the Ordinary General Assembly must disclose (i) all payments made to the directors during the fiscal year in the form of rewards, allowances, expenses and other benefits; (ii) payments made to directors in their capacity as employees or executives or in consideration for technical, administrative or consultancy assignments; and (iii) the number of meeting held and the number of meeting attended by each director. The board report must be made available to the shareholders 21 days prior to the date set for convening the general assembly and submitted to MOC 15 days prior to the date set for convening the general assembly.

For listed JSCs, the board report must disclose in addition to the aforementioned the remuneration of the members of the executive management. The disclosure of remuneration in the board report must be made in the form provided by the CGRs under Appendix (1). The board report must be submitted to the CMA and disclosed to the shareholders within three months from the end of the financial year.

LLC

The shareholders have the ultimate power to control the company, acting as provided in the articles of association. It also is not uncommon for shareholders to enter into a separate shareholders agreement but this would be in the nature of private agreement binding on them contractually but not on the company (unless it is expressly made a party) or third parties dealing with it.

JSC

The relationship between the company and the shareholders is regulated by its by-laws. In the case of non-listed JSCs in particular, the shareholders may also enter into a separate shareholders agreement as in the case of a LLC.

LLC

The managers have the authorities granted to them in the company's articles of association or otherwise by the shareholders through resolution or power of attorney. No specific authorities are granted by law. The shareholders acting as a body remain the ultimate decision-making authority.

JSC

The management of the company is the exclusive function of the board of directors within the powers granted to it by the by-laws or the General Assembly. No shareholder may intervene in the management of the company, unless the shareholder is a member thereof; or unless the shareholder's intervention is made through the General Assembly.

LLC

The shareholders (General Assembly) are required to meet at least once a year within three to four months following the end of each fiscal year, by invitation of the managers of the company as stipulated in the company's articles of association.

JSC

The shareholders (ordinary General Assembly) are required to meet at least once a year within six months following the end of each fiscal year.

LLC

Claims against managers is discussed in 4.7 Responsibility/Accountability of Directors.

JSC

Claims against the directors is discussed in 4.8 Consequences and Enforcement of Breach of Directors’ Duties and 4.9 Other Bases for Claims/Enforcement Against Directors/Officers.

Regarding claims against the company, the law and regulations do not expressly address this point. However, in practice, a shareholder may bring an action against the company if the shareholder can evidence that the company breached a contractual or other duty and that the shareholder suffered a direct and actual damage as a result.

Any person must notify the Saudi Stock Exchange (Tadawul) if such person becomes the owner of, or is interested in, 5% or more of any class of voting shares or convertible debt instruments of the listed company at the end of the third trading day following the execution of the transaction or the occurrence of the event that results in such ownership or interest. The notification shall also include a list of persons who have an interest in the shares or convertible debt instruments that they own or control.

In calculating the total number of shares or convertible debt instruments in which a person is interested, that person will be deemed to be interested in any shares or convertible debt instruments owned by or controlled by any of the following persons:

  • a relative of that person;
  • a company controlled by that person; or
  • any other persons with whom that person has agreed to act in concert to acquire an interest in or exercise voting rights in the shares or in the convertible debt instruments of the issuer.

LLC

The following documents must be prepared within three months of the closing date of every fiscal year:

  • financial statements;
  • profit and loss statement;
  • report prepared by managers of the company describing the company's activities and financial position and containing his/their recommendations as to the distribution of profits; and
  • auditor's report.

In addition, the shareholders must issue a resolution to approve the above-mentioned documents.

The auditor report must be submitted to the MOC within one month after the completion of the auditor report. In other words, the auditor report must be submitted to the MOC not later than four months following the end of each fiscal year.

JSC

The following documents must be made available to the shareholders 21 days prior to the date set for convening the General Assembly and submitted to MOC 15 days prior to the date set for convening the general assembly (and the CMA in case of listed JSCs):

  • the financial statements;
  • the board report;
  • the auditors' report; and
  • the audit committee report.

Copies of these documents must be submitted to MOC and CMA (in case of listed JSCs) within 30 days from the date the General Assembly approves them.

Listed JSCs on the main market are required to disclose in the board report, among other things, the following:

  • the requirements of the CGRs that have been implemented and not implemented in the company along with justifications;
  • a description of the competencies and duties of all committees of the company, the date of their meetings and details of their attendance;
  • an assessment of the performance of the board and committees; and
  • the audit committee's recommendations and results of review of the internal control system.

LLC/JSC

Any change in the shareholders (of a LLC only), objectives, address, duration, head office, and management of the company must be registered with the companies register at the MOC. Such information will be available to the public.

LLC/JSC

An external auditor must be appointed/reappointed by the shareholders in the annual General Assembly meeting.

LLC

There are no specific risk management or internal control rules applicable to a LLC.

JSC

This role is covered by the Audit Committee and the Risk Committee, as discussed in 3.2 Decisions Made By Particular Bodies.

Note: Shortly before publication of this chapter, Saudi Arabia issued a new Companies Law pursuant to Royal Decree M/132 dated 1/12/1443 (30 June 2022). The law has not yet been published in the Official Gazette. The new law will affect the current legal position described in this chapter in various ways, but it will not take effect until 180 days after publication. Updates will be provided for the online version of this chapter as the effective date of new law draws closer and related enactments such as implementing rules are promulgated.

Abdulaziz Alajlan & Partners Legal Advisors

Olayan Complex
Tower II, 3rd Floor
Al Ahsa Street
Malaz
Saudi Arabia

+966 11 265 8900

+966 11 265 8999

legal.advisors@legal-advisors.com www.legal-advisors.com
Author Business Card

Trends and Developments


Authors



Abdulaziz Alajlan & Partners Legal Advisors is a well-established Saudi firm that works in association with Baker McKenzie, a worldwide law practice. It has been working in the Kingdom for 43 years, advising on Saudi Arabian and international matters with on-the-ground experience and competence. Legal Advisors offers comprehensive legal assistance on a wide range of corporate and commercial, competition, merger control, real estate, capital markets, employment and compensation, banking and financial, project, litigation and dispute resolution, and administrative issues. Its practice is consistently listed as a Tier 1 in the Kingdom, and its attorneys are acknowledged as leaders in their fields by legal directories. The firm's lawyers are able to provide intelligent solutions and advice due to their extensive experience and familiarity with market trends.

Introduction

In accordance with Vision 2030, the Kingdom of Saudi Arabia aims to attract foreign investors and, in particular, big multinationals to invest in the Kingdom. Furthermore, the government is encouraging multinational groups operating in the MENA region to relocate their regional headquarters to the Kingdom. In recent years, the pace of legal and regulatory change has accelerated as policymakers update and expand the Kingdom's laws and regulations and tighten enforcement practices, both to improve the workings of the domestic economy and to demonstrate that the Kingdom is well-equipped to welcome foreign direct and indirect investment and improve the accountability of listed entities.

Corporate Governance in Saudi Arabia

Local authorities, including the Capital Market Authority (CMA) in particular, have updated the Kingdom’s corporate governance regulations with the aim of improving the business environment, promoting accountability and transparency, ensuring best practices, compliance and protection of shareholder and stakeholder rights while maintaining market integrity and confidence. The CMA – which has raised significant awareness on governance matters – is well-placed to encourage and implement corporate governance mechanisms and has enacted the most elaborate corporate governance rules. Since its inception, the CMA has contributed significantly to shaping corporate governance practices in Saudi Arabia. While the corporate governance rules enacted by the CMA have been in place for some time now, their enforcement is becoming ever-more strict, with fewer exemptions and waivers being granted in relation to corporate governance requirements over the past couple of years.

Board Composition, Disclosure and Audit

Board composition and election rules are strictly enforced in listed companies. Boards must comprise a majority of non-executive directors, with at least two independent members or one-third, whichever is greater. There is also a separation of positions between board chairman and any other executive position in the company, including the positions of managing director, general manager or CEO. Boards of directors are elected using a cumulative voting method, for a three-year renewable term. Directors in listed companies are nowadays more aware about the responsibility and liability that their role entails.

There is an increasing focus on transparency and disclosure requirements. Listed companies are expected to disclose documents explaining related party transactions, board of directors’ biographies and disclosures about board and committees’ charters, in addition to disclosure of board and executive management members' detailed remuneration. We are witnessing greater transparency in relation to potential conflicts of interest of all employees of a company, including executive management in addition to board members.

There is also a push towards higher audit quality. This includes the requirement to submit financial statements to a competent, external auditor appointed by the General Assembly, in addition to the creation of board committees. Several years ago, Saudi Arabia adopted the International Financial Accounting Standards (IFRS) to ensure compatibility of financial reporting with international norms.

Corporate governance regulation outside of listed entities is largely the responsibility of the Ministry of Commerce (MoC), although other agencies may also play a role in regulated industries, such as the Saudi Central Bank (SAMA), in respect of banks, finance companies and insurance companies, for example.

Companies Law

The current Companies Law was enacted in 2015. While the basic corporate governance rules did not change greatly from prior law, the penalties for failure to comply were significantly increased. For example, managers or directors of a company may face fines of up to SR5 million and imprisonment of up to five years for breaching their fiduciary duties by acting in their own interest or that of a single shareholder or a third party and contrary to the interest of the company for which they act as director or manager.

In the years since the current law was enacted, enforcement has gradually become stricter, and the greater focus on corporate governance generally, including by the CMA, has served to focus attention on fiduciary duty issues. Litigation involving allegations of breach of fiduciary duty by managers and directors (eg, by favouring the interests of one shareholder over that of others and the company as a whole) has become an ever-more common feature of disputes involving Saudi/foreign joint ventures, for example.

One aspect of corporate governance on which the MoC is currently focused is the longstanding problem of ostensibly Saudi-owned entities that are managed and operated by and for the account of undisclosed foreign interests. This practice is a violation of the Foreign Investment Law and usually involves tax evasion. A statute targeting the practice, called the Anti-Cover up Law, has been in place for many years and was recently updated, but enforcement has historically been uneven. During the past year, the MoC and the tax authorities implemented an amnesty, which resulted in many companies in which foreign parties have undisclosed interests regularising their status. Now that the amnesty has expired, however, a crackdown on those who did not avail themselves of it can be expected. This should serve not only to improve compliance with foreign investment and tax regulations by directing foreign investment into recognised and regulated channels, but also to uphold principles of transparency of management and ownership structures as well as proper accountability of interested parties corresponding to their actual roles in the management and beneficial ownership of entities.

We expect to see ever-higher internationally accepted principles of good corporate governance being introduced in the future with stricter enforcement of already adopted regulations aiming to continue to facilitate the flow of private investment and improve competitiveness.

Abdulaziz Alajlan & Partners Legal Advisors

Olayan Complex
Tower II, 3rd Floor
Al Ahsa Street
Malaz
Saudi Arabia

+966 11 265 8900

+966 11 265 8999

legal.advisors@legal-advisors.com www.legal-advisors.com
Author Business Card

Law and Practice

Authors



Abdulaziz Alajlan & Partners Legal Advisors is a well-established Saudi firm that works in association with Baker McKenzie, a worldwide law practice. It has been working in the Kingdom for 43 years, advising on Saudi Arabian and international matters with on-the-ground experience and competence. Legal Advisors offers comprehensive legal assistance on a wide range of corporate and commercial, competition, merger control, real estate, capital markets, employment and compensation, banking and financial, project, litigation and dispute resolution, and administrative issues. Its practice is consistently listed as a Tier 1 in the Kingdom, and its attorneys are acknowledged as leaders in their fields by legal directories. The firm's lawyers are able to provide intelligent solutions and advice due to their extensive experience and familiarity with market trends.

Trends and Development

Authors



Abdulaziz Alajlan & Partners Legal Advisors is a well-established Saudi firm that works in association with Baker McKenzie, a worldwide law practice. It has been working in the Kingdom for 43 years, advising on Saudi Arabian and international matters with on-the-ground experience and competence. Legal Advisors offers comprehensive legal assistance on a wide range of corporate and commercial, competition, merger control, real estate, capital markets, employment and compensation, banking and financial, project, litigation and dispute resolution, and administrative issues. Its practice is consistently listed as a Tier 1 in the Kingdom, and its attorneys are acknowledged as leaders in their fields by legal directories. The firm's lawyers are able to provide intelligent solutions and advice due to their extensive experience and familiarity with market trends.

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