The Companies Law recognises the following types of corporate organisations:

• general partnership;
• limited partnership;
• joint stock company;
• simplified 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 engineering consulting, medical consulting, legal consulting and accounting as well as banks, finance companies and insurance companies.

The legal regime governing foreign investors from countries that are not members of Gulf Cooperation Council (GCC) countries 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 a 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 in 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 the investment is specifically precluded by law.

Foreign investors must also abide by the Rules for Foreign Investment in Securities issued by the board of the Capital Market Authority (CMA) when investing in Saudi listed securities, debt instruments and investment funds. These rules stipulate the categories of foreign investors permitted to invest in securities in Saudi Arabia and the restrictions on these investments.

Limited Liability Company (LLC)

The locally incorporated LLC is one of the most common forms used by foreign companies doing business in Saudi Arabia. An LLC may have as few as one or as many as 50 shareholders. MISA must approve the formation of an LLC 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 purposes the company will be authorised to pursue.

The shareholder(s) must submit an application to MISA for this purpose. Before submitting the application it is customary to enter into a joint venture agreement (if the shareholders are unaffiliated with one another) and agree on the company's articles of association.

After MISA has granted the licence, the articles of association (in the case of multiple shareholders) or the bylaws (in the case of a single shareholder) must be submitted to the newly established Saudi Business Centre (SBC) for its approval. Any change in ownership of the company likewise requires the approval of MISA and the amendment of the licence, articles/bylaws and commercial registration. Every shareholder has a statutory right to pre-empt the sale of shares by any other shareholder to a third party. Ownership changes therefore 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)

Like an 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. The application for the formation of the JSC must then be submitted to the Ministry of Commerce (MOC) along with the proposed articles of association and bylaws of the company. A JSC may be formed by a single founding shareholder or several shareholders and there is generally no limit on the number of shareholders this type of company may have.

The Companies Law is more prescriptive regarding a JSC's management structure and shareholder voting percentages than an LLC and they are subject to greater regulatory control and scrutiny. For example, MOC representatives can attend shareholder meetings. However, shares are freely transferable (although 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 licence to form a branch, a foreign company must submit an application to MISA. The formation process is generally similar to that of an LLC 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 those for an LLC and depend on the type of activity the proposed branch will undertake. 

Technical Scientific Office (TSO)

Only foreign pharmaceutical companies legally have to establish a TSO. However, non-pharmaceutical companies 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 will 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. Approval from the Saudi Food and Drug Administration (SFDA) is also 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 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; studying the market and preparing reports to the company's head office; and 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 a very limited sense and has only been available to companies with a government contract. In most cases, TCRs have not 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 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. The term of a TCR is limited to the term of the contract it is granted for.

Regional Headquarter (RHQ)

The Council of Ministers of Saudi Arabia adopted a resolution dated 03/06/1444H (corresponding to 27 December 2022G) clarifying the consequences in terms of eligibility to compete for government contracts for companies that fail to locate their RHQ in Saudi Arabia. This clarification had been anticipated for some time, as the Kingdom first announced that multinationals wishing to continue contracting with the government would need to locate their RHQs in the Kingdom by 2024 at the end of 2020.

The new resolution establishes various controls (the "Controls") applicable to government contracting with certain companies that do not have a RHQ located in Saudi Arabia (In-Scope Companies) and/or with parties related to them (Related Parties). The Controls have come into force as of 19/06/1445H (corresponding to 1 January 2024G). Following the Saudi government's efforts to encourage multinationals operating in the Middle East and North Africa region to set up an RHQ in Saudi Arabia, the Controls are a long-awaited official clarification as to the possible implications of not doing so.

Overview and scope of application

Generally, the Controls have the effect of restricting government authorities (as defined below), whether subject to the Government Tenders and Procurement Law or not, from contracting with In-Scope Companies or Related Parties with respect to the procurement of goods or provision of services, as detailed below. 

Government authorities 

The Controls impose restrictions specifically on government authorities. These are defined as including Saudi government ministries, authorities, agencies, commissions, establishments and independent agencies with public legal personalities. The term does not appear to include companies owned in whole or in part by the Saudi Arabian government.

In-Scope Companies

The Controls restrict government authorities from contracting with In-Scope Companies. This is defined as multinational entities that have an RHQ in the Middle East and North Africa region but not in Saudi Arabia and that are expressly listed in a register (the "Register") that will be periodically updated and published on Etimad, the unified electronic portal for Saudi government procurement.

Related Parties 

The Controls also restrict government authorities from contracting with any Related Parties. This is defined as any agent of In-Scope Companies, or any distributor, supplier or provider of their goods or services in relation to them.

Restrictions under the Controls

The restrictions introduced by the Controls apply to government authority public tenders, limited tenders, and direct contracting. Generally, government authorities may contract with an In-Scope Company or Related Party only if certain criteria are met, in emergency situations, or if there is no alternative for the required good or service. For example, in public tenders, an In-Scope Company or Related Party may only be selected if it submitted the only acceptable technical bid or, if there are more than one, if its financial bid is significantly below that of the second-best financial bid.

Exclusions

The Controls do not apply to dealings or procurements by a government authority with a cost not exceeding SAR1 million (this threshold may be amended from time to time) or business or purchases carried out outside of Saudi Arabia.

Reporting obligations

Government authorities that contract with any In-Scope Company or Related Party will be required to submit a report to the Court of Audit and the Expenditure and Project Efficiency Authority (EXPRO) signing the relevant contract, which must include a rationale for concluding the transaction.

Exemption Committee

The Controls also establish an Exemption Committee that will be empowered to review and approve requests submitted by government authorities to exempt In-Scope Companies and Related Parties from the Controls. The Exemption Committee may approve or reject a request in a way consistent with the public interest. A government authority may appeal an Exemption Committee decision before the Minister of Finance, who may issue a final and binding decision regarding the appeal.

Of the above, branches (including TCRs and TSOs) and proprietorships are managed by a single manager and therefore corporate governance is quite straightforward. As discussed further in 3. Management of the Company, LLCs and SJSCs 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. LLCs, JSCs and SJSCs will therefore be focused on throughout this chapter.

The principal sources of corporate governance for companies in Saudi Arabia are:

• the Companies Law;
• the Implementing Regulations to the Companies Law; 
• the Implementing Regulations to the Companies Law for Listed Joint Stock Companies issued by the CMA; and
• the Corporate Governance Regulations (the "CGRs") issued by the CMA, which are only applicable to JSCs listed on the main market.

Listed JSCs must comply with the requirements of the Companies Law (applicable to all type of companies), the Implementing Regulations of the Companies Law for Listed Joint Stock Companies and the CGRs. While the requirements of the Companies Law and its Implementing Regulations for Listed Joint Stock Companies are mandatory, the requirements of the CGRs are only mandatory for companies listed on the main market of the Saudi Stock Exchange (save for some articles which are indicated in the CGRs as "guiding").

The requirements of the CGRs are voluntary for JSCs listed on the parallel market of the Saudi Stock Exchange.

Several corporate governance themes became prominent in Saudi Arabia in 2023.

Evolving Regulatory Landscape

Several updates and revisions have been made to the Implementing Regulations of the Capital Market Law. The CGRs have been a focus, particularly in terms of compliance and disclosure standards.

ESG Integration

Increasing attention has been given to environmental, social, and governance (ESG) factors in corporate decision-making in light of global trends towards sustainable investing and responsible business practices.

Board Diversity and Independence

There has been a specific focus around the composition of boards of directors and their compliance with independence requirements, with a special focus by the CMA on related party transactions and the direct and indirect interest that a board member may have in the contracts and business of a listed company. 

Corporate Social Responsibility (CSR) Initiatives

There has been increasing focus on CSR initiatives and their integration into corporate strategies, including philanthropy, community engagement and sustainable business practices.

There are no specific ESG reporting requirements imposed in Saudi Arabia at the present time. However, the Saudi Exchange has issued ESG disclosure guidelines to act as a useful resource for listed companies navigating ESG.

The principal bodies or functions involved in the governance and management of a company will vary depending on the corporate entity.

LLC

The principal bodies or functions involved in the governance and management of an LLC are:

• a general assembly consisting of the shareholders;
• a board of managers (if there is one);
• a general manager or manager(s); and
• a supervisory board if there are more than 20 shareholders. However this is rare.

JSC

The principal bodies or functions involved in the governance and management of a JSC are:

• a general assembly of shareholders;
• a board of directors; and
• board committees (if relevant).

SJSC

The principal bodies or functions involved in the governance and management of a SJSC are:

• a general assembly of shareholders; and
• a board of directors (if there is one) or a president or general manager.

JSCs Listed on Tadawul's Main Market

The principal bodies or functions involved in the governance and management of JSCs listed on Tadawul's main market are:

• an audit committee;
• a remuneration committee and nomination committee (these two committees may be combined into one); and
• other board committees as may be established by the board of a listed JSC from time to time.

The types of decisions each of these bodies typically make and whether any types of decisions are reserved for a particular body to make will vary depending on the corporate entity.

LLC

The shareholders acting through the general assembly have the ultimate power in 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:

• review the board/manager(s)'s report on the company's activities and financial position for the preceding fiscal year and the auditor's report (if any);
• discuss and approve financial statements; and 
• decide on the manager's proposal on the distribution of dividends, if any.

Shareholder approval is required to amend the articles of association. This includes changes to the capital, altering objectives, management, or shareholding structure and dissolving or merging the company. However, certain decisions can be delegated to the board or managers, although the shareholders always retain the authority to overrule them.

The managers only have those authorities over a company that are stipulated in a company's articles of association, or otherwise in separate power of attorneys granted by the shareholders 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.

A Single Shareholder LLC

The sole shareholder will have the powers and authorities of the manager, board of managers and general assembly of partners stipulated in the Companies Law. Their decisions will be issued in writing and recorded in a special register kept at the company. The shareholder may appoint one or more managers to represent the company before the judiciary, arbitration tribunals and other parties and to be responsible to the shareholder for its management.

JSCs

The ordinary general assembly makes decisions on all matters in relation to the company, except those reserved to the extraordinary general assembly.

The extraordinary general assembly has the exclusive authority to amend the bylaws of the company (save for amendments prohibited by the Companies Law); decide on the continuation or dissolution of the company; and approve the company's purchase of its shares. 

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 way that achieves its objectives.

SJSCs

The bylaws of a SJSC must outline the matters to be presented to the shareholders for approval and the procedures for making these resolutions. In all cases and regardless of whether it is provided for in the bylaws or not, a SJSC's shareholders must decide on matters falling within the powers of a JSC's ordinary or extraordinary general assembly as per the Companies Law. 

Without prejudice to the powers conferred on the shareholders, the president, manager, or board of directors will have full power to manage the business of the company in a way that achieves its objectives.

Bodies Specific to JSCs Listed on Tadawul's Main Market

The audit committee oversees financial reporting integrity, external audit engagement, internal controls and risk management. The committee also monitors related party transactions while also ensuring effective communication with stakeholders.

The remuneration committee prepares a policy for the remuneration of board members, its committees and executive management for presentation to the board and approval of the general assembly and periodically reviews the remuneration policy and assesses its effectiveness and recommends the remunerations to the board.

The nomination committee sets the standards and policies for membership of the board and executive management and recommends the nomination of candidates for the board. It also reviews the composition and structure of each committee of the board and ensures the independence of the independent directors and the absence of conflict of interests annually.

If there is a risk management committee, it oversees a company's risk management system and assesses its effectiveness.

The process by which each of these bodies make decisions will vary depending on the corporate entity.

LLC

The shareholders act by means of resolutions, which may be issued either during a duly convened meeting, or by circulation. Meetings generally require at least 21 days' notice. The rules for holding meetings and issuing resolutions by circulation are set out in the Companies Law, its Implementing Regulations and the articles of association.

The general manager issues decisions through resolutions. 

The general manager acts in line with resolutions issued in accordance with the majority requirements specified in the LLC's articles of association.

The board of managers also acts in line with 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

In terms of the general assembly, shareholders typically issue resolutions at meetings or, if provided for in the JSC's bylaws, by circulation. Meetings generally require at least 21 days' notice.

The board of directors 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.

Any board committees may issue resolutions at meetings or by circulation depending on the rules set out in the constitutive resolution of the relevant committee.

SJSC

Shareholders act by means of resolutions, which may be issued either during a duly convened meeting, or by circulation. Meetings generally require at least 21 days' notice. The rules for holding meetings and issuing resolutions by circulation are set out in the Companies Law, its Implementing Regulations and the articles of association.

The general manager or president(s), manager(s) or board of directors issues decisions by means of resolutions. A board issues decisions by resolutions at a meeting or by circulation.

The bylaws of a SJSC will specify the manner of appointing and removing those tasked with managing the company as well as their powers, authorities and work procedures.

The structure of the board of directors varies from corporate entity to corporate entity.

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 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 of at least three directors.

SJSC

Shareholders of a SJSC have the utmost flexibility when determining the company's management structure (which will be specified in the company's bylaws), whether it be via appointing a president, manager, or a board of directors to manage the company.

The roles of different members of boards of directors will vary from corporate entity to corporate entity.

LLC

In most cases, managers in the board of managers of an LLC are not granted the power to represent the LLC severally in their capacities as managers in the board. However the shareholders of an LLC can grant this power. 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. The chairman or general manager may authorise the delegation of any of their authorities to other managers in the board or others.

JSC

The roles will be as follows:

• Chairperson: Bylaws determine the powers of the chairperson and include convening board meetings and representing the company before courts, governmental authorities and third parties.
• Vice chairperson (among members of the board): Assumes the chairperson's responsibilities in their absence. It should be noted that the appointment of a vice chairperson is only mandatory in listed JSCs.
• Managing director (among members of the board): Bylaws determine the powers of the managing director.
• Secretary (among members or outside of the board): Takes minutes of meetings, signs them and enters them in a special register.

The composition requirements or recommendations for boards of directors vary from corporate entity to corporate entity.

LLC

There are no specific requirements for board composition. However, if there is a board it is normally a relatively small one consisting of between three and seven members.

JSCs Listed on the Main Market

The composition requirements or recommendations for the board of directors in JSCs listed on the main market are as follows:

• The number of 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.
• A vice chairman must be appointed.
• A director must not be on the board of more than five listed JSCs at the same time.

Non-Listed JSCs

The composition requirements, or recommendations for the board of directors of non-listed JSCs are as follows:

• The number of directors must not be less than three.
• All directors must be natural persons.
• The appointment of a vice chairman is optional.

SJSCs

There are no requirements/recommendations in the relevant regulations with regards to the management of a SJSC.

The rules relating to the appointment of directors or officers will depend on the nature of the corporate entity.

LLC

The managers of an LLC are normally appointed and removed in the company's articles of association, or by a separate contract, which can only be amended by the shareholders of the company. Managers are removed in accordance with the quorum and majority requirements set out in the LLC's articles of association. In practice, 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.

SJCS

The manner of appointment/removal of a SJCS's president(s), manager(s), or board of directors will be specified in the SJCS's bylaws.

Independent directors are non-executive members of the board who enjoy complete independence in their positions and decisions. Independent directors are able to perform their duties, express their opinions and vote on decisions objectively in order to help the board make correct decisions that contribute to achieving the interests of the company.

Limited Liability Companies

There are currently no regulations in Saudi Arabia that set out independence requirements or govern conflicts of interest by managers or board members of LLCs. However, penalties can be imposed on managers who use the powers they enjoy or the voting rights they hold by reason of their position with the intention of achieving personal goals, act in a way that favours 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 the use is in conflict with the interests of the company. Managers, including members of a board of managers, may also incur liability to the company, shareholders and third parties for damage resulting from any breach of the Companies Law or other misconduct in performance of their duties. This liability cannot be waived in advance.

Joint Stock Companies

The CGRs only apply to listed joint stock companies. Closed joint stock companies in Saudi Arabia often adopt a corporate governance structure that aligns with the CGRs to achieve best practice in the market. 

Listed joint stock companies are required to appoint at least two independent members or one third of the board, whichever is greater. The CGRs provide guidance to listed joint stock companies on what negates the independence requirement for an independent director. This includes:

• 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 the 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 a relative of any senior executive of the company or of any other company within the company's group;
• if they are a board member of any company within the group of the company for which they are nominated to be a board member;
• 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, or if they held a controlling interest in the company or any party dealing with the company or any company within its group, such as external auditors or main suppliers during the preceding two years;
• if they have a direct or indirect interest in the businesses and contracts executed for the company's account;
• 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 in the last year for the membership of the board or any of its committees, whichever is less;
• if they engage in a business where they compete with the company, or any of the company's activities; or

• if they served for more than nine consecutive or inconsecutive years, as a board member of the company.

The Companies Law sets out the general legal duties of directors and officers of a company. These include: acting in the best interests of the company while exercising reasonable and expected care; diligence and skill; avoiding conflict of interest situations; and disclosing any direct or indirect interests they might have in any business or contracts undertaken by the company.

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 an LLC must comply with the duties set out by the Companies Law. These are:

• convening the general assembly of shareholders at least once a year within four months from the end of the company's fiscal year;
• preparing financial statements 45 days before the annual general assembly and providing copies to the shareholders 21 days before the meeting and a report on the company's operations including their proposals for the appropriation of net profits and any dividend distribution;
• sending a copy of each of these reports (together with a copy of the supervisory board report, if any, and the auditor's report) to MOC and to every shareholder within one month of their preparation; and

• convening a shareholders meeting within 60 days from the date on which he/they became aware of the company's losses reaching one half of its capital, in order for the shareholders to consider the appropriate measures to address these losses, or to dissolve the company. 

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 must 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 bylaws. The board must convene a meeting of the ordinary general assembly within 30 days from the date of request made by the auditor, or by a number of shareholders representing at least 10% of the company's capital; and
• convene an extraordinary shareholder meeting within 60 days of becoming aware of the company's losses reaching one half of its paid-up capital. The extraordinary shareholder meeting must be convened within 180 days of the shareholders being informed of the losses, to decide on the appropriate measures to take to address the losses, or dissolve the company.

The rules related to who director duties are owed to will depend on the type of corporate entity.

LLC

The Companies Law provides that managers/board members of an LLC are liable to the company, the shareholders and third parties for damage they may cause as a result of their violations of the Companies Law or acts of mismanagement. However this should not be construed as creating a duty to third parties other than to comply with the law and otherwise deal with them in a lawful way. 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 an 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 bylaws and may bring an action for liability against the directors.

The Companies Law provides a private right of action to the company, the shareholders and third parties who suffered losses or damage as a result of unlawful acts of managers/directors. In addition, the Companies Law provides for the imposition of penalties as follows.

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

• entering any false or misleading information in the financial statements or in the reports or data prepared and related to the company's capital reduction, or the adequacy of its assets to pay off its debts upon liquidation submitted to the shareholders, or deliberately failing to include in these financial statements or reports material facts with the intention of concealing the company's financial position; or
• using company funds, the powers vested in them or the votes held in the relevant capacity in a way that is damaging to the company's interests and with intent to achieve personal gains; act in favour of a company or person; or gain a benefit from a project or transaction in which they have a direct or indirect interest, knowing that the use is in conflict with the interests of the company.

Managers and board members 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:

• receiving benefits in exchange for voting or abstaining from voting, with the intention of damaging the company's interest;
• announcing or publishing or declaring in any way or for any reason, suggesting that a company received its registration when in fact registration proceedings have not been concluded;
• misleadingly publishing the names of persons untruthfully portraying them as being, or that they will be, associated with the company in any way;
• distributing or being paid profits or revenues in violation of the provisions of the Companies Law or the company's articles or association or bylaws;
• knowingly overstating or providing false statements from the partners, shareholders or others in relation to the valuation of shares in-kind, the distribution of shares among partners or shareholders, or the full payment of the value of shares, or the modification of the distribution of shares among the partners or shareholders;
• failing to convene a general assembly or shareholders meeting or not taking the necessary measures to do so, upon discovering that the losses have reached the prescribed limits in accordance with the Companies Law;
• exploiting or disclosing a company secret with the intention of harming the company; or
• deliberately impeding the right of entitled parties to review the company's documents and accounts or refusing to enable them to perform their duties.

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

• deliberately interfering with the convening of a partners' or shareholders' general assembly and preventing a shareholder or partner from participating in a shareholder or partner general assembly, or preventing them from exercising their right to vote, as conferred therein by their shares or interests;
• failing to perform their duty to summon a partners' or shareholders' general assembly to convene within the period stipulated in the Companies Law;
• accepting an appointment to the board of directors of a joint stock company, or remaining a member in violation of the provisions of the Companies Law, and any board member, is aware of this violation happening and fails to object to it;
• obtaining a guarantee or loan from the company (as a board member of a JSC) in violation of the Companies Law;
• failing to perform duties in making necessary documents available to partners or shareholders, maintaining the company's accounting records or preparing the financial statements in accordance with the accounting standards adopted in Saudi Arabia; or
• violating the regulations governing the activities of professional companies or the general applicable conditions, controls and rules.

Whether any other clams or enforcement actions can be taken against directors or officers for breaches of corporate governance requirements and whether liability of a director or officer can be limited and how will depend on the type of corporate entity.

LLC

The managers of an 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 any wrongful acts, negligence or mismanagement committed by the managers in the performance of their duties. The law also provides that any stipulation to the contrary will be null and void, so a waiver would not be valid. 

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

JSC

Any person who suffers damage (the company, 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 LLCs any stipulation to the contrary will 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.

Where a resolution has been adopted by majority vote, dissenting directors will 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 three years from the discovery of the act causing the damage has passed. With the exception of cases of fraud and forgery, the statute of limitations for liability actions will be five years from the end of the fiscal year during which the act causing damage was perpetrated, or three years from the end of the relevant board member's term in office, whichever is greater.

The approvals required for the remuneration of directors and officers and the consequences for failing to comply with these requirements will vary depending on the corporate entity.

LLC

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

JSC

The bylaws must specify how directors will be remunerated. 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; and
• be proportionate 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) will be stipulated in the bylaws. Limitations as fixed by the bylaws and the remuneration must be fair, incentivising and commensurate with the performance of the director and the company. The remuneration must take several factors such as the experience and specialties of the director, the annual objectives and the size and the activities of the company into account.

Failure to comply with these requirements may expose the companies to penalties or fines as set out in the Companies Law and the CMA regulations.

The public or other disclosures a company must make in terms of the remuneration payable to directors and officers will depend on the type of corporate entity.

LLC

There are no relevant disclosure requirements.

JSC

The annual board report submitted to the ordinary general assembly must disclose: 

• all payments made to the directors during the fiscal year in the form of rewards, allowances, expenses and other benefits; payments made to directors in their capacity as employees or executives or as consideration for technical, administrative or consultancy assignments; and
• the number of meetings held and the number of meetings attended by each director. The board report must be made available to the shareholders 21 days before the date set for convening the general assembly and submitted to MOC 15 days before the date set for convening the general assembly.

For listed JSCs, the board report must also disclose the remuneration of the members of the executive management. The disclosure must be made in line with the form provided by the CGRs. The board report must be submitted to the CMA and disclosed to the shareholders within three months of the end of the financial year.

The relationship between the company and its shareholders and the rules governing this relationship will vary depending on the type of corporate entity.

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 shareholder agreement. This would be a private agreement and 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 bylaws. In the case of non-listed JSCs in particular, the shareholders may also enter into a separate shareholder agreement as in the case of an LLC.

Shareholder involvement in the management of a company will vary depending on the nature of the corporate entity. Whether shareholders can direct the management of a company to take, or refrain from taking, certain actions in the business will also vary depending on the nature of the corporate entity.

LLC

The managers have the powers granted to them in the company's articles of association or otherwise by the shareholders through resolution or power of attorney. No specific powers are granted by law. The shareholders 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 bylaws or the general assembly. No shareholder may intervene in the management of the company, unless the shareholder is a member of the board of directors or unless the shareholder intervention is made through the general assembly.

Shareholder meetings and the rules that govern the holding and conducting of those meetings will very depending on the corporate entity.

LLC

The shareholders (general assembly) are required to meet at least once a year within three to four months of 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. The agenda must include a review and discussion of the board report, the financial statements, the auditor's report and decisions on any board proposal in relation to the distribution of profit (if any). Additional ordinary general assembly meetings may be convened as needed, at the invitation of the board of directors as stipulated by the company's bylaws.

In a SJSC, there are no specific quorum requirements for shareholder assemblies and the board of directors invitation must be sent five days before convening a shareholder assembly. The new Companies Law also allows for the issuance of shareholder resolutions by circulation.

When claims might exist for shareholders against the company or directors depends on the type of corporate entity involved.

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.

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

Any person must notify the Saudi Stock Exchange (Tadawul) if they become the owner of, or are 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 this ownership or interest. The notification must also include a list of those 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 a person is interested in, that person will be considered 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.

The annual and other periodic financial reporting requirements, companies are subject to will depend on the type of entity they are.

LLC

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

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

In addition, the shareholders must issue a resolution to approve these documents.

The auditor report must be submitted to MOC within one month of the auditor report being finalised. In other words, the auditor report must be submitted to MOC no later than four months following the end of each fiscal year.

JSC

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

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

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

Listed companies are required to disclose:

• 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 of the committees of the company, the date of their meetings and attendance details;
• 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,

in the board report, among other things.

In an LLC, a company must submit an application and any changes to the articles of association or bylaws, shareholding structure, objectives of the company, address, duration, head office location and change in management through the newly established Saudi Business Portal (a platform established by MOC). This information will be available to the public.

In the context of a listed company, there are strict rules governing disclosure requirements to the CMA. Any material developments as set out by the continuing obligations of listed companies in the Rules on the Offer of Securities and Continuing Obligations must be disclosed to the CMA and the public through a public Tadawul announcement.

Material developments will include any transaction to purchase, sell, lease of mortgage an asset at a price equal or more than 10% of the listed company's net assets, any changes in the management or executive structure of the listed company, any changes to its external auditors or any changes to its articles of association. 

Failure to submit these applications or filings with the relevant authorities may expose the companies to penalties or fines as set out in the Companies Law and the CMA regulations.

In the context of an LLC and a JSC, an external auditor who is licensed in Saudi Arabia must be appointed/reappointed by the shareholders in the annual general assembly meeting.

The Companies Law sets out the main requirements that govern the relationship between a company and its external auditor.

The auditor is required to be independent and have access to the company's books, accounting records and any other documents that enable them to perform their duties at all times. The managers or the board members (as the case may be) must facilitate the work of the auditors. The auditor's main function is to submit a report on the company's financial statements that are to be prepared in line with the audit standards in Saudi Arabia to the annual meeting of the partners or the general assembly (as the case may be).

The auditor remains liable for the content of its report and for any losses or damages incurred due to any potential error committed by the auditor. In the event that a company appoints two auditors, they may be held jointly liable.

There may be requirements for directors in connection with the management of risk and internal controls in the company depending on the type of entity.

LLC

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

JSC

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