Saudi Arabia introduces new Companies Law

published on 12 December 2022 | reading time approx. 3 minutes

On 28 June 2022 the resolution to enact the new Companies Law was approved in the cabinet meeting under the N’ 678/2022. The new law will be replacing the current Companies’ Law enacted by Royal decree M/3 dated 1437/01/28 (corresponding to 10 November 2015), and it will come into force after 6 months of publishing the law in the Gazette, so with the beginning of 2023.

The new law aims to promote the Kingdom of Saudi Arabia's Vision 2030. It is designed to further advance and develop the economic system of Saudi Arabia. The work of the companies is to be facilitated and they are to be enabled to maintain their expansion and growth momentum. The fact that the law leads to a reform of company law only seven years after the publication of the Companies Law currently still in force underlines the dynamism of Saudi Arabia in transforming its legal system.

The new law is in line with international standards to ensure that all challenges faced by companies can be overcome. The public and private sectors have contributed to the draft law. Opinions were sought from professional associations, international organizations and specialized experts.

The aim of the legislative reform is to improve the sustainability of businesses, support investment in small and medium-sized enterprises by easing procedures and regulatory requirements. It also seeks to achieve greater diversity in the market through the addition of new business entities and to increase the flexibility of systems, as well as to safeguard customers' rights and reduce disputes.

The new Companies Law regulates all provisions related to companies, regardless of whether they are commercial, non-profit or professionals. This is to ensure that all regulations are regulated in one legal document.

The law contains provisions on a new form of company, the so-called Simplified Joint Stock Company. This new corporate form is an outgrowth of the needs of entrepreneurship and venture capital growth. This new form of company is also intended to serve investments by non-profit organizations, enabling them to move up into the third sector and generate returns to be used for charitable purposes.

It also allows for the enactment of a family charter that regulates ownership in family businesses, as well as governance, management, labour policies, employment of family members and cash profits to ensure the sustainability of these businesses.

The law contains relief for small, medium and micro companies. The procedure and requirements as well as the incorporation process are simplified. Special clauses can now be included in the incorporation agreements of companies or their articles of association. In addition, possible mechanisms for entrepreneurs, owners of venture capital and private ownership are opened up.

Under the new law, electronic legal transactions will be strengthened. Thus, incorporation applications can be submitted electronically, and participation in general assemblies of shareholders or partners and voting on decisions can be carried out by means of distance communication. Disputes can now be settled through arbitration or other alternative means of dispute resolution. The new law also contains provisions on the liquidation of companies. The procedure of liquidation is now simplified according to the provisions of the Bankruptcy Law.

Different types of shares with different rights, privileges and categories or restrictions as well as the possibility of issuing shares to employees are made possible by the new law. This is to attract investment and global talent. Annual or temporary distribution of profits will also be allowed, as long as the company's creditors are not disadvantaged.

In addition, the new law also deletes numerous restrictions. For example, restrictions on incorporation, withdrawal from the market and the company name will be removed. The provisions on the transformation and merger of companies are also amended, as it is now possible to split companies into two or more companies and owners of sole entities are now allowed to transfer their assets to any type of company. Limited liability companies are now allowed to issue debt instruments or tradable financial instruments.

The new law is expected to improve financing and business dynamics in all sectors and is believed to have a very positive impact on the economy in the coming decades.