The companies law regime in Saudi Arabia has been governed completely by a single codified companies law that was originally issued in 1965 (the 1965 Companies Law), with occasional minor amendments. However, by Royal Decree dated 10 November 2015, Saudi Arabia adopted a completely new codification of its companies law regime (the New Companies Law), totally replacing the existing 1965 Companies Law.
The New Companies Law came into effect as of May 2, 2016 and, pursuant to Article 224 thereof, existing companies have one year thereafter to come into compliance therewith.
Adoption of the New Companies Law has resulted in several important changes to Saudi Arabia’s existing companies law regime. Among these are changes to company ownership structures, as well as criminalization and penalization of particular acts. Companies doing business in Saudi Arabia should understand and start coming into compliance with all provisions of the New Companies Law promptly.
Under the 1965 Companies Law, the corporate forms that were available for incorporation could only be owned by a minimum of two partners, owners, or shareholders. Joint stock companies (JSCs) (which are most akin to the standard corporation used in the USA) required a minimum of five shareholders. Nonetheless, sole proprietors of Saudi or Gulf Cooperation Council (GCC) nationality can obtain registration as an “establishment,” while foreign investors can set up a wholly owned “branch” office as a matter of policy. However, establishments and branches are not officially recognized corporate forms in Saudi Arabia.
Now, under the New Companies Law, a single shareholder may incorporate a wholly owned limited liability company (LLC), while a non-government (i.e., non-government owned entity) single shareholder may incorporate a JSC with a minimum paid-up capital of SAR 5 million (about USD 1.3 million). However, there are restrictions on singly owned entities. Namely, a natural person may not be the sole shareholder in more than one single owner LLC, and an LLC owned by a single shareholder (whether natural or legal) may not be the sole shareholder in a subsidiary LLC.
The 1965 Companies Law provided for criminal sanctions with penalties ranging from fines of SAR 1,000 – 5,000 (USD 267 – 1,333) for certain low-level offenses, to fines of SAR 5,000 – 20,000 (USD 1,333 – 5,333) and/or imprisonment for a period of 3 – 12 months for certain high-level offenses. Conviction of a high-level offense generally required some degree of malicious intent or purpose to defraud.
Under the New Companies Law, individuals now face the possibility of substantially more severe sanctions.
Acts designated as criminal may now carry penalties of imprisonment for up to 5 years and fines up to SAR 5,000,000 (about USD 1.3 million), thus dramatically increasing the historic criminal sanctions under the 1965 Companies Law.
Moreover, low-level offenses are now subject to a much higher fine of up to SAR 500,000 (USD 133,333), as compared to the previous ceiling of just SAR 5,000 (USD 1,333).
In addition, under the 1965 Companies Law, penalties involving imprisonment generally required some level of malicious intent, mens rea, and / or purpose to defraud. However, under a literal reading of the New Companies Law, mere negligence without any intent can be grounds for imprisonment.
A number of these sanctions are aimed specifically at officers, directors, auditors, and liquidators of Saudi Arabian companies, while some apply generally to any third party.
For example, a shareholder or director (or a proxy thereof) in a Saudi Arabian company who accepts or agrees to accept a bribe in return for abstaining from voting or voting in a particular way for a certain matter, as well as the individual who offered or gave the bribe, faces a fine of up to SAR 500,000 (USD 133,333).
As another example, an auditor who fails to notify a Saudi Arabian company of any civil or criminal violations discovered during the audit process faces a fine of up to SAR 1,000,000 (USD 266,666) and/or imprisonment for up to 1 year. In addition, the same sanctions would apply to anyone who uses a Saudi Arabian company to carry out any activities other than the activities for which it has been authorized. This could, for example, apply to a General Manager of a consulting services company who signs a contract binding the company to sell goods to a third party.
As a further example, any officer, director, auditor, or liquidator who provides false or misleading information, or fails to include material information in the company’s financial statements, or reports for submission to the shareholders or general assembly faces a fine up to SAR 5 million (USD 1.3 million) and/or imprisonment up to 5 years.
In conclusion, the above-mentioned restrictions on ownership structures and criminal acts under the New Companies Law represent two of the most significant changes to Saudi Arabia’s companies law regime. In addition, the New Companies Law brought in several additional substantive and technical requirements, which companies doing business in Saudi Arabia should understand and start coming into compliance with promptly pursuant to Article 224.
