Types of Companies

Article (3) list the types of companies approved under the law as the following:

• joint liability companies;
• limited partnership companies;
• partnerships;
• joint stock companies; and
• limited liability companies.

Article (4) lists the types of companies approved under the law as the following:

• joint liability companies;
• limited partnership companies;
• joint stock companies;
• simplified joint-stock companies; and
• limited liability companies.

Introducing a new type of company “Simplified JSC” and removal of an older type of company “partnerships”.

Incorporation Documents and Details of Bylaws and Articles of Association (“AoAs”)

No corresponding article.

Under Articles (61) and (158), the New Law provides the required documents and details to be included in the bylaws of JSCs and the AoAs of LLCs.

Documents required for establishing new companies include:

• a declaration letter from the shareholders establishing the company of its compliance with all the requirements of the New Law in relation to its incorporation; and
• a statement or report prepared by an accredited valuer showing the fair value of the in-kind shares, if any.

The New Law introduces new declarations and deliverables to be provided by shareholders looking to incorporate a new company in KSA.

Shareholder Agreements and Family Business Charters

No corresponding article.

Article (11) states that shareholders may, during or after the incorporation process, enter into a shareholders’ agreement or a family business charter to organize the relationship between the shareholders and/or family members between themselves and/or the company.

The shareholder agreement and/or the family business charter are considered binding and shall form a part of a company’s AoA or bylaws and they may not violate the AoA or bylaws.

This is an interesting development in the New Law which acknowledges that the contractually agreed provisions in a shareholders’ agreement are considered binding and form part of a company’s constitutional documents pursuant to this New Law.

It is, and has always generally been, widely accepted in practice in KSA that any terms of a shareholders’ agreement which violate the terms of the bylaws or the AoA would unlikely be enforceable. However, having the New Law recognize the shareholders agreement as being part of a company’s constitution will be welcomed by stakeholders with complex shareholder arrangements in KSA whom rely on the bespoke contractual arrangements provided for in their shareholder agreements.

LLC Shareholder Annual Meeting

Article (167)(2) states that the general assembly shall convene an annual meeting at least once a year, to be held within four (4) months from the end of the fiscal year.

Article (165) states that the general assembly shall convene an annual meeting at least once a year, to be held within six (6) months from the end of the fiscal year.

Increasing the period required for holding the annual meeting from four (4) to six (6) months from the end of the fiscal year.

Debt Instruments

Article (153)(2) states that LLCs may not use an initial public offering to create or increase its capital or to obtain a loan, nor may it issue negotiable instruments.

Article (179) states that LLCs may issue, in accordance with the Capital Markets Law, debt instruments or negotiable financing instruments (Sukuk) by resolution of the shareholders pursuant to the conditions set by a company’s AoA.

The change ought to provide LLCs with greater flexibility to pledge their shares, issue Sukuks or any other debt instruments.

LLC Share Buy-Back

No corresponding article.

Article (180) states that a company may buy-back its shares or mortgage such shares if allowed under a company’s AoA. Such shares shall not grant a right to vote in general assemblies.

This share buyback framework will more readily enable LLCs to restructure their existing share capital and potentially facilitate an alternative exit route for existing shareholders of LLCs.

Drag-along and Tag-along Rights

No corresponding article.

Article (181) states that a company’s AoA may include the following (subject to the approval of one or more shareholders representing 90% of a company’s shares):

• the majority shareholders may oblige the minority shareholders to accept the offer of a purchaser to purchase the complete shares of a company at the same price, terms, and conditions for the purchase of majority shares; and
• the minority shareholders may obligate the majority shareholders to guarantee selling the minority shares at the same price, terms, and conditions for selling the majority shares.

The New Law now recognizes drag-along and tag-along rights, which were historically seen as quite challenging contractual rights to enforce in KSA.

Dissolution of LLCs by force of law due to losses

Article (181) states that:

1. if the losses of an LLC reach half its capital, the company’s managers shall record such incident in the commercial register and call the shareholders for a meeting within ninety (90) days from the date of being aware of such losses to consider the continuation or dissolution of the company.
2. the shareholders’ decision to continue or dissolve the company shall be published in the manner prescribed by the law.
3. the company shall be deemed terminated by the force of law if the company’s managers fail to call the shareholders for a meeting or if the shareholders fail to issue a decision relating to the company’s continuation or dissolution.

Article (182) states that if the losses of an LLC reach half of its capital, the company’s managers are required to invite the shareholders to meet within sixty (60) days from the date of being aware of such losses to consider the continuation of the company and implement the required procedures to resolve the losses or to liquidate the company.

Removal of the provisions that refer to the dissolution of LLCs by force of law due to losses, which was in practice often seen as problematic.

That being said, the New Law reduces the period required for convening the shareholder meeting from ninety (90) to sixty (60) days.