New Saudi Companies Law – Accumulated Losses and Risk of Statutory Dissolution

by Latham & Watkins LLP
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For the past few decades, the obligations of companies with losses reaching 50% or more of their share capital has been a topic of high debate in the Kingdom of Saudi Arabia. That is due to the uncertainty surrounding the application of Articles 148 and 180 of the current Companies Law (Current Companies Law), which regulate this matter in connection with joint stock companies (JSCs) and limited liability companies (LLCs), respectively. On 9 November 2015, however, a new Companies Law (New Companies Law) was enacted, which addressed some of the ambiguities relating to this matter under the Current Companies Law. The New Companies Law will repeal and replace the Current Companies Law with effect from 2 May 2016 (Effective Date).

Below is an overview of the required steps to be taken by the management of an LLC or a JSC with accumulated losses reaching 50% or more of its share capital under the New Companies Law.

LLCs

Within 90 days of becoming “aware” of the losses reaching 50% of the LLC’s share capital, pursuant to Article 181 of the New Companies Law, which applies to LLCs, the managers of the LLC must record the event in the Companies Registry with the Ministry of Commerce and Industry (MoCI) and convene a shareholders meeting to resolve to either continue or dissolve the LLC.

The resolution to continue or dissolve the LLC requires the approval of shareholders representing 75% of the LLC’s share capital, unless its articles of association specify otherwise. In both cases, the resolution must be published on the MoCI website. It is important to note that, unlike the Current Companies Law, under the New Companies Law, the LLC’s corporate veil may no longer be pierced if the managers fail to call for a meeting or the shareholders are unable to resolve to either continue or dissolve the LLC. Instead, the LLC will be deemed dissolved by operation of the law.

It is difficult to ascertain from the New Companies Law what constitutes “awareness” by the managers of the losses reaching 50% of the LLC’s share capital thus triggering an Article 181 event and the start of the 90 day period set out in Article 181. We are hopeful that the expected rules for implementing the New Companies Law will address this issue.

JSCs

Pursuant to Article 150 of the New Companies Law, which applies to both closed JSCs and listed JSCs, the following steps must be followed if the losses of a JSC reach 50% or more of its share capital at any time during its financial year. First, the JSC’s auditor or any of its officers must notify the chairman of the board of directors immediately upon becoming aware of such losses. Second, the chairman of the board must in turn immediately notify the board of directors of such development. Next, the board of directors must convene the extraordinary general assembly within 45 days of becoming aware of the losses. And finally, the extraordinary general assembly of the JSC must resolve to either increase or decrease the JSC’s share capital or, alternatively, dissolve the JSC.

It is important to note that the JSC will be deemed dissolved by the force of law if the extraordinary general assembly does not convene within the specified 45-day period, convenes but is unable to adopt a resolution on the matter, or approves increasing the JSC’s share capital but the shares issued are not fully subscribed for by its shareholders within 90 days from the date of the resolution to increase the share capital.

While closed JSCs may face less difficulties in complying with the 90-day period within which the share capital must be increased, it will be exceedingly difficult for listed JSCs to comply with such requirement. This is because a capital increase of a listed JSC requires the approval of the Capital Market Authority (CMA) and, in some cases, requires also the filing of a prospectus with the CMA (i.e., when the share capital increase represents 10% or more of the JSC’s share capital). This 90-day period indeed poses a regulatory challenge to listed JSCs with losses reaching 50% or more of their share capital and jeopardizes their existence altogether.

In addition to the provisions set forth in Article 150 of the New Companies Law, listed JSCs with losses reaching 50% or more of their share capital are subject to the “Procedures for Companies with Accumulated Losses Reaching 50% or More of their Capital” issued by the CMA, which impose further obligations on listed JSCs. It should be noted that failure to comply with these Procedures may have negative effects on the listed JSC and could potentially lead to the suspension of trade in its shares or its delisting.

Criminal Liability

It is of imperative importance that the management of a company (whether LLC or JSC) follow the abovementioned steps as the New Companies Law has introduced criminal sanctions on management that neglect to take the necessary actions prescribed under the law and made them subject to imprisonment for no more than five years and/or a fine of no more than SAR 5 million.

Compliance

Companies are granted a one-year grace period before they are required to fully comply with the New Companies Law. It is unclear, however, whether this grace period applies to the provisions of Articles 150 and 181 of the New Companies Law. We hope that the expected rules for implementing the New Companies Law will clarify this issue.

Implementing Rules

Finally, it expected that MoCI and CMA will publish the rules for implementing the New Companies Law prior to the Effective Date. Stay tuned for an update on this article once these rules have been published.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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