On 19 January 2023, the new Companies Law entered into force following the conclusion of the 180-day publication period, enacted by Cabinet Resolution No. 678 dated 29/11/1443H (corresponding to 28/06/2022) and ratified by Royal Decree No. M/132 dated 01/12/1443H (corresponding to 30/06/2022) (“New Companies Law”).
The New Companies Law represents the first wholesale revision of the law since 2016 and implements a broad range of changes intended to reflect international practices and foster the growth and expansion of Saudi companies and thereby boost the Kingdom’s investment climate. As under the previous law, the New Companies Law recognizes the Capital Market Authority of Saudi Arabia (CMA) as the Competent Authority to supervise and monitor joint stock companies listed on the Saudi Exchange (whether on the Main Market or Nomu) and to issue rules to regulate their operations. The Ministry of Commerce (MoC) remains the competent authority for all other forms of companies established in the Kingdom.
The New Companies Law specifically recognizes the CMA’s authority to set regulations regarding the governance of listed joint stock companies (LJSCs). In particular, Article 274 of the Companies Law emphasizes, in some detail, the scope of governance related matters which fall within the CMA’s purview in recognition of CMA’s authority to promote governance values that are appropriate for LJSCs.
As the relevant Competent Authority for LJSCs, on 18 January 2023 the CMA announced the introduction of the Implementing Regulations of the Companies Law for Listed Joint Stock Companies (“LJSC Implementing Regulations”), which represents a significant overhaul of the previous Regulatory Rules and Procedures issued pursuant to the Companies Law relating to Listed Joint Stock Companies (now re-named as the LJSC Implementing Regulations). Implementing regulations for other forms of companies established in the Kingdom were separately issued by the MoC on 16 January 2022.
The LJSC Implementing Regulations have been significantly amended to reflect the changes introduced by the New Companies Law, and are the primary repository for the rules concerning corporate matters as they apply to listed joint stock companies. Key amendments to the LJSC Implementing Regulations made to reflect changes introduced by the New Companies Law include:
- various duties of board members to act in the best interests of the company, exercise independent judgment and reasonable care, skill and diligence, as well as provisions concerning avoiding conflicts of interest and the disclosure or interests in business for company’s account (which overlap to some degree with the provisions of the Corporate Governance Regulations);
- clarifying that, whilst compulsory for Main Market LJCSs, cumulative voting is optional for Parallel Market LJSCs and specifying the conditions to permit the election of board members by shareholders to reserved board seats; and
- clarifying powers of the General Assembly to remove board members and clarifying the continuation period for terms of boards beyond the expiry of their term (90 days) or their resignation (120 days)
The CMA also announced amendments to the following other implementing regulations (together with the LJSC Implementing Regulations, “Amended CMA Regulations”) in which certain changes have been made to reflect other significant changes introduced by the New Companies Law as well as to further enhance the CMA’s governance framework for LJSCs:
Corporate Governance Regulations
- substantial new developments to board memberships and audit committee formations, including, increasing the term of board members from no more than three years to four years, and vesting boards (rather than the General Assembly) with the authority to form audit committees; and
- number of guiding articles will become mandatory and apply to companies listed on the Parallel Market effective from 01/01/2024 including requirements to convene an Ordinary General Assembly at the request of an external auditor, audit committee or shareholders holding 10% of the company’s voting shares and provisions concerning certain composition requirements, powers and responsibilities and reports of the audit committee.
Merger and Acquisitions Regulations
- introduction of a ‘squeeze out’ mechanism for persons who reach the 90% ownership threshold to apply to the CMA for the right to compulsorily acquire the shares of minority shareholders;
- introduction of a corresponding ‘sell-out’ right for minority shareholders to require a person who has reached the 90% ownership threshold to purchase their shares; and
- exempting intra-group mergers from some conditions under the New Companies Law, particularly preparing a merger proposal, approved by each company party to the merger.
Rules on the Offer of Securities and Continuing Obligations (OSCOs)
- carving out the provisions on demergers in a separate part (new Part 9 of the OSCOs) to provide further clarifications on the applicable requirements and process and to distinguish demergers from a new category of transactions defined as “Significant Transactions” (which involve the sale of assets, businesses or subsidiaries to separate legal persons); and
- significant Transactions are covered by the new Part 11 of the OSCOs and are subject to the old regime applicable to demergers prior to the amendment of the OSCOs. Significant Transactions generally comprise transfers of assets with a value exceeding 50% of the value of a company’s total assets
Procedures and Instructions related to Listed Companies with Accumulated Losses Reaching 20% or More of their Share Capital
- deleting the board’s limited recommendation to the general assembly to either amend the capital or dissolve the company in the event of accumulated losses to provide flexibility to the board in determining the appropriate course of action when accumulated losses exceed 50% of a Company’s issued capital (in line with the corresponding amendment to the New Companies Law);
Glossary of Defined Terms Used in the Regulations and Rules of the Capital Market Authority
- aligning the scope of the definition of ‘Related Parties’ and ‘Relatives’ for the purposes of the Corporate Governance Regulations and for the purposes of the OSCOs.
As with all other Saudi incorporated companies, LJSCs are subject to the New Companies Law which contain various obligations applicable to all companies that are not specifically reflected in the Amended CMA Regulations. Accordingly, LJSCs will need to remain cognizant of these and treat the New Companies Law together with the Amended CMA Regulations as the framework under which they will operate.
The Amended CMA Regulations became effective as of 26/06/1444H (corresponding to 19/01/2023G) as per the approval resolution of the board of the CMA, save for certain amendments to the Amended Corporate Governance Regulations which shall be effective on 19/06/1445H (corresponding to 01/01/2024G) which gives LJSCs an opportunity to review their existing governance.
