Main Articles of the Saudi Companies’ Law:
The Saudi Companies’ Law issued by the Royal Decree No. (6) and Order No. 185/1385H, and amended by the Royal Decree No. M/3 and the Ministerial Decree No. 30/1437H, deals with several matters including the method of foundation of different types of companies in the Kingdom of Saudi Arabia, and their organization, management, merger, liquidation and dissolution, namely:
1) – General partnerships
A general partnership similar to partnerships of states that adopt the common law and it has officials jointly liable for the general partnership’s debts.
2) – Limited Partnerships:
A limited partnership consists of two teams of partners, one including at least one joint partner who shall be liable in his entire funds for the partnership’s debts, and the other including at least one dormant partner whose name does not appear in the limited partnerships’ management and shall be liable for the partnership’s debts to the extent of his share in the capital.
3) – Joint Ventures:
A joint venture neither enjoys a legal personality nor subjects to the notarization procedures.
4) – Joint Stock Companies:
5) – Limited Liability Companies:
The articles of incorporation of a limited liability company may provide for the increase of its capital by the partners, entry of new partners or reduction of its capital through the exit of any of its partners.
6) – Cooperative Companies:
A cooperative company is a joint stock company or a limited liability company to be founded by a Royal Order, and usually it is a governmental company.
The Saudi Companies’ Law prohibits the foreign companies from issuing stocks unless they get the approval of the competent authorities.
According to the Saudi Companies’ Law, the company’s capital may consist of cash shares and in-kind shares. Also the creditors of any of partners are prohibited to collect their debts from the debit partner’s share in the company’s capital. The law also permits to convert the company from one type to another. The most important characteristic of this law is that it permits the company’s articles of incorporation to include provisions stipulating that the profits to be distributed to the partners can differ from the percentage of any of them in the company’s capital, and the company can be formed of two partners and above.
In addition to the procedures indicated in law, the foreign partner should obtain the approval of the competent authorities and necessary permits and licences subject to the exceptions mentioned in such laws.
One of the legal entities preferred to the foreign investors is the limited liability company which according to its name the liability of its partners is limited to their shares therein. The limited liability company requires at least one person and no more than 50 partners, and it is of the most common companies for foreign investment. However, the limited liability company is not permitted to operate in the field of banking and insurance services.
Although it is not required to distribute the profits of the limited liability companies according to the share of every partner in the company’s capital, these shares are equal in the voting rights and no discrimination among them. Also, every partner has the right to exercise the right of pre-emption when any of other partners sells his share in the company’s capital or a part thereof.
As to the limited liability companies, the articles of incorporation shall specify the ownership of shares. Any amendment to the articles of incorporation in regard to the company’s nationality or the increase of capital shall require the unanimous consent of all the partners (general assembly of partners).
The limited liability company shall prepare the balance sheet, profit and loss account and reports that disclose its activities, financial position and the recommendations concerning the distribution of profits for every fiscal year, and they should be checked by an auditing office licensed to do business in Saudi Arabia. To perform such matters, the company should hold a general assembly of partners every year.
The limited liability company may be run by one manager or a board of directors composed of more than one manager. If the company’s partners are more than 20, they should appoint a control council composed of at least three partners to exercise control over the duties of the company’s manager or board of directors.
The law specifies the joint liability of the manager and the board of directors for any damages hitting the partners, the company or third parties due to the violation committed by the manager or the board of directors to any of the articles of the Companies’ Law or the clauses of the company’s articles of incorporation or any violations of their duties. Every partner is entitled to empower any other partner to represent him in the meetings of the general assembly of partners.
The partners whose shares include in-kind shares are jointly liable to third parties for any error in assessing the value of such in-kind shares, provided that a measure in the concern shall be taken within the three years following the publication of the summary of the company’s articles of incorporation in the official gazette.
In conclusion, the Saudi Companies’ Law provides that in case the company’s debts reach half of its capital or more, the company’s manager or board of directors shall call on the other partners to decide to dissolve and liquidate or continue the company. Whatever the resolution of partners is, it shall be published in the official gazette. If the partners decide to continue the company, they must then pump more capital into the company. If the partners fail to pump more capital into the company and it continues the partners shall be jointly liable for all the company’s debts.
Under the Law of Companies and Laws of Ministry of Commerce and Investment, our firm performs the following:
Our firm provides the legal services and consulting related to the commercial franchise where it has become one of the most common means in the field of foreign investment in the Kingdom of Saudi Arabia because it is characterized by flexibility compared with the commercial agencies. The Kingdom of Saudi Arabia has issued the Franchise Law by the Royal Decree No. M/22 dated 29.09.1441H corresponding to 08.10.2019G which sets the procedures needed for granting, licensing and registering the commercial franchise according to the rules in force in a manner that guarantees the rights of the franchisor and the franchisee.
The commercial agent usually knows the local market well and he may help to facilitate the conclusion of some deals. So any foreign company has to better choose its commercial agent where the cancellation of the commercial agencies or change of commercial agents is so complicated. The term “commercial agent” includes a variety of duties and responsibilities where some commercial agents sell goods, some provide services, some purchase goods directly from the manufacturing companies and re-sell them, and some sell goods for the manufacturing companies against commissions. These are the forms of commercial agencies covered by the Commercial Agency Law in Saudi Arabia. A foreign company should first choose its commercial agent that may be an individual or a company. The Saudi Commercial Agency Law permits the Saudis whether individuals or companies to exercise the activities of commercial agents. The foreign investor may exercise the activities of the commercial agents according to certain conditions to be met. The commercial agent should be licensed first to exercise the activities of the commercial agency, then the commercial principal agrees with the commercial agent through a commercial agency agreement. The Ministry of Commerce and Investment is the competent authority to approve the commercial agency agreement where it has a current model for the commercial agency and distribution agreement. However, the foreign companies usually wish to add some provisions or propose substitutes therefor. The foreign companies can insert any provisions, but the Ministry of Commerce and Investment probably prefers to approve a draft of commercial agency agreement similar to that prepared thereby so that the cancellation of commercial agency or change of the commercial agent should fair as to the prior commercial agent. In some cases, the non-renewal of the commercial agency is deemed a cancellation thereto. The arbitrary cancellation of a commercial agency may expose the commercial principal to pay compensations and makes it difficult for him to get the Governmental approval to conclude a new commercial agency agreement or to appoint a substitute commercial agent. Therefore, particular attention should be given to the clauses related to the cancellation of commercial agency in any agreement in the concern. In all cases, the commercial agency agreement should contain provisions fair to all the parties thereof in the cancellation field.
(There is no need for contractual joint ventures to take the form of a company).
Usually, the joint ventures are related to quite large contracts and obligations where they receive a favorable tax treatment or some incentives from the Saudi Government in the end.
Also, the joint ventures in most cases do not take the form of a company unless the procedures of registration and publications require so, because they are usually a gathering of several persons or companies to realize a certain purpose.
If the foreign investor is a natural person or a company partner to a joint venture, it should obtain a licence from the Saudi General Investment Authority or a temporary commercial register from the Ministry of Commerce and Investment if this foreign investor is a party to a consortium submitting a bid to perform a public works contract.
In practice, a joint venture is deemed a general partnership.
The joint ventures taking the form of company:
Alternatively, the foreign investor may choose a separate legal entity (a limited liability company). Most foreign investors prefer to establish limited liability companies to commence any investments in the Kingdom of Saudi Arabia.
The joint venture in this way (the mixed company) differs from the company’s branch office where the mixed company is entitled to do any type of the permitted transactions.
On establishing a limited liability company, it is necessary for its partners to include Saudi citizens. Even the presence of Saudi partners is not a legal obligation that must be met and not violated, the Saudi Government prefers the companies including Saudi partners.
If the Saudi partners own a considerable percentage in the mixed company, it shall receive tax cuts and other investment incentives.
Joint Ventures in Contracting:
The Governmental construction, supply and service contracts are governed by the Saudi Government Tenders and Procurement Law issued by the Royal Decree No. M/58 in 1427H corresponding to 2006G and its amendments issued by the Royal Decree No. M/128 dated 13.11.1440H and its Executive Regulations issued by the Decree of Ministry of Finance No. 1242 dated 21.03.1441H. This law includes the regulation of contracting among the companies, establishments and Governmental entities through tenders, auctions, framework agreements, award of contracts , general conditions of contracts, down payments, penalties for delay in execution and models of contracts.
Al-Nami Law Firm professionally performs the following:
Preparation of tender documents including the bidding forms, bid bond, general conditions, letter of award, performance bonds, the payment of amounts due for subcontractors and workers, lump-sum contracts, turnkey contracts (design & build), engineering contracts, claims of construction contracts and all claims arising out of the management contracts and their disputes in terms of the legal actions or legal services.
Al-Nami Law Firm has extensive expertise in the construction litigations:
Saudi Regulations of Mergers and Acquisitions:
Such regulations apply to any case in which an offer to purchase the shares or to perform a reverse takeover of a company listed in the Saudi Stock Exchange is made.
The regulations guarantee that the practices of the offeror company and the offeree company observe the interests of the shareholders and they have been provided with sufficient data and advice enabling them to take the right decisions.
After the offeror company makes the necessary announcements, it should submit to the Saudi Capital Authority the timetable related to the acquisition including the approval of the shareholders to the acquisition, and submit, publish and deliver the final offer to the board of directors of the offeree company, the earliest date to conclude the deal and the last date for accepting the offer after which the acceptance becomes unconditioned.
The offer document should include the following:
1 – A statement that one of the certified independent financial advisors was consulted by the Capital Market Authority in case there are some doubts on the acquisition offer.
2 – The date on which the document was published, and the name and address of offeror company or any person authorized by thereby.
3 – Details of securities subject to offer including whether they shall be transferred with dividends or not.
4 – Total offer amount.
5 – Closing price of securities to be purchased, and securities offered on the first day of the six months directly prior to the publication date of offer document and the last day before the start of offer period and the last date known before the publication of offer document.
Price offers related to the securities listed in the market shall be taken from the official list. But if none of the securities is listed, any information or data on the selling or purchasing deals and the number of securities traded during the last six months shall be mentioned with the source thereof or any negative statement.
6 – In case, there is an offer for securities exchange, the details of any dividends, interest, capital and refund thereof, and a statement proving the acceptance on the capital position and income by the offeror company’s partners shall pointed out.
7 – In case of exchange of securities offer, the effect of offer full acceptance on the assets of the offeror company and its profits and activities which may be enormous on the sound evaluation of the offer shall be pointed out.
The offer document should be submitted to the Capital Market Authority to be approved before being published. The time set for approval by the Authority is thirty (30) days from the receipt date of information and documents.
The Capital Market Authority has full right at its discretion to agree to the offer or not if it concludes that it is in the interest of partners, and it does not violate the Capital Market Law and its Executive Regulations.
In regard to the takeover of companies, our firm performs the following:
1 – Letters of intent.
2 – Non-disclosure agreements.
A legal due diligence investigation:
The legal due diligence investigation is essential to determine whether it is right to proceed with deal and takeover or not, and at which price after knowing the issues and problems surrounding the company to be purchased. This usually helps the full understanding of the concerned company, plant, establishment or others. It is remarkable that legal due diligence investigation is full of surprises and it takes a long time where the local companies and establishments are neither accustomed thereto nor how to conduct it.
The legal due diligence investigation covers several matters such as the powers of the company or establishment, ownership of assets, commitment to the regulatory measures of laws, regulations and instructions, rights and obligations arising out of contracts, and actions and claims filed against the company or establishment to be taken over. Such matters play an important role in determining the deal value.
There are other matters to be treated by the legal due diligence investigation such as:
1 – Trademarks and other intellectual property rights owned to the any other company in the same group of companies to be taken over.
2 – Insufficient documents showing the owners of property, buildings and other assets.
3 – Property and lands owned by other companies.
4 – Insufficient documents of loans and guarantees.
5 – The buildings may be constructed without licences or other approvals. These matters can be handled while others are so complicated. Whatever the situation may be, the investor wishes to know the real status before it pumps any funds into the project.
Labour relations between the employees and the employers in the Kingdom of Saudi Arabia are governed by the Labour and Workmen Law issued by the Royal Decree No. M/46 for Year 2005G, and the Ministry of Labour supervises its enforcement. In addition, there are several Royal Orders, Decrees of Council of Ministers, circulars and instructions that are issued from time to time by the competent authorities to be applied and enforced. Labour and Workmen Law applies to all the employment agreements in which the workmen are committed to work with the employers for wages.
Clauses and Provisions of Employment Agreement:
The employer is entitled to consider the first three months of the employment agreement as a probation period, and this should be expressly specified in the employment agreement, otherwise the right to apply it is denied. The employment agreement includes the agreed wage, transportation allowances, annual leave, official holidays, medical insurance, cases of employment agreement termination, end of service reward and cases of compensation for unfair dismissal.
Policy of Saudization and Foreign Workers:
The foreign investor who starts a business in the Kingdom of Saudi Arabia should bear in mind that the Saudization policy adopted by the state obligates him to employ a number of Saudis in his establishment.
The minimum rate of employment depends on the type of company and the sector in which it operates. Usually, the rate of 30% of work force should be Saudi except for the activities of contracting, cleanliness and operation where the rate is within 10%. Also, it is necessary for the foreign worker to obtain a work permit.
Subject to the mutual health insurance scheme, the employers are obliged to submit health insurance coverage to a worker or employee and his family. In usual, such mutual health insurance is borne by the worker or employee.
The Social Insurance Law provides for the right of a worker who reach the age of 60 years or more to an elderly man’s pension. This pension is limited to the Saudi workers and employees who pay their social insurance contributions during their service period.
Social Security & Health Insurance:
The Social Insurance Law obligates the employers who employ one local or foreign worker or more to pay on their behalf a monthly contribution to the General Organization for Social Insurance.
Such contributions are cut as percentages from the salary of worker or employee. The salary from which contributions are cut is the basic salary plus the housing allowance such that it does not exceed forty 45 thousand Saudi riyals per month.
The percentage required for the foreign workers is 2% of the monthly salary to be paid by the employers without cuts form salaries for the coverage of work injuries.
As to the Saudi workers, the employer shall pay 11% of the monthly salary for a worker; 2% out of which for coverage of work injuries and the rest is 9% for the Public Pension Agency.
To the General Organization for Social Insurance, the salary includes the basic salary plus the housing allowance.
Preparation of: Labour Regulation and Approval thereof:
Due to the great development the Kingdom of Saudi Arabia is witnessing in the business sector, industries and trading where this development necessitates the presence of sufficient, specialized and professional laborers from the Saudis and residents to participate into upgrading all the business sectors and investments, expansion of labour relations and diversity of specialties, the Saudi legislator has been keen to issue the laws, regulations and instructions related to labour and workmen to maintain the interests of employers and the rights of laborers. The issuance of labour regulation to every business sector of establishments and companies with all their specialties aims to control the policies of such sectors and their labour relations and raising the labour productivity levels in a manner that points out the rights and obligations of each party in the labour relations and the functioning of facilities. Such regulations should be documented and approved by the Ministry of Labour and Environment. Accordingly, after reviewing the Labour Law issued by the Royal Decree No. M/51 dated 23.08.1426H, amended by the Royal Decree No. M/24 dated 12.05.1434H and amended by the Royal Decree No. M/46 dated 05.06.1436H, after reviewing Article (12) of Labour Law which decides that the Ministry should set control mechanisms for approving the regulations of labour and after reviewing Article (4) of the Executive Regulations of Labour Law and their annexes issued by the Ministerial Decree No. 70273 dated 11.04.1440H, the Saudi legislator has issued a standardized labour regulation. Our firm has become one of the firms accredited with Qiwa Platform due to our extensive expertise in this field where we have drawn several labour regulations and get them approved by the Ministry of Labour and business offices for a large group of companies.
Objectives of Labour Regulations:
In view of the requirements of the public interest, the following is decided:
First: Agreement to the participation of the Saudi entities specialized in the field of legal profession (offices & firms) which meet the conditions in reviewing and approving the labour regulations for non-standardized form of the private sector establishments before the Ministry approves them.
Second: conditions to be met by the entities specialized in the field of law practice to share the Ministry in reviewing and approving the labour regulations for non-standardized form of the private sector establishments are as follows:
Third: The Ministry Undersecretary for Inspection and Development of Labour Environment forms a committee of three members under his presidency to approve the participation of entities specialized in field of legal profession to review and certify labour regulations for non-standardized form to whoever meets the conditions.
Fourth: The entity specialized in the field of legal profession shall apply to participate in the review and certification of labor regulations for non-standardized form through the electronic gate of the Ministry.
Fifth: The obligations to be met by the owner of entity to participate in the review and certification of labour regulations to private sector establishments for non-standardized form:
Sixth: Controls to be observed on preparing the labour regulations for non-standardized form by the owner of the establishment:
Seventh: The Ministry is entitled to withdraw the accreditation from its owner in the following cases:
Eighth: The licence holder shall not deserve any compensation for withdrawing the licence.
Ninth: The Deputy Minister shall take the necessary actions to notify, publish and execute this decree.
The Foreign Investment Law was issued by the Decree of Council of Ministers No. 01 dated 05.01.1421H which includes the organization of foreign investment in the Kingdom in terms of the conditions, procedures, privileges, guarantees, the competence of the High Economic Council to issue a list of activities excluded from the foreign investment, the foreign project’s enjoyment of the national project’s privileges and incentives, foreign investor’s rights, immunities and obligations, General Investment Authority’s duties and powers, penalties of law violation and determination of the authority to decide on the penalties and to appeal against them, the judgments of dispute settlement and tax treatment. The General Investment Authority shall issue the Executive Regulations of the law.
The General Investment Authority:
The General Investment Authority announces the investment opportunities in the Kingdom of Saudi Arabia. It is also in charge of granting the foreign investment licences in cooperation with the Ministry of Commerce and Investment. It seeks to create more advanced investment environment in the Kingdom of Saudi Arabia. The Commercial Anti-Concealment Law was issued by the Royal Decree dated 01.01.1442H corresponding to 20.08.2020G which prevents doing investment activities without obtaining the necessary licences and punishing the Saudi person who provides facilities to a foreigner to do any investment activities without obtaining the licences needed according to the Foreign Investment Law and other relevant laws.
Requirements for grant of licences to the foreign investment:
1 – Investment activity to be licensed shall not be within the list of activities excluded from the foreign investment.
2 – The technical specifications of the product and the technique of its production shall conform to the Saudi, Gulf or international specifications.
3 – The licence applicant should not have received final judgments or decisions due to fundamental violations to the provisions of this law.
4 – The licence applicant should not have received previous judgments including judgments in financial or commercial violations inside or outside the Kingdom.
5 – The licence applicant shall be bound by the conditions, controls, declarations and representations attached to the investment licence application form.
6 – The grant of licence shall realize the investment objectives and the purposes of the Authority. These requirements shall apply to the licence renewal application.
Types of investments in the Kingdom of Saudi Arabia:
There are a many forms of investments in Saudi Arabia, namely:
Activities excluded from investment in Saudi Arabia for the residents:
The Kingdom of Saudi Arabia has decided to exclude some fields and activities from the foreign investment, namely:
Some services subject to the Printing and Publication Law except for the following services:
We, through our accumulated expertise in the real estate field, have contributed to a number of projects of real estate development, investment and infrastructure in the Kingdom of Saudi Arabia, Gulf Cooperation Council States and Middle East Region. Our services include providing assistance on all the stages of the real estate project and employing our specialized knowledge in the fields of financing of the real estate projects, taxes and Islamic financing techniques.
Real Estate Issues:
The real estate field constitutes a significant percentage in the economic practices in the Kingdom of Saudi Arabia in general. So its issues receive great attention from the state as well as the individuals or financing companies and banks where a lot of cases of commercial paper collections are related to housing loans. This is due to the disputes related to evacuation or compensation with the courts. Through our extensive expertise in the field of litigation, in particular, the real estate evacuation actions, we have extensive expertise in this field for banks and financing companies.
The real estate actions are classified as per the claim type:
1 – Actions of fixing the defects which the owner or seller has paid its value to the lessee, and claiming the former owner of the property to pay the amount of such repairs (compensation claims).
In case of compensation claim, the court shall assess the fees and assign an expert from the Office of Experts against charges. In this case, the former owner may move to cancel the contract.
2 – Actions of fixing the defects in which judgments have been rendered against the owner to cancel the contract between the owner and the lessee and to obligate him to pay.
The legal orientation and the owner’s motions must be determined, either to cancel the contract with the former owner of property through the judgment instrument issued by the court whose content is to cancel the contract between the owner and the client of financing lease and to obligate the bank to pay the amount of lease, or to claim the former owner of property to repair the defects.
3 – Evacuation Actions:
In regard to the evacuation requests of the clients, an action is filed with the General Court or the Banking Disputes Committee as per the type of property, action merits, filing of statement of claims and attendance of sessions until the issuance of judgment instrument. Then, the judgment instrument is deposited at the court of execution until the evacuation instrument is executed.
We have been keen to obtain the licences of notaries so that we could render such integrated services to our clients to facilitate their transactions in the real estate sector. We also render the notarial services as follows:
1 – Issuance of proxies inside and outside the Kingdom.
2 – Notarization of companies’ contracts and annexes thereof.
3 – Division of movables.
4 – Representations and declarations of financial amounts, delivery and assignment thereof.
5 – Sale of property and electronic transfer of ownership.
6 – Property Mortgage correction.
7 – Electronic transfer of ownership and mortgage.
8 – Mortgage and redemption.