The success of a business and its ability to remain profitable, while avoiding any losses that could result in the company's dissolution, is directly linked to the company's legal management and responsibility. It is crucial to constantly evaluate the company's financial position and make necessary adjustments in order to promote economic and investment growth.
Management and representation of an LLC was addressed under Royal Decree No. (R/132) dated 01.12.1443 AH, and we discuss as follows:
Management of an LLC in the Saudi Companies Law ("Law").
- Appointment and dismissal of the director, and the extent of the director's powers to represent the company.
The rights and obligations of the partners of an LLC.
The General assembly of an LLC and the decisions taken by the company.
The agenda of the General assembly of an LLC.
Objection to the decisions of the General assembly of an LLC.
Amending the capital of an LLC, by increasing or decreasing.
Expiration of an LLC.
Extending the term of an LLC.
Management of an LLC under the Law:
Appointment of LLC board of directors The company may be managed by a single director, multiple partners, or third parties, as specified in the company's operating agreement or a separate agreement. If there are multiple directors, a board of directors may be established through a decision made by the partners.
The management structure of an LLC is determined by the company's operating agreement or the partners' decision. The required majority for decision-making is outlined when there is more than one director or a board of directors in place. Procedures for authorizing the board of directors of a joint stock company (JSC) to engage in business activities, contracts, or competitive activities in which a member has a direct or indirect interest, also apply to the LLC board of directors, unless stated otherwise in the operating agreement.
An LLC director with a vested interest may participate in discussions and vote on matters related to business, contracts, or competitive activities in which they have a direct or indirect interest, provided that the company's operating agreement permits such involvement.
An LLC director may manage and represent the company in legal matters, arbitration proceedings, and dealings with third parties. He may assign his responsibilities to third parties for the execution of specific tasks. Any decision regarding the appointment, dismissal, or restriction of the director's powers does not affect third parties until it is officially registered in the commercial register. The company is bound by the actions of the director that align with the company's objectives.
If the position of the LLC director becomes vacant and the company has a single director, the partners shall appoint a new director within 15 days of becoming aware of the vacancy. In this case, the company's auditor or a partner may call for a general assembly meeting to appoint a new director.
Partners may dismiss the LLC director, whether appointed through the company's operating agreement or a separate agreement. In case of removal, partners shall appoint one or more directors to fill the vacancy. If the removed director is a partner, he is not allowed to participate in the voting process for his removal. Partners holding at least a quarter of the company's capital may request the removal of the director through the competent judicial authority.
The decision to remove an LLC director, even if he is a partner, shall comply with the company's operating agreement or a separate agreement, following the quorum specified in the Law for the validity of partners' decisions.
Rights and obligations of the LLC partners:
- A partner may vote on decisions and participate in discussions. The number of votes a partner has shall be determined by the number of shares they hold. No other agreements may be made regarding this matter.
- A partner has the right to authorize another partner to attend and vote at the meetings of the partners. However, this authorization must be in writing, unless the company's operating agreement states otherwise. The operating agreement may also allow partners to appoint non-partners in writing to attend and vote at these meetings.
- A partner, except for a director, has the right to express their opinions to the director. Additionally, they have the right to request access at the company's headquarters the business and examine its records and documents twice during the fiscal year. The company shall respond to this request within 15 days of submission. Any clause that contradicts this is considered invalid.
- Anyone holding information shall maintain confidentiality and refrain from using such information for any purpose that causes harm to the company or any of the partners. Failure to comply with this obligation will result in the individual being held responsible for any damages caused.
The General assembly of the LLC under the Law:
- The general assembly of an LLC comprises all partners and is convened by the company director within six months after the end of the fiscal year. The general assembly may be called upon request by the directors, the company's auditor, or one or more partners representing 10% of the company's capital. The invitation, sent at least 21 days prior to the scheduled date, may be delivered through registered letters, advanced means, or any other means specified in the Memorandum of Association.
- The partners holding all the shares of the company's capital may conduct the general assembly meeting without adhering to the prescribed conditions and timeframes for the invitation.
- Such meetings are documented in the company's register. The company may adopt advanced technologies for verifying and recording discussions and decisions. Additionally, these meetings may also be conducted using up-to-date means.
Decisions of the General assembly of the LLC under the Law:
- The company's general assembly decisions may be shared with partners for approval without the need for a physical meeting. The director shall send the proposed resolutions and relevant documents to each partner for their written vote.
- Unless the company's operating agreement states otherwise, the proposed decisions and related documents may be delivered through various methods: registered letter, personal delivery to partners or their legal representatives, or via email or other advanced means.
- Decisions are considered valid only if approved by one or more partners representing at least 50% of the company's capital, unless the Memorandum of Association specifies a different percentage. If the quorum is not met at the initial meeting, partners may be called for another meeting. Decisions may be made with the majority approval of the shares represented, regardless of their percentage in the capital, unless stated otherwise in the Memorandum of Association.
- The company's operating agreement may outline alternative procedures for convening meetings or reporting decisions.
LLC General assembly Agenda:
- The general assembly of the company is annually convened to deliberate on the financial position at the end of the year and the director's report on the company's activities. During this assembly, the financial statements for the preceding financial year are examined, the auditor's report is reviewed (if applicable), and recommendations are put forth regarding dividends.
- The agenda items for the general assembly shall be exclusively discussed, unless any additional items arise during the meeting that require attention or if a partner requests to address a specific item. In case the partner's request is denied, they have the right to appeal to the Assembly. Each partner is entitled to discuss the agenda items. The company director is responsible for addressing the partners' queries. If the response provided is deemed insufficient, the partner may further appeal to the Assembly.
How can the decisions of the General assembly of the LLC be objected to?
Article 107 of the Saudi Companies Law states that:
- Without prejudice to the rights of bona fide third parties, each partner may apply to the competent judicial authority to annul the decision of the general assembly of the partners issued in violation of the provisions of the Law or the Company's Memorandum of Association. However, only partners who objected in writing or who were unable to object to the decision after being aware of the same may request to annul the decision.
- A claim of invalidity shall not be heard after the elapse of ninety days from the date of issuance of the decision issued in violation of the provisions of the Law or the Memorandum of Association.
- To file an action of invalidity, the claimant shall be a partner in the company during the filing of the action and throughout all its proceedings.
- With regard to the settlement of disputes: excluding criminal offenses, the operational agreement of the company may establish mechanisms for settling disputes or disagreements whatsoever that may arise between partners or between the company and the director. These mechanisms may include arbitration or other alternative methods of resolution.
Amendment to the capital of an LLC by increasing or decreasing:
- An LLC's operating agreement may be modified, including capital increasing or decreasing. However, this can only be done with the approval of one or more partners who represent three-quarters of the company's capital, unless otherwise specified by the company operating agreement.
- When a decision is approved to increase the company's
capital by issuing new shares, the partner who owns cash shares has
the priority in acquiring the newly issued shares. The proportion
of shares acquired will be based on the partner's ownership in
the company's capital. It is not permissible to increase the
capital by raising the nominal value of the partners' shares or
by suspending the right of priority, unless all partners reach a
consensus.
- Pursuant to Article 64 of the Executive Regulations of the Saudi Companies Law, in the event of an increase in the company's capital through the issuance of new shares, partners may acquire a proportionate number of shares based on their ownership in the company's capital. Should a partner opt to acquire a lower percentage of the new shares than their entitlement, the remaining shares may be acquired by other partners in accordance with their existing shareholdings.
- The partners shall submit a proposal to amend the company's operating agreement, including an increase in the company's capital and an acknowledgment of payment of the value of the increased shares.
- The general assembly of partners may decrease the capital if it exceeds the company's needs or causes losses. The decision shall state the reasons and the auditor's report. If the capital is decreased to exceed the company's needs, the company's manager shall prepare a statement of the company's financial solvency and examine the company's financial situation, and whether or not the company is unable to pay its debts and obligations.
- If the company's losses reach half of the capital, the company director shall invite the partners to the general assembly to meet within 60 days from the date of becoming aware that the loss reached this amount to consider the continuation of the company and take the necessary measures to recover the losses.
LLC Termination
An LLC does not terminate upon the death or incapacity of a partner, the initiation of liquidation proceedings against them under the Bankruptcy Law, their insolvency, or their withdrawal unless the company's operating agreement specifies otherwise.
LLCExtension of Term:
Article 183 of the Saudi Companies Law states that:
- An LLC term may be extended if it is fixed before its expiration for another period by a decision issued by the general assembly of partners who own half of the shares representing the capital unless the company's operating agreement provides for a greater majority.
- If no decision is issued to extend the company's term and it continues to perform its business, it shall be extended for a similar term under the same conditions as stated in the company's operating agreement.
- A partner who does not wish to continue in the company may exit the company. His shares shall be evaluated in accordance with the Saudi Companies law. The extension shall not be effective until such partner's share is sold to partners or third parties and their price has been paid to such partner, unless this partner agrees with the rest of the partners to the contrary.
A third party who has an interest in not extending the term may object to it and maintain to the same.
Finally, we conclude that the Saudi Royal Commission, under such controls on LLC management, ensures that the company is legally represented to achieve economic development of the business activity and attracting sustainable investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.