Joint-stock companies represent formidable legal entities due to the legal advantages they offer to investors and their substantial contribution to the economy and investment milieu. They provide investors with the opportunity to manage their investments, fostering elements of creativity and innovation. Noteworthy is the fact that the capital of joint-stock companies can rival the budgets of some countries, thereby positively impacting economic development. Recognizing the necessity for progress and involvement in large-scale projects, the Kingdom of Saudi Arabia saw the need to institute contemporary legal regulations that align with the nature of joint-stock companies. As such, there were deliberations on the nature of these companies, capital requirements, procedures for subscribing to company shares, as outlined in Royal Decree No. (M/132) dated 1-12-1443 AH. The following aspects were covered for elaboration:
Nature of joint-stock companies in the Saudi system.
Capital requirements of the company.
Required documentation for incorporation.
Subscription to shares of the joint-stock company and deposit of share value.
Evaluation of in-kind contributions to the joint-stock company.
Company shares, impact of subscription on these shares, and issuance of company shares.
Nominal value of shares in the joint-stock company.
Regulations governing the company's repurchase of its shares and the process involved.
Utilization of cash reserves which are appropriated from company profits.
Increase of the joint-stock company's capital (increase with priority rights - increase through 6capitalization).
- Reduction of the company's capital for the joint-stock company.
Nature of Joint-Stock Companies in the Saudi System:
A joint-stock company in the Saudi system is established by one or more natural or legal persons, with its capital divided into tradable shares. The company itself bears the responsibility for debts and obligations arising from its activities, while the shareholder's liability is limited to the value of the shares subscribed to.
Capital Requirements of the Company:
- The issued capital of the company must not be less than 500,000 Saudi Riyals, and the paid-up portion during incorporation must not be less than a quarter (125,000 Saudi Riyals).
- The issued capital of a joint-stock company represents the subscribed shares, and the company's articles of association may specify the authorized capital.
- The board of directors may, by decision, increase the issued capital within the limits of the authorized capital, with the issued capital being fully paid up.
Documentation and Information Required for Incorporation:
- When submitting a request to establish a company, the following must be included in the articles of association:
1. Names, addresses, and nationalities of the founders.
2. Statement detailing the business and expected expenses for establishing the company.
3. Declaration of the founders' subscription to all issued company shares and the amount paid for them.
4. Certificate of deposit for the paid-up portion of the issued capital at a bank licensed in the Kingdom.
5. Decision of the founders to appoint the initial board of directors, specifying their names, nationalities, addresses, dates of birth, and the appointment of the initial auditor if required by law if not specified in the articles of association.
6. Declaration of the founders to comply with all relevant regulations regarding company establishment.
7. Report prepared by one or more accredited residents indicating the fair value of any in-kind contributions, if applicable, with consent from the other founders on the determined compensation.
Subscription to Shares of the Joint-Stock Company and Deposit of Share Value:
- During the incorporation phase, if the founders do not subscribe to all shares themselves, the shares that have not been subscribed to by them must be offered for subscription according to the regulations of the financial market.
- The Ministry and the Authority are responsible for setting the guidelines, procedures, and determining the necessary documents and approvals for the establishment of a joint-stock company offering shares for public subscription during the incorporation phase or for listing on the financial market.
- The value of the subscribed shares is deposited in the name of the newly established company at one of the banks licensed in the Kingdom upon receiving the subscription. This amount may only be managed by the board of directors after the company is registered in the commercial registry.
- If the company is not registered in the commercial registry, investors have the right to reclaim the paid amounts. The banks where the subscriptions were made are required to return the amount to each investor. The founders are jointly liable for fulfilling this commitment and compensating investors as needed. The founders are also responsible for covering all expenses incurred during the company's establishment. Joint liability applies against any third party for actions taken during the establishment period.
- Once the company is registered in the commercial registry, it gains legal recognition as a properly established entity. Any claim challenging the validity of the company due to non-compliance with the regulations or the company's articles of association is not permissible after registration.
Evaluation of In-Kind Contributions for the Joint-Stock Company:
1. When presenting an in-kind contribution during the incorporation or capital increase, the contributions are assessed by one or more accredited residents, who prepare a report indicating the fair value of these contributions. This report is presented to the founders or an extraordinary general assembly for discussion. The contributors of the in-kind contributions do not have the right to vote on the decision regarding the prepared report. If the decision involves reducing the determined compensation for the in-kind contribution, the consent of the contributors to that contribution is required for the reduction.
2. It is required that the period between the issuance of the report by the accredited resident estimating the fair value of the in-kind contributions and the issuance of shares against those contributions does not exceed six months.
Company Shares and the Impact of Subscription on Those Shares and issuance of Company Shares:
1. The shares of a joint-stock company are nominal and indivisible. Ownership of shares cannot be divided among multiple owners. If such a situation arises, they must choose a representative to exercise the rights associated with the shares owned collectively. Their liability is joint for obligations arising from share ownership.
2. The nominal value of shares is determined in the company's articles of association. The shares must be of equal nominal value in terms of type and class. They may be subdivided into shares with lower nominal values or consolidated into shares with higher nominal values, with necessary controls in place by the relevant authority.
3. Unlisted joint-stock companies are required to issue a physical or electronic certificate proving an individual's ownership of shares.
4. Subscription to or ownership of shares implies agreement to the company's articles of association and compliance with decisions made by shareholder meetings in accordance with Saudi company law and the company's articles of association, even if the shareholder is absent or present, whether in agreement or not.
5. Company shares are issued in exchange for in-kind or cash contributions.
- If the consideration is in cash, the payment must not be less than a quarter of the nominal value specified in the company's articles of association. The remainder of the value must be paid within 5 years from the date of share issuance. Unlisted joint-stock companies are obligated to issue a physical or electronic share certificate indicating the amount paid towards the value.
- If the consideration is in-kind, the shares are issued after the full value is met. The value of shares are not transferred to the owners until the complete ownership of these shares to the company is established.
Nominal Value of Shares in a Joint-Stock Company:
Article 33 of the Executive Regulations of the Saudi system stipulates that:
Shares cannot be issued below their nominal value. They may be issued above this value if the company's articles of association or an extraordinary general assembly approve it. In this case, the difference in value is placed in a separate section among the rights of shareholders, cannot be distributed as cash dividends, may be used to increase capital through the issuance of bonus shares, or to offset losses after depleting any previously formed reserves from profits.
Shareholders have all the rights associated with nominal shares, including the right to dispose of them, attend shareholder meetings, participate in discussions and voting on decisions, entitlement to dividends, elect board members, access company records with confidentiality, monitor board activities, hold board members accountable, challenge the validity of decisions made during shareholder meetings, and claim their share of company assets in case of liquidation, subject to provisions in the company's articles of association.
Shares issued by the company are ordinary, preferred, and redeemable shares, each with equal rights and obligations.
Each unlisted joint-stock company must maintain a register containing names, nationalities, residences, share ownership, and paid-up amounts of shareholders. This register must be kept in Saudi Arabia, and any changes must be communicated to the commercial registry within 15 days of registration or modification.
Guidelines for Repurchasing Company Shares and How it Works:
A joint-stock company is allowed to repurchase ordinary or preferred shares as long as permitted by the company's articles of association. The company's purpose must be to reduce capital or retain repurchased ordinary shares as treasury shares. The percentage of treasury shares held by the company at any given time should not exceed 10% of the total class of shares available for purchase. The value of these shares must be fully paid, and the debit balance of treasury shares should not exceed retained earnings.
The company buys shares based on a decision by an extraordinary general assembly approving the purchase with a maximum limit on the number of shares. The decision should authorize the board of directors to complete the purchase in one or more phases within a maximum of 12 months from the approval date. The company must announce this approval and its conditions immediately upon issuance, and the extraordinary general assembly can change the purposes of share repurchases at any time.
The company must provide all relevant information to shareholders about the share purchase offer and its duration, giving them a fair opportunity to offer their shares.
Preferred shares are canceled upon completion of their repurchase, and the company must take the necessary regulatory measures to reduce capital.
The extraordinary general assembly, when approving the company's share repurchase, can determine the duration for which the company is allowed to retain treasury shares and the consequences of the expiry of this period without taking any action.
The board of directors of the joint-stock company is obligated to prepare financial statements at the end of each financial year, detailing the company's activities, financial position, dividend distribution, and these reports should be available to the auditors at least 45 days before the shareholder meeting and to the shareholders at least 21 days before the meeting. The financial statements must be signed by the chairman of the board, CEO, and CFO, with a copy placed at the company's head office.
Utilizing Cash Reserves from Company Profits and its Usage:
1. The company's articles of association may outline the allocation of a portion of the company's net profit to form cash reserves, designated for specific purposes as specified in the articles of association. The competent authority may establish necessary controls for creating cash reserves.
2. The ordinary general assembly, when distributing shares from net profit, may decide to create additional cash reserves to meet the company's needs and ensure the distribution of consistent dividends to shareholders. The assembly may also allocate a percentage of the net profit for social purposes for the company's employees.
3. In all cases, the cash reserve allocated for specific purposes outlined in the articles of association cannot be used without a decision from an extraordinary general assembly. If the reserve is not designated for a specific purpose, the ordinary general assembly, based on the board of directors' proposal, may decide to utilize it for the benefit of the company or shareholders. The competent authority can set guidelines for using the cash reserve.
4. The ordinary general assembly has the right to use remaining profits and distributable reserves to settle any remaining amount due on the share value, ensuring fairness among shareholders in accordance with the company's articles of association.
Distribution of Profits to Shareholders in a Joint-Stock Company according to Saudi Law:
Article 125 of the Saudi Companies Law stipulates that:
The general assembly determines the percentage of net profit that should be distributed to shareholders after the allocation of cash reserves, if any.
Shareholders have the right to receive their share according to the decision of the general assembly, specifying the dividend entitlement date and distribution date. Profit entitlement belongs to registered shareholders at the end of the specified entitlement date. Regulations determine the maximum period within which the board of directors must implement the general assembly's decision regarding profit distribution to shareholders.
Increase of Capital in a Joint-Stock Company (Increase with Priority Rights – Increase through Capitalization):
- Capital can be increased through the following methods outlined in Article 126 of the Saudi Companies Law:
1. Issuance of new shares in exchange for cash or in-kind contributions.
2. Issuance of new shares in lieu of specific company debts, subject to approval from relevant creditors, with the shares issued at a value determined by an extraordinary general assembly after consulting experts or accredited assessors. A report from the board of directors, signed by the company's auditors, must be prepared.
3. Issuance of new shares equivalent to the cash reserve decided by an extraordinary general assembly to be integrated into the company's capital.
4. Issuance of new shares in exchange for debt instruments or financial sukuk.
Increasing the Capital of a Joint-Stock Company with Priority Rights or through Capitalization:
If treasury shares are allocated for an employee stock program, the company cannot increase its issued capital by offering priority rights shares if it retains treasury shares or if an extraordinary general assembly approved the purchase of the company's shares and did not revoke that approval.
In the case of increasing the company's capital through capitalization, treasury shares have the same rights allocated to other shares.
- If the losses of the jointstock company reach half the issued capital of the company, the board of directors must disclose this information and any recommendations regarding those losses within 60 days of being informed of such a situation. The board should call for an extraordinary general assembly meeting within 180 days from the date of such knowledge to review the company's existence, taking any necessary actions to cover and resolve those losses.
Reduction of Capital for a Joint-Stock Company:
The capital reduction of a joint-stock company can be carried out by one of the following methods as stipulated in Article 133 of the Saudi Companies Law:
1. Canceling a number of shares equivalent to the required reduction amount.
2. Reducing the nominal value of each share by canceling a portion thereof corresponding to the company's incurred losses.
3. Reducing the nominal value of each share by refunding a portion thereof to the shareholder or by releasing the shareholder from all or part of the unpaid amount of the share value.
4. The company purchasing a number of its shares equal to the required reduction amount and subsequently canceling them.
In conclusion, the joint-stock company remains the most robust legal entity for promoting economic support and serves as the optimal investment incentive for major projects within the Kingdom of Saudi Arabia. It provides a favorable aspect for investors by distributing risks among shareholders.
As a legal institution with extensive expertise in Saudi law and its provisions, we are constantly striving to facilitate all matters related to the establishment of joint-stock companies within the Kingdom of Saudi Arabia for esteemed Arab and foreign investors.
Hence, Al-Saadani and Khalifa Legal Consultancy is pleased to be your partner in continuous success and development.
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.