A.C.E. ARABIAN COURT EXPERTS SERVICES KINGDOM OF SAUDI ARABIA COMMERCIAL LAW,
Commercial Law of: UAE Qatar Bahrain Oman Saudi Arabia Kuwait		Companies Law The Companies Act (the "Act") was issued by Royal Decree no. M/6 dated 22/3/1385H corresponding to 22/7/1965. The Act contains 234 Articles and has been amended several times. The following is a summary of certain fundamental matters dealt with in the Act. It is not, nor is it intended to be, a literal translation or interpretation of the Act: • The different types of company are listed in article 2 of the Act. Please see the section below entitled "Different Types of Companies" in this regard. • The Act is not applicable to companies incorporated in whole or in part by royal decree of the Government. The royal decree authorizes the company's incorporation and contains the provisions which the company shall be subject to. Saudi Electricity Company is an example of a company established by royal decree. • The procedure for company mergers. • The procedure for the conversion of companies from one entity to another. For example, the conversion of a limited liability company ("LLC") into a joint stock company ("JSC") or the automatic conversion of an LLC into an unlimited liability partnership in certain circumstances (as detailed below under LLC section). • The liquidation of companies. • Penalties for violations of the Act. Different Types of Companies The following is a brief description of the most common types of company in Saudi Arabia and how each is established: Limited Liability Company • LLC is also commonly referred to as a "limited liability partnership". • Must not have less than two and not more than fifty shareholders. • Cannot offer shares to the public. • May not conduct banking, insurance or investment activities. • 100% foreign ownership is permitted following the new foreign investment law which came into effect 05/01/1421H (corresponding to 10/04/2000). Please contact us for detailed information regarding "Foreign Investment Law". • Minimum share capital of Saudi Riyals ("SR") 500,000 if the company shareholders are all Saudi nationals. If the company shareholders are non-Saudi nationals or include non-Saudi nationals then the minimum share capital depends on the activities being undertaken by the company. For example, a service company would require share capital of SR 2 million and an industrial company would require share capital of SR 5 million. Share capital must be divided into shares of equal value, each to be fully paid in cash or in kind on incorporation. • Statutory pre-emption rights apply in favour of the remaining shareholders when a shareholder wishes to sell its shares. • In general, the liability of shareholders is limited to their capital contributions in the company. • Will automatically convert in accordance with article 180 of the Act into an unlimited liability partnership if the company accumulates losses amounting to 75% of its capital and within one month of such losses being known the shareholders do not meet to resolve to pay either all of the debts of the company or to dissolve it. • Incorporated by the signing of the articles of association before the notary public and the publication of the articles of association in the official gazette. Generally, this procedure takes approximately 8 weeks. Joint Stock Company: • A JSC can be one of two types. A public or "open" JSC which offers its shares to the public or a private or "closed" JSC which does not. Minimum share capital of SR 10,000,000 if shares are offered to the public (this minimum may be increased by the Ministry of Commerce in certain circumstances). • Minimum share capital of SR 2,000,000 if shares are not offered to the public (this minimum may be increased by the Ministry of Commerce in certain circumstances). • 25% of issued share capital must be paid-up on incorporation. • Must have not less than 5 shareholders. • Capital is divided into shares of equal value with a par value of at least SR 50. • The liability of shareholders is limited to the extent of their shares. • Foreign investment in new JSCs is still an uncertain area. We have not yet seen a new foreign investment license issued to a foreign entity, though there have been amendments to existing JSC licenses to include a foreign shareholder(s). • It is the only form of entity which may undertake banking and insurance activities in Saudi Arabia. • Each director must hold shares in the company worth at least SR 10,000. • Incorporated by a resolution of the Minister of Commerce or by royal decree. The time taken to complete this procedure will vary. General Partnership • Commonly referred to as a "joint liability partnership". • Two or more partners who are jointly and severally liable for the debts of the partnership to the extent of their personal assets. • May not conduct banking, insurance or gold/silver broking activities. • Can not offer shares to the public. • Foreign ownership is permitted. • Established in same manner as LLC. Limited Partnership • Commonly referred to as a "mixed liability partnership". • At least one general partner who is liable for the debts of the partnership to the extent of his personal assets. • At least one limited partner who is liable for the debts of the partnership to the extent of his capital contributions. • May not conduct banking, insurance or gold/silver broking activities. • Foreign ownership is permitted. • Established in same manner as LLC. Less Common Forms of Business Entity In addition to the above entities there are three other types of entity that are rarely encountered: Partnership Limited by Shares • At least one general partner who is liable for the debts of the partnership to the extent of his personal assets. • At least four limited partners. • Minimum share capital of SR 1,000,000. • 50% of share capital to be paid in cash or in-kind on incorporation. • Foreign ownership is permitted. Variable Capital Company • Capital of the company may be varied in accordance with the constitutive documents of the company. • Foreign ownership is permitted. Co-operative Company • An LLC or JSC may be incorporated as a "co-operative" for the purpose of attaining a particular objective such as the reduction in price of certain products or services. Joint Adventure • An association of which third parties are not aware and which neither enjoys a juristic personality nor is subject to publication or Commercial Register formalities. FOREIGN INVESTMENT LAW • The new Foreign Investment Act (the "Act"), was issued by Royal Decree no. M /1 dated 5/1/1421 corresponding to 10/4/2000 and the General Investment Authority Ordinance was issued by Council of Ministers Resolution no.2 dated 10/4/2000 (together referred to as the "Foreign Investment Law"). Under the Foreign Investment Law, foreigners (i.e. non-Saudi Arabian and non-GCC entities) are not permitted to carry out any business activities within Saudi Arabia unless licensed to do so. The broad objective of the Foreign Investment Law is to make foreign investment into Saudi Arabia more attractive by increasing the sectors within which foreigners may invest and making the application process more efficient. We deal with these matters in more detail below. The power of licensing foreign investments in Saudi Arabia is vested in the Saudi Arabia General Investment Authority ("SAGIA"). SAGIA has the power to license those activities which are not included in the "negative list" (see Negative List section below) and those activities which are not regulated by another body/law. While the Foreign Investment Law and the negative list provide further clarity in respect to investing in Saudi Arabia they act more as an enabling framework rather than a fully comprehensive set of laws. A brief summary of the Foreign Investment Law is as follows: • All foreign investment into Saudi Arabia requires a license. • Foreigners may have 100% ownership of locally established businesses in Saudi Arabia. • SAGIA has overall responsibility of attracting, encouraging and licensing foreign investments into Saudi Arabia and in respect to the licensing will act as a "one-stop" shop. • SAGIA aims to make the application process for a foreign investment license more streamlined and efficient and is obliged to process applications within 30 days of their receipt. • Under the previous foreign investment law the areas within which foreigners could invest were limited to those areas which were expressly permitted. Under the new law all areas are open to foreign investment save for those areas which are expressly prohibited. • All licensed foreign investments are meant to receive the same treatment as national entities, which, in practice, means that licensed foreign investments may qualify for soft loans for certain projects and certain customs exemptions which were previously only available to Saudi nationals or foreign investments with majority Saudi ownership. • With regard to expropriation, foreign investments will be treated on an equal footing with national entities and, in particular, foreign investments will not be expropriated or confiscated "save for public interest in exchange for an equitable compensation". • Foreign businesses are no longer required to have a Saudi sponsor under immigration and residency laws and may sponsor their own employees. • Corporate tax on profits has been reduced to 30% from 45% and tax holidays have been abolished (meaning foreign businesses can carry forward corporate losses). A further reduction of tax was recently approved initially by the Government to a flat rate of 20%. • Subject to applicable penalties under other laws, violations of the Foreign Investment Law are punishable by a fine not exceeding SR 500,000 and/or the termination of the foreign investment license and/or the removal of any incentives or privileges granted to the foreign investor. The Negative List The negative list may be further modified as sectors and industries in the Kingdom become more accessible to private and foreign investment. It currently comprises 22 activities closed to foreign investment. We have set out below some general points in respect to the negative list and certain of those activities included on it and excluded from it. However, it would be advisable to contact one of our corporate lawyers to discuss the list in more detail. • Foreign companies are excluded from upstream oil activities (exploration, drilling and production services), but not from upstream gas activities and mining services. • Foreign companies are excluded from certain other industrial activities such as the manufacturing of military equipment, machinery and clothing. • In the services sector foreign companies are excluded from providing services in respect to military, media, security, education, real estate brokerage, retail and wholesale/distribution sectors. There will be a number of issues to be clarified as regards interpretation of the list. The Foreign Investment Law and the negative list should at this stage be viewed as a developing area within the Kingdom's framework of laws and one which may be subject to further change. The Grievances Board The Grievances Board has jurisdiction in relation to commercial matters, insolvencies, disputes with governmental bodies and enforcement of foreign judgments and arbitral awards. The Negotiable Instruments Office The Negotiable Instruments Office is the appropriate forum for dispute and claims involving all types of negotiable instruments e.g. promissory notes, cheques and bills of exchange. Settlement of Labour Disputes Committee The Settlement of Labour Disputes Committee is the appropriate forum for labour disputes. Other Committees There are other specialised committees empowered to hear disputes with respect to specific matters. These include, for example, the Customs Committee and the Commercial Fraud Committee.