Companies Law in KSA | Complete Guide for Entrepreneurs

Access to or conducting business in the Saudi market offers significant opportunities for growth. However, understanding the regulatory framework of Companies Law (“Law”) requires careful attention, practical knowledge, and a proactive approach. This Guide, produced by Sadany & Partners Law Firm, addresses the key issues relating to the Saudi Companies Law that entrepreneurs need to understand before establishing, growing, or restructuring their businesses in the KSA.

1. What is the Legal Framework?

The key legislation is:

• The Saudi Companies Law (Royal Decree M/132 dated 1 December 1443 AH), which came into force around January 2023.
• The Executive Regulations issued by the Ministry of Commerce and, where applicable, the Capital Market Authority for listed companies.
• Sector-specific laws (on investment, foreign ownership, labour, etc.) that interact with the Law.

Why this matters: The new Law brings about a major overhaul of the Companies Law. It offers greater flexibility on entity types, governance, and the entry of foreign investors. It also affects all aspects of business, including incorporation, management, and exit.

2. Types of Companies and Which One to Choose

Entrepreneurs should be familiar with the main types of legal entities:

• Limited Liability Company (LLC): Commonly used in SMEs, they have a smaller number of shareholders and greater flexibility.
• Joint stock company (JSC): They are often used for large-scale projects, stock market listings, and major commitments. The new Law has removed some of the previous restrictions.
• Simplified JSC: This is a new format designed to meet the needs of start-ups and venture-backed entities, whilst reducing red tape.
• Professional firm / Sole proprietorship: The new law permits certain specific structures for individual shareholders and professional firms.

Advice for entrepreneurs: When choosing a legal structure, consider the size of your business, your capital, your growth ambitions, and investors’ expectations. The wrong choice could lead to additional costs or administrative complications down the line.

3. Incorporation and Registration – Key Steps

The following are some of the key procedural steps and considerations:

• Drafting the articles of association or memorandum and articles of association in Arabic (or in two languages) in accordance with the law.
• Choosing a company name, legal form, and paid-up capital (which varies depending on the form and sector).
• Registering with the Ministry of Commerce via the online portal and obtaining a commercial registration certificate.
• For foreign investors, it is important to check the relevant regulations regarding foreign ownership, licences, and sector-specific restrictions.
• Considering the physical presence requirements, as well as the board and governance structures, in accordance with the company’s size and structure.

Practical advice: Consulting a local lawyer early on, as certain procedural errors (such as choosing the wrong legal form, failing to provide documents in Arabic, or failing to schedule board meetings or meetings with the auditor) can lead to costs and delays.

4. Governance and Responsibilities of Board Members

Corporate governance under the new Companies Law emphasises transparency, duties of board members, and the protection of shareholders’ rights. Key features:

• Members of the Board of Directors must act within the scope of their powers, exercise due care, and avoid conflicts of interest.
• Increased protection of minority shareholders’ rights: Dividend rules, share classes, and convertible financial instruments.
• For JSC and listed companies: The Audit Committee, the Remuneration Committee, disclosure obligations, and the independence of the Board of Directors.

Advice for entrepreneurs: Even if your company is privately owned, adopt sound governance practices early on (clear rules, defined roles and decision-making protocols), as this will prove beneficial later on when expanding or attracting investors.

5. Share capital, shares, and dividends

Some notable changes:

• The JSC minimum share capital requirement has been reduced/amended; LLC simpler procedures have been introduced and small JSCs.
• Under the new Law, companies may issue different classes of shares (ordinary, preference, redeemable).
• The allocation of profits and losses must initially be made in proportion to the number of shares held, unless otherwise agreed in the articles of association.

Tip: If you aim to raise capital, be sure to build flexibility into the articles of association’s equity classes and dividend structure early on, as it will be difficult to make changes later if investors object.

6. Foreign Investment, Shareholding and Exit Planning

For international entrepreneurs:

• The Saudi regulatory environment is increasingly encouraging foreign investment, with foreign ownership permitted up to 100% in many sectors (depending on the licensing/investment regime).
• Exit planning is of the utmost importance:  Shareholder agreements, transfer restrictions, co-sale rights/right of first refusal, and local regulatory approvals must be taken into account.
• Enforcement of rights (contracts, intellectual property, cross-border rights) requires compliance with local laws and sound corporate governance.

Example: A technology company owned by a foreign investor must, upon incorporation, have clear exit rights, share class structures, and governance arrangements that comply with Saudi law.

7. Compliance, Restructuring and Liquidation

• The new law sets out the procedures for conversion, merger, division, and liquidation.
• Files can be submitted online. Shareholder meetings can be held electronically. More flexibility is available in company management.
• In the event of a significant loss of capital, the previous automatic liquidation rule has been relaxed, meaning that companies now have greater scope to continue operating with the approval of shareholders.

Advice for entrepreneurs: Establish internal indicators (board review, audit committee review) to facilitate restructuring or divestment well in advance of a crisis.

8. Considerations specific to SMEs

For startups in the KSA:

• We recommend considering the use of a public limited company structure (effective 2023) to provide greater flexibility.
• Using a flexible structuring system and early planning of share classes to meet investors’ needs and expand the scope of operations.
• Digital readiness: Integrating e-governance, digital general meetings, and e-disclosures – in line with new regulatory trends.

9. A Brief Checklist for Entrepreneurs

• Choose the entity type and structure that best suit your business plan, investment ambitions and exit strategy.
• Draft the company’s articles of association with structures that are suitable for investors (share classes, corporate governance, and exit rights), in accordance with Saudi law.
• Get ready to comply: Duties of the Board of Directors, meetings, disclosures, and digital filings.
• Plan for foreign investment/regulatory aspects/licensing if you have cross-border ambitions.
• Maintain sound corporate governance: An up-to-date register of shareholders, minutes of board meetings, annual reports, and digital compliance.
• Draw up your exit strategy now: Mechanisms for the transfer of shares, investors’ rights, and conditions for liquidation/dissolution.
• Seek the advice of a local legal adviser to avoid procedural errors and speed up the launch or restructuring.

Conclusion 

The newly established corporate legal framework in Saudi Arabia has brought about a significant transformation in establishing, managing, and conducting business operations and exits. This framework presents a tremendous opportunity for entrepreneurs, but it also underscores the importance of establishing a solid legal foundation from the outset. Thanks to a robust structure, clear governance and full compliance with the Saudi legal framework, your company will be well-positioned not only to participate but also to succeed and thrive.

If you are launching a business venture, restructuring your company, or planning to invest in the KSA, and require specialist legal advice, contact us today. We will work closely with you to establish a legal and strategic foundation that ensures your business's success.