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How Saudi Arabia Protects Minority Shareholder Rights

Saudi Arabia Capital Market Authority (CMA) has passed several sweeping reforms to bolster protections for minority investors in Joint Stock Companies (JSCs) over the last five years. Recently, the World Bank recognized the Kingdom for its improvements. The initiatives are part of Saudi Arabia’s Kingdom Vision 2030. This strategic plan will help diversify the nation’s economy and reduce its dependence on oil-based businesses. It will also develop public sectors such as education, health, infrastructure, recreation, and tourism.

The organization ranked the nation as seventh in the world for its strong protection of minority shareholder rights in its “Ease of Doing Business” Index. Saudi Arabia jumped from its previous 63rd position to the top ten within a single year, according to Mohammed El-Kuwaiz, Capital Market Authority chairman. The nation was also named to the World Bank’s Top-20 Improvers in Doing Business 2020 list.

This article will discuss recent laws and amendments that will impact minority investor rights in Saudi Arabia.

Protections for Shareholders of Public Firms under Saudi Company Law

A minority investor is someone who owns less than a 50 percent stake in a company. Under Saudi Company Law, the nation has created protections for minority shareholders of public firms in its company law.

Under sections 76, 77, and 78, minority investors now have the statutory right to seek legal remedy against directors who abuse or mishandle their company’s operations. These directors can be jointly liable to compensate the firm and its shareholders.

Additionally, a company can file a liability suit against its directors when the board’s decisions have harmed all shareholders. Individual shareholders can also sue when directors’ actions damaged specific ones. Investors may only file suit if the firm’s litigation right remains valid, and they must notify the company that they will sue.

Recent Saudi Amendments that Will Impact Minority Investor Rights

Last year, the Council of Ministers approved 11 amendments to the Companies Law. Here are five changes to CL that will affect investor rights.

  • Ability to call meetings – Under previous Companies Law statutes, only shareholders (who represented half of the capital) could call an extraordinary general assembly meeting. The new Amendments have lowered the threshold. Now, shareholders who represent only 10 percent of capital can call a meeting.
  • Shareholder investigations – Shareholders (who represent at least five percent) may now initiate investigations by a competent judicial authority. They can ask for an investigation when the Joint Stock Company’s directors or auditors have acted suspiciously. (Article 100 of the New Companies Regulations).
  • Minority investor protection in JSC – There are new protections for minority shareholders in the New Companies Regulations. These include the following. Shareholders can only nominate board members based on the shareholder’s share percentage.
  • Cumulative voting procedures – Saudi law mandates cumulative voting for board appointments.
  • Independent audits – The statutes require each JSC to hold a general assembly-appointed audit committee separate from the JSC’s board of directors.

Saudi Law Minority Shareholder Rights during Mergers & Acquisitions

Saudi Arabia has approved several new statutes to protect minority investor rights during mergers and acquisitions. In 2017, the CMA’s Board of Commissioners issued a resolution to update the Merger and Acquisitions Regulations. These provisions replaced the previous one adopted in 2007.

The update resulted from the CMA’s efforts to regulate mergers and acquisitions within Saudi Arabia. The articles comply with the new Companies Law and best international standards for mergers and acquisitions. Investors should be aware of the following regulations.

Provision One: The Companies Law Article 94

Here are several statutes that protect minority shareholder rights under the Companies Law Article 94.

  1. Validation of Meetings – An extraordinary general assembly meeting isn’t valid if only shareholders representing half of the company’s capital are in attendance unless the business bylaws allow for a higher proportion provided that such proportions shall not exceed two-thirds.
  2. Notification for Second Meetings – Businesses must notify shareholders about a second meeting when they don’t reach a quorum at the initial one. The notice should comply with the Companies Law Article (91). The second meeting can be held an hour following the first. Companies must tell shareholders that a second meeting is possible when they advertise the initial assembly. The Authority will only validate meetings that have investors (representing one-quarter of the company’s capital) attending.
  3. Quorums Are Not Required at Third Meeting – Companies should send a notice about a third meeting when shareholders don’t reach a quorum at the second one. The notice should follow the standards outlined in Article (91) of the Companies Law. Once a competent authority approves the third meeting, it is valid regardless of the number of shareholders represented.
  4. Adopting Resolutions – At the extraordinary general assembly, a two-thirds majority vote of represented shares should adopt the resolution. These measures relate to capital increases/decreases, term extensions, and the termination or merger of the company will only be valid if shareholders reach a three-fourths majority vote.
  5. Publishing Amendments and Resolutions – According to Article (65) of the Companies Laws, the Board of Directors must publish the resolutions adopted by an extraordinary general assembly meeting if they include amendments to company bylaws.

Provision Two: Merger and Acquisition Regulations

Minority shareholders have rights under Saudi Law during mergers and acquisitions. Here are a few statutes which discuss them.

  • Paragraph (c) of Article 3 – At the Offeree Company, all shareholders of the same class must receive equal treatment when another business makes an offer.
  • Paragraph (e) of Article 3 – If an Offeree Company is contemplating an offer, parties must provide information to all shareholders. They cannot limit information or share it with only a few investors. This regulation doesn’t apply to the following situations: 1.) When the Offeree Company provides confidential information to a legitimate Offer or regarding the offer (or vice versa). 2.) The Offeree Company gives confidential information by selling the shareholder, or the company, to a legitimate Offer or during a private transaction.
  • Paragraph (j) of Article 3 – If the Offeree Company’s Board believes there is an imminent, legitimate offer, it may not undertake any actions related to the company’s affairs. Their steps can cause the rejection of the offer. Others include moves that prevent investors from making informed decisions without the shareholders’ approval at an extraordinary general assembly.
  • Paragraph (o) of Article 3 – Directors and representatives can’t vote on resolutions where they have clear conflicts of interest. They shouldn’t vote at committee, general assembly, or board of director’s meetings. Conflicts arise when directors have personal interests related to the business deal. For example, conflicts may occur if a person serves as a board director and owns company stock. In another situation, a person belongs to the Offer or Company’s Board at the same time he/she manages the Offer’s one.
  • Paragraph (o) of Article 3 – Directors and representatives can’t vote on resolutions where they have clear conflicts of interest. They shouldn’t vote at committee, general assembly, or board of director’s meetings. Conflicts arise when directors have personal interests related to the business deal. For example, conflicts may occur if a person serves as a board director and owns company stock. In another situation, a person belongs to the Offer or Company’s Board at the same time he/she manages the Offer’s one.
  • Paragraph (a) of Article 23 -The Board has the right to exercise discretionary power to force certain persons to offer shares for purchase (according to Article 45 of the Capital Market Law). This situation can occur when a person (or group) increases aggregate interest shares through a restricted purchase that becomes 50 percent of an Exchange-listed class carrying voting rights. The Board can order an individual (or group) to sell shares of the same class if it doesn’t own the Offeree Company (according to Article 23 and other relevant regulations). Once an Offeree Company incurs obligations under this statute, it doesn’t need to extend the offer to its treasury shares.
  • Paragraph (a) of Article 23 -The Board has the right to exercise discretionary power to force certain persons to offer shares for purchase (according to Article 45 of the Capital Market Law). This situation can occur when a person (or group) increases aggregate interest shares through a restricted purchase that becomes 50 percent of an Exchange-listed class carrying voting rights. The Board can order an individual (or group) to sell shares of the same class if it doesn’t own the Offeree Company (according to Article 23 and other relevant regulations). Once an Offeree Company incurs obligations under this statute, it doesn’t need to extend the offer to its treasury shares.
  • Paragraph (a) of Article 24 – A person who purchases 40 percent (or more)of specific share classes that carry voting rights, may not control them for six months after purchasing this percentage. They must seek the Authority’s approval first if they wish to sell them.
  • Paragraph (a) of Article 35 – Companies must make information about the Offer immediately and equally available to all shareholders. They can distribute information through announcements, statements, presentations, and circulars that provide details about businesses involved. The companies should also publish this information on the Offeror and Offeree companies’ websites or through the exchange, or Regulatory Information Service Providers, no later than the end of the trading day.
  • Sub-paragraph (2/b) of Article 36 – Any proposed break-up fee must be a minimum size of no more than one percent of the Offer’s value. The Offeree Company’s Board of Directors and its Independent Financial Advisor must confirm that the fee is in the business shareholders’ best interest in a written letter to the Authority. They should disclose all breakup-fee arrangements in the Offer Document and the announcement (according to paragraph (e) of Article 17).

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