On November 9, 2015, the Council of Ministers in the Kingdom of Saudi Arabia assented the Kingdom’s company law 1437H/2015G (The New Law) that was enacted in May 2016. The New Law modernized the Current Law following the consent of Saudi Arabia to the World Trade Organization and the continued initiative to modernize the legal and regulatory environment in the Kingdom to match with international trade trends and standards.
The New Law aims at promoting investment in SMEs by establishing a flexible entry strategy for investors. It also introduces the Kingdom to new corporate governance rules to align with international best practice. It aims at establishing clarity and efficiency in the regulatory framework to match the growth of the Saudi Arabian stock market, which has been opened up for Foreign Direct Investment.
The Ministry of Commerce and Investment will continue acting as the primary regulator of listed liability companies under the New Law. The Capital Markets Authority will oversee the operations of listed joint-stock companies. The two organizations will work together to draft and implement the requirements of share transfers under the New Law.
In the Saudi Arabian market, leveraged buyouts and venture capital investments constitute the primary private equity transactions. The market is predominated by local and regional private equity firms, quasi-government entities, family offices, and sovereign wealth funds. Private equity transactions usually involve investors acquiring the majority stake or significant minority interest through the transfer of shares. Unlike in established markets where the general partner and limited partners investment structure exists, the Saudi Arabian market supports direct investments by investors and through a fund established by a local asset manager who determines who will acquire the shares of a target. This is usually done through limited liability companies and joint-stock companies.
Share Transfer in a Limited Liability Company
The transfer of shares in a limited liability company is outlined by the Ministry of Commerce to entail the following steps:
- Preparation of an amendment to the articles of association of the target company to reflect the name of the investor and exit of a shareholder, including identifying in the relevant shares and percentage to be owned by each party. The Ministry of Commerce & Investment (MOCI) regulations require the articles of association to be amended and presented for approval.
- The next step involves seeking the approval of MOCI on the amendments done on the articles of association.
- The Ministry of Commerce and Investment will then publish the amendment on their website as a public notification of the intent to transfer shares.
- The final step is updating the commercial registration of the target.
Transfer of Shares in a Joint Stock Company
For joint-stock companies with foreign investors, if a license from the Saudi Arabian General Investment Authority is expected to be amended as part of the process, the same will be processed prior to commencing with the MOCI steps identified above. Similarly, if the foreign investment license is not required or does not need to be updated as part of the transfer process, closing the share transfer transaction in a CJSC will be a much easy process. It will only require the preparation and performance of the share transfer agreement and an update of the share register of the target.
If an amendment to the by-laws is required as part of the closing process, then a shareholders’ general meeting is required to approve the amendments to the by-laws. The notice for the meeting will be issues in a minimum of ten days. The general meeting approvals must be obtained prior to commencement of the share transfer process, which is usually completed in one business day. Post-completion of the commercial registration of the target will need to be updated to reflect any amendments to the target’s board of directors.
During the share transfer process, Saudi Arabia’s law implies a wide seller representation and warrant as to the ownership and title of the transferred shares and authority to transfer the shares. The implications are adopted from the sharia law, which prohibits unfairness in dealings (Ghobn) under which it is unfair for a transferor to sell shares they do not own.
Restrictions on Share Transfer
Article 161 of the Companies Law provides preventative right to existing shareholders of a limited liability company to acquire the shares of a transferor. The Minister of Commerce and Investment issued a ministerial directive on April 18, 2018, indicating that the admission of new shareholders into a limited liability company through the issuance of shares will require the unanimous approval by the existing shareholders. A transformer wishing to transfer their shares must notify the existing shareholders in writing, through the company’s management. Existing shareholders will then exercise their pre-emptive rights by bidding to purchase the shares offered at fair value within 30 days from the day the transfer notice is given.
Article 107 of the Companies Law restricts the transfer of shares to third parties in joint-stock companies prior to the publication of financial statements covering not less than two years since its formation or conversion from a LLC. However, the Capital Markets Authority may change the 2-year lock period for any joint-stock company that wishes to trade its shares publicly. Any shares bought back by a joint-stock company are deemed as non-voting shares under the New Companies Regulations. There are generally no stamp duty taxes or duties payable upon the transfer of shares in both an LLC and a JSC. Since Saudi Arabia is still governed by the Sharia law in its operations, it does not support the taxation of share transfers. However, a non-resident imposes a 20% capital gains tax on the disposal of shares of a Saudi entity.
Are you a local or foreign investor interested in investing in Saudi Arabia’s economy? Hammad & Al-Mehdar Law Firm is dedicated to providing you with a comprehensive outline of the regulatory and procedural changes, which will affect private equity investment in the form of shares. Contact us today and get the latest updates on Saudi Arabia’s Companies Law and the clauses that affect you when transferring shares.