Tag: Corporate & Commercial

THE UNIFIED REGISTRY FOR COMMERCIAL PLEDGES TAKES EFFECT IN SAUDI ARABIA

The Saudi Arabian Ministry of Commerce and Investment (MCI) launched on 17 March 2019 the Unified Registry for Commercial Pledges (URCP) and published the regulations for its implementation. The announced procedural rules envisaged in the Commercial Pledge Law (CPL) that came into effect in April 2018. The CPL stipulates the regulations and procedures for creating, granting, perfecting, and enforcing pledges over movable and future assets as security for “economic” debts.

Whom Should the URCP Regulations Concern?

URCP regulations apply to creditors (pledgees), debtors (pledgers), and any interested third parties. Registering a pledged movable asset with the URCP in strict compliance with the relevant procedural rules gives the pledgee a valid priority security claims over the asset or a recognized right provided for by the CPL against other interested entities.

What are Pledgeable Assets?

According to the CPL, lenders can register commercial pledges with the URCP over any of the following asset categories:

•    Companies: An economic enterprise may agree to a pledge over its entire tangible and intangible business assets.

•    Receivables: The law now recognizes potential business earnings as valid collateral. For example, an organization may qualify for construction financing after agreeing to the registration of a pledge on its future revenue.

•    Bank accounts and deposits: Lenders can take security over pledged bank accounts, deposits, or balances. The pledge agreement on a current account remains valid even if the borrower deposits more funds after the date of the URCP contract registration.

•    Inventory: Enterprises can grant a pledge over their stocks to secure financing. One tool they can use is the floating pledge.

•    Shares: There is now a legal framework for pledging shares, including limited liability companies.

Registering a Commercial Pledge Under URCP Procedural Rules

A person must first open an electronic account to log a pledge with the URCP. The MCI has set up an online portal for this purpose as no other method is acceptable for registering movable assets going forward. Below are some of the mandatory steps in commercial pledge registration:

1.    The pledgee sends a registration application to the URCP via the official online registry. The applicant must attach a copy of the pledge contract and any other pertinent documents to the request. Vital information to provide includes the name and contact details of all parties to the pledge agreement, the value of the pledged asset, date of the security contract, and the secured debt’s maturity date.

2.    The URCP notifies the pledger of having received the pledgee’s application for registration. The URCP can decline the registration request if the pledger formally objects to it within seven days from the date of notification.

3.    The URCP continues acting on the pledgee’s registration request if the pledger approves it or does not object to it within seven days after receiving the URCP’s notification of the application.

Notifying Specialized Registries

Certain pledgeable assets require registration under other regulations besides URCP. For instance, the General Department of Traffic at the Ministry of Interior registers all vehicles in Saudi Arabia. Once the URCP completes the registration of a pledge over such an asset, it must share the contract details with the relevant specialized registry to tag the asset in question as pledged in the appropriate database.

Rules for Amending a Registered Pledge

The new CPL recognizes future assets as pledgeable, and it allows for the creation of securities over the same. What if the status of a future pledged asset changes to current? The pledger must, immediately or soon afterward, formally request the URCP to update the registry account in question with the new status of the pledged asset. The amendment request stands with or without the pledgee’s approval.

A typical case in point is when a bank creates security over future proceeds for money it lends to a business, and it registers the pledge with the URCP. In this scenario, the pledger (borrowing enterprise) must notify the URCP soon after collecting the secured or pledged receivables because they have become available movable assets.

If the pledgeable future asset is subject to pledging procedures in compliance with other relevant regulations, the URCP processes the amendment requests before sending any updates to the applicable specialized registry to capture the new asset status. The URCP notifies the pledger and the pledgee once the amendment is complete.

Criteria for Terminating Any Pledge Registration

Ways to terminate the pledge registration are:

1.    The pledgee can request termination, or a judicial body may order the cancellation;

2.    Expiry of the pledge duration, subject to condition three below;

3.    Termination can take effect 60 days after an enforcement document is issued. Nonetheless, the law permits the pledgee or enforcement agent to request the URCP to extend the pledge term by an additional 60 days.

The law requires the pledgee to end the pledge registration with the URCP not later than three days after terminating the pledge contract, or after the execution of relevant enforcement actions on the property in question.

Who Can Search the URCP Database?

Upon request, the URCP may allow the pledger and the pledgee to view all details pertinent to a registered pledge. To third parties, however, the URCP may only confirm whether an asset is the subject of a registered pledge.

For a fee and with the pledger’s consent, the URCP may provide specific details of a registered pledge to a third party. Approval is contingent on the URCP receiving the name of the individual requiring the information and the particulars that the person is requesting.

When to Commence Enforcement

The pledgee or execution agent may enforce a pledge on an asset registered by the CPL only after obtaining an enforcement document from the URCP. The regulator must not provide the requested paperwork until the pledgee has the legal right to enforce the pledge contract.

The pledgee should request and can only obtain the prerequisite enforcement paperwork before the pledge registration period with the URCP expires. The regulator cannot issue these documents for execution on a future asset. For example, the pledger must first own the pledged asset, such as a car, before the pledgee has the right to initiate the enforcement process.

Perfection and Priorities

To guarantee priority against third parties, the pledgee should complete the pledge registration process with the URCP. However, there can be multiple pledges of varying priority levels over a single movable asset. Still, the pledger may agree with the relevant pledgees to alter the pledgees’ order of precedence over the same pledged property.

In a move to provide practical assistance to companies in the Kingdom of Saudi Arabia, currently facing problems in complying with certain ongoing obligations under the Companies Law (the Law), the Ministry of Commerce (MoC) announced that a Royal Order (the Order) was issued on 2 December 2020 which temporarily suspends the application of certain provisions of the law relating to both Joint Stock Companies (JSCs) and Limited Liability Companies (LLCs).

Whilst the Order provides relief from a number of provisions, the suspension of Article 181 of the Law (for LLCs) and Article 150 of the Law (for JSCs) provide a significant respite for companies facing financial challenges as a result of the COVID-19 Pandemic.

Whilst we eagerly await the publication of the New Companies Law (following the consultation which took place earlier this year), these measures are a sensible and practical response welcomed by both investors and companies in the Kingdom outlining a practical approach as to how to deal with certain corporate governance issues over this period.

The Order made the following changes:

Article of the Law	Area of Concern	Effect of suspension
LLCs
167(2)	Annual General Meetings (AGM)	An LLC must hold its AGM within 12 months following the LLC’s end of financial year, rather than 4 months. (suspension expires on 31 December 2020)
175(2)	Auditors’ Report	Filing of the auditors’ report, financial statements, business report, dividend recommendation and the report of the supervisory board (if applicable) is now to occur within 12 months following the LLC’s end of financial year, rather than 1 month. (suspension expires on 31 December 2020)
168(1)	Written Resolution	Permitting shareholders if there are more than 20 shareholders to make decisions separately by way of a written resolution. This is possible if the General Manager or directors of the LLC use registered mail when communicating in relation to such resolution. (suspension expires on 22 October 2021)
181	Losses of the LLC having reached 50% of the share capital
181(1)	Losses of the LLC above 50%	The GM or board of the LLC must invite the shareholders to meet and decide to continue or to dissolve the LLC within 180 days (rather than 90 days) from the date of the directors’ knowledge of the losses of the LLC reaching 50% of its share capital. (suspension expires on 4 March 2022)
181(3)	Automatic dissolution of the LLC	The LLC shall not automatically dissolve (by operation of law) if the shareholders do not meet or pass a resolution to continue or dissolve the LLC, if the directors: Disclose to the MoC the losses, the losses as a percentage of capital and  the reasons that led to the current situation; Give quarterly updates (within 15 days of the end of each quarter) on the status of losses; Disclose to MoC when the losses have decreased to less  than 50% of share capital and measures undertaken. (suspension expires on 3 March 2022)
166	Appointment of Auditors	Allowing the re-appointment of the company’s auditors (who has been appointed for a period of 5 consecutive years) for an additional period not exceeding 2 years, provided that: the total period of appointment of the auditor does not  exceed 7 consecutive  years; the shareholder supervising the auditing process has not  been doing so for  5 consecutive years. (suspension expires on 4 March 2022)
JSCs
150	Losses of the JSC having reached 50% of the share capital
150(1)	(when to hold the Extraordinary General Meeting (EGM) of shareholders of the JSC)	The board of a JSC must call an EGM to decide to either (i) increase or decrease the JSCs share capital, or (ii) dissolve the JSC within 60 days (rather than 45 days) from the date of the board’s knowledge of the losses of the JSC reaching 50% of its share capital. The EGM must be held within 180 days from the board’s knowledge of the losses. (suspension expires on 4 March 2022)
150(2)	Automatic dissolution of the JSC for non-compliance by the shareholders	The unlisted JSC shall not automatically dissolve if the shareholders do not meet or pass a resolution to support or fund or dissolve the JSC, if the Chairman of the Board of Directors complies with the following: Disclose to MoC the losses, the losses as a percentage of capital and the reasons that led to such losses; Give quarterly updates on the status of losses; Disclose to MoC when the losses have decreased to less than 50% of share capital and measures undertaken (suspension expires on 3 March 2022)
133(1)	Appointment of Auditors	Allowing the re-appointment of the company’s auditors (who has been appointed for a period of 5 consecutive years) for an additional  period not exceeding 2 years, provided that: the total period of appointment of the auditor does not exceed 7 consecutive years; the shareholder supervising the auditing process has not been  doing so for 5 consecutive years. (suspension expires on 4 March 2022)

If you have any questions or wish to discuss any of the above, please contact Rakesh Bassi (rakesh.bassi@13.233.247.59) or one of our Saudi Arabia based team.

About the Authors:

Rakesh Bassi is a Partner in the Corporate Commercial department at Hammad & Al-Mehdar Law Firm specializing in M&A, JV, merger control, capital markets and restructurings, as well as complex Go To Market strategies in KSA.

Ebaa Tounesi is an Associate and part of the Corporate and Intellectual Property team in Hammad & Al-Mehdar Law Firm.

About the Hammad & Al-Mehdar:

We are a full service leading law firm in Saudi Arabia (Riyadh, Khobar and Jeddah) and Dubai that offers international-standard corporate legal services. Our Corporate department provides innovative solutions to assist you in with all your corporate legal needs.

Saudi Arabia is a kingdom that is teeming with possibilities for enterprising companies looking for new opportunities when it comes to commercial franchising. Here are a few reasons why these franchising opportunities exist, why they are so exciting, and how you can take advantage of them with the right kind of help.

Franchise Expansion Example: Abu Dhabi Bank and Jeddah Branch

The recent news that the Abu Dhabi Bank is expanding to Jeddah is just one example of how the commercial banking business is picking up in the kingdom of Saudi Arabia. They recently got a license from the Saudi Arabian Monetary Authority, or SAMA to start this franchising back in March. The license allowed FAB to operate three franchises in the kingdom.

They operate in 5 different countries.

In fact, FAB is now operating on three different continents, just expanding its business in Saudi Arabia recently. This is just one example of how the Kingdom is opening up and how those who take advantage can reap considerable rewards with the right help with getting licenses and navigating the new laws.

E-commerce Law Begins in Saudi Arabia

Those who seek to franchise through a digital approach need to consider both the new franchise and the new e-commerce laws. The e-commerce law, in particular, will govern anyone who provides services or goods to those who can access them in the KSA. This is an example of KSA opening up commerce to anyone in the world to offer goods and services to the citizens of KSA, but it’s also an opportunity for those going into commercial franchising in the area.

After all, plenty of goods and services need to be applied locally, even if they are purchased digitally. An example would be anything related to shipping or the transportation of people. The new law dictates that service provides a need to show consumers online terms and conditions as part of an electronic contract. The provider will also need to disclose details about their operations, about taxes, other fees, total price disclosure, and other information.

The KSA is interested in protecting consumers while opening up this market, which will surely include commercial franchises operating locally. This includes allowing the consumer to cancel orders if the provider has delivery delays of more than 15 days, for example.

An Impressive Market for Franchises

Recent studies have concluded that there are nearly 13 million e-commerce users in Saudi Arabia, which over 6 million more coming by 2022. These 19 million users will use over 480 dollars a day by that time. This is a huge opportunity for franchises to take advantage of, with the right representation.

New Franchise Law

One of the reasons for the recent interest in commercial franchise opportunities in the Kingdom of Saudi Arabia is due to the new franchise law that people brought to attention starting in October of 2019. This law will take effect on April 22 of 2020. It will apply to any franchise that operates in the Kingdom at all, either in part or fully. The Law is M/22 of 1441h (2019).

The law defines how the franchisee and franchisor are to interact inside the Kingdom of Saudi Arabia for one thing. The law creates a new registration and disclosure regime that will regulate franchise relationships with the Kingdom.

Opting out

There are commercial provisions in the law that restrict franchise interactions, but there are also opt-out clauses that allow franchisees to interact with the franchisor however they want. This is essential to the growth of commerce and it will help encourage the growth of commercial franchises in the Kingdom, leading to a potential boom and substantive opportunities for growth for anyone who seeks to take advantage of the new law.

Planning Window

There’s a 180-day period as a window before the effective date of the new law, which is an excellent time for parties interested in franchising to review the law with their attorneys to potentially plan their next steps when it comes to commercial franchise expansion into the country. Or, a company doesn’t have the representation they want or don’t have attorneys that they think are up to the task, it’s also a good time to get new representation with experts who understand the law, its implications, and how it can be used fully with potential ventures going forward.

In other words, this is the perfect time to find new attorneys that can help you navigate what is happening in Saudi Arabia since it’s a natural window before the law fully takes effect. After all, planning these things can take time, and that’s what you have a little bit of at the moment.

Getting Started with HMCO

The key to taking advantage of these laws and the other recent news in Australia is to go with a trusted set of attorneys such as HMCO. Hammad & Al-Mehdar are experts in areas of Saudi Arabian law including starting franchises.

Given the intricacies of the law, it’s going to be a dangerous thing to try going it alone, even if you have attorneys if those attorneys have no expertise in this specific area of practice. Making a mistake when it comes to the law in the KSA is often a fatal error for your business and your dreams of expansion in the future.

Not only are there two major laws that affect commercial franchising coming into effect in recent days or in the near future, but the interaction between the e-commerce and commercial franchise laws are going to be important to understand as well.

For more information on starting a franchise in the KSA soon, and staying within both of these laws as well as any other law that is in effect or may go in to effect in the future, make sure you don’t hesitate to go ahead and contact us today.

The faster you contact us about your intentions, the more quickly we can make sure that your venture has the best chance of success within the KSA as possible.

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).

Your company deserves a veteran team that can handle your legal affairs in Saudi Arabia. Only trust the Hammad & Al-Mehdar Law Firm to handle your legal affairs. We’re a top-firm that has more than 35 years of experience. Our team has skilled litigators who specialize in international law and common law. We specialize in many sectors, including real estate, private equity, and venture capital. Count on us to provide you with exceptional customer service. Contact us to schedule a consultation today.