Corporate governance has become an issue of increasing interest and importance in Saudi Arabia, as evidenced by the recent proliferation of corporate governance rules and the increasingly active involvement of regulators to ensure that the applicable rules are being applied. This article presents a general overview of corporate governance of the two most common types of corporate entities in Saudi Arabia.
Sources of corporate governance
The principal sources of corporate governance in Saudi Arabia are:
- the Companies Law, which is applicable to all types of entities incorporated in Saudi Arabia;
- the Corporate Governance Regulations for listed companies issued by the Capital Market Authority (CMA), which are applicable to joint stock companies (JSCs) listed on the Saudi Stock Exchange (Tadawul) and the Saudi Parallel Market (Nomu), but only binding on the former; and
- the Corporate Governance Regulations for non-listed companies issued by the Ministry of Commerce (MOC), which are generally expressed as voluntary guidelines.
A new Companies Law has just superseded the existing Companies Law in mid-January 2023 and will be supplemented by implementing regulations that are expected to be issued by the MOC and CMA shortly. Companies formed after the new Companies Law takes effect are expected to comply with all of its requirements, but existing companies are not required to comply for two years after its entry into force, except insofar as the MOC and CMA may impose certain requirements during the transitional period.
The new Companies Law generally reorganises and clarifies corporate governance principles that are already included in the existing Companies Law, with some minor changes.
The two corporate entity types most commonly used by foreign investors in Saudi Arabia are limited liability companies (LLCs) and JSCs (both listed and non-listed), which will be the entities discussed in this article.
Corporate authorities
LLCs
In an LLC, the shareholder(s) have the ultimate power to control the company acting in accordance with its articles of association (AOA). It is not uncommon for shareholders to enter into a separate shareholders agreement but it would only bind them contractually and not third parties dealing with the company.
An LLC need not have a board, but at least one manager is required. The manager(s) have only those authorities over a company that are stipulated in a company’s AOA or in separate instruments issued by the shareholder(s), which are typically to run the day-to-day business of the company, such as representing the company vis-a-vis third parties, entering into contracts in the ordinary course of business, and hiring or appointing employees or independent contractors.
JSCs
In a JSC, the relationship between the company and the shareholders is regulated by its by-laws. While non-listed JSCs may also have one owner, this occurs rarely in practice. Non-listed JSCs may also enter into a separate shareholders agreement as in the case of an LLC. The ultimate authority in JSCs rests with:
- the ordinary general assembly (OGA), which makes decisions on all matters in relation to the company, except for those reserved to the extraordinary general assembly (EGA); and
- the EGA, which has the exclusive authorities to amend the bylaws of the company.
Unlike in an LLC, a JSC must have a board of directors comprising of at least three directors. The management of a JSC is the exclusive function of the board within the authorities granted to it by the by-laws or the OGA/EGA.
All JSCs must have an audit committee and JSCs listed on Tadawul must also have a remuneration committee, a nomination committee, and a risk management committee.
Statutory duties and responsibilities
Shareholders of LLCs and JSCs
The principal duty of shareholder(s) in LLCs and JSCs is to attend an annual general assembly meeting, with an agenda that includes the discussion of the auditor’s and management reports relating to the company’s activities and financial position in the previous fiscal year, approval of the audited financial statements for such year, decision on profit distribution, and appointment of the next auditor.
Managers of LLCs and directors of JSCs
Other than duties assigned to them by the AOA or by-laws (as applicable) or the decision of the shareholder(s), the principal duties of manager(s) of an LLC and directors of a JSC are to prepare and share with the shareholder(s) the financial statements and management report on an annual basis, convene an annual general assembly of the shareholder(s) at least once a year, and, if the company’s losses reach one half of its capital, convene a general assembly meeting for the shareholder(s)to consider whether to continue or dissolve the company.
The new Companies Law provides that manager(s) of LLCs and directors of JSCs owe a duty of care and loyalty to the company and are generally required to:
- perform their duties within the scope of their authorities;
- act in the best interests, and promote the success, of the company;
- take decisions or vote thereon independently;
- exercise reasonable and expected care, diligence and skill;
- avoid conflict-of-interest situations and competition with the company’s business without shareholder authorisation;
- disclose any direct or indirect interests in any business or contracts undertaken for the account of the company;
- refrain from accepting any benefit from a third party in relation to their position with the company; and
- refrain from taking advantage of the company’s assets or investment opportunities to achieve any direct or indirect personal interest.
Under the existing Companies Law, most of these duties only apply expressly to directors of JSCs.
Accountability
Manager(s) of LLCs and directors of JSCs may be held jointly liable by the company, the shareholders, and/or third parties for any damages resulting from any violation of their duties (whether pursuant to statute or the company’s constitutional document), or as a result of any wrongful acts, negligence or failure on their part in the course of performing their duties. A manager or director may avoid liability arising from an action if they have expressly recorded their objection to such action in the minutes of a meeting.
Additionally, the MOC and the CMA may impose penalties on manager(s) and directors (as applicable) for any violations of relevant statute or regulation.