Since its formation in July 2004, the Capital Markets Authority (CMA) has taken various measures to improve corporate governance and disclosure standards for Saudi Arabian public companies, which has also resulted in the improvement of such standards among private companies that may seek to be publicly listed in the future.
PREPARING THE GROUND: The CMA adopted the Corporate Governance Regulations in November 2006, and since then through a series of board resolutions has made more and more of its rules binding. In addition to being applicable to publicly listed companies, the CMA extended the application of the Corporate Governance Regulations to non-publicly listed financial institutions that are licensed as authorised persons by the CMA. Furthermore, pursuant to the listing rules adopted by the CMA in January 2012, increased disclosure standards were implemented and are applicable to a public company both at time of listing and on an ongoing basis.
The CMA has also issued a number of resolutions that are meant to provide the market with additional guidance on what types of material information should be announced by a public company, as well as how and when such disclosures should be made. In addition to the measures taken by the CMA, the Ministry of Commerce and Industry (MCI), through its enforcement of Regulations for Companies, and the Saudi Arabian General Investment Authority (SAGIA), through its licensing of entities with foreign shareholding and other initiatives, have taken steps to improve corporate governance and the transparency of firms operating in the country.
CORPORATE GOVERNANCE REGULATIONS: In addition to matters of corporate governance, which are proscribed in the Regulations for Companies as enforced by the MCI, the CMA adopted a set of rules that are applicable to all companies listed on the Saudi Arabian Stock Exchange. In addition, companies that are filing for a public listing must show that they are in compliance with the Corporate Governance Regulations and certify to same. Items required by the Corporate Governance Regulations include:
• Adoption of proper internal control systems, including a written policy regulating conflict of interest, and clear policies, standards and procedures for membership on the board of directors;
• That the majority of board members should be non-executives, independent directors should not be fewer than two members or one-third of the board, whichever is greater, and that the position of chairman and managing director must be separate;
• That the board sets up a suitable number of committees to enable the board to perform its duties in an effective manner, and that such committees include a sufficient number of non-executive members; and
• That companies are required to set up an audit committee, as well as nomination and remuneration committees. Furthermore, in January 2014, SAGIA announced the launch of an initiative to establish a corporate governance index for public and non-public companies operating in Saudi Arabia. The aim of the index is to evaluate the level of corporate governance standards of share-issuing companies in Saudi Arabia (both public and non-public). The index will be based on a number of board ratings criteria, which will include the independence and compensation of directors, and the composition of the board.
DISCLOSURE STANDARDS: Pursuant to the CMA’s listing rules, there are clear disclosure requirements for publicly listed companies, both at the time of listing and on an ongoing basis after listing. As part of its initial public offering, an issuer must prepare a prospectus that contains all information which is necessary to enable an investor to make an assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and its profits and losses. At a minimum, the prospectus must contain each of the items included in Annex 4 of the listing rules (Contents of a Prospectus for Shares), which include, without limitation, provision of thorough information on the issuer, management discussion and analysis, a business description, organisational and management structure, material agreements, and so on.
ADDITIONAL REQUIREMENTS: In addition to the disclosures required in the prospectus, a publicly listed company is required to publish any material developments in its sphere of activity which are not public knowledge and which may have an effect on the assets and liabilities, financial position, or on the general course of business of the issuer or its subsidiaries and which may (1) lead to movements in the price of the listed securities or (2) significantly affect an issuer’s ability to meet its commitments in respect to debt instruments.
The listing rules also provide guidelines as to what types of information constitute material developments, which include any purchase or sale of an asset, any debt issuance and losses, increase or decrease in nets assets, and increase or decrease in gross profit, in each case equal to or greater than 10% of the net assets of the company.
Other matters that must be disclosed include: significant changes in the firm’s production environment or activity, changes to the makeup of the board or CEO, significant legal proceedings where the value is equal to or greater than 5% of the net assets of the company, entering into or termination of a contract with revenues equal to or greater than 5% of the company’s gross revenues, any transaction between the company and a related party and any interruption in principal activities of the company or its subsidiaries. Whether in the prospectus or as part of the company’s continuous obligations, the disclosure must be clear, fair and not misleading. The CMA also issued General Instructions which set out the main items that should be included in any announcement to be made by a public company and include forms that should be used when making certain announcements. In announcing any major development or expected major development, public firms should comply with the following rules:
• The heading of the announcement should be clear and should reflect the major development that is the subject of the announcement;
• The announcement must include a detailed description of the major development;
• The reasons that led to the major development should be highlighted in the announcement;
• The announcement must set out any financial implications of the major development to the extent applicable and possible;
• The announcing company must make a reasonable endeavour to ensure that any facts or information relating to the major development being announced is correct and not misleading;
• The company must not delete or hide any information relating to the major development; and
• Any future development related to the major development should be announced when it occurs. Other rules that apply generally to announcements by public companies include:
• In the event that two major developments occurred, a separate announcement for each development should be published;
• Each company must have policies and procedures in place for announcing important developments so that it can comply with the disclosure rules; and
• Each company must have the ability to determine the need to respond to any rumours related to any developments and the CMA has the right to oblige a public company to respond to any rumours to the extent a response is considered necessary.
