Saudi Arabia’s Capital Market Authority (CMA) approved updated corporate governance regulations (CGRs) for joint-stock companies listed on the Saudi Stock Exchange (Tadawul) in February 2017, and amended them in May 2019. The new CGRs reflect efforts to enhance the competitiveness of the Saudi exchange to investors. The regulations set standards for best corporate practices by promoting accountability, clarity and transparency for management, board members, shareholders and stakeholders.
One of the central objectives of the CGRs is protection of shareholders’ rights. This is manifested in an extensive list of legal rights of shareholders, such as:
• Shareholders must be treated equitably and fairly.
Discrimination among shareholders is not permitted.
• Shareholders have the right to access information and inspect company books and records.
• Shareholders have the right to receive their respective, fair portion of company assets upon liquidation.
• Shareholders are entitled to seek judicial enforcement of their rights and to seek redress for breaches of the board’s fiduciary duties.
Governance & Board of Directors
The main focus of the CGRs is to regulate the board of directors. The CGRs set out their duties and responsibilities, as well as the criteria for and composition of boards of directors. The regulations set out specific rules and procedures for convening board meetings, setting the meetings’ agendas, documenting the minutes of each meeting and the disclosure of conflicts. Important provisions in this regard include:
• Composition, nomination and dismissal of the board of directors: The CGRs stipulate that a board of directors must be composed of at least three members and no more than 11 members elected by the shareholders, as required under the Companies Regulations. The CGRs limit the term for each board member to three years. A director may serve longer if the company’s by-laws allow for re-election. Directors must also be professionally capable and have the requisite credentials and qualifications to serve as board members. Listed companies are required to provide the CMA with the names and resumes of newly elected board members within five business days of their election. The CGRs grant shareholders the authority to dismiss directors at any time prior to the expiration of the director’s term, even if the by-laws of the company provide otherwise.
• Duties of loyalty: Directors must abide by the principles of honesty, integrity and loyalty in carrying out their responsibilities. This entails adhering to applicable laws and regulations, disclosing conflicts, and having an honest and professional relationship with the company by disclosing any material information that may compromise the director’s judgment.
• Governance and ongoing obligations: The CGRs require the board of a listed company to publish and make available to shareholders a report on company performance on an annual basis. The report should include details on the board’s compliance with laws and regulations, and its adherence to its own duties and responsibilities.
• Committees: Listed joint-stock companies are required to have certain committees. Under the CGRs, the Ordinary General Assembly forms an Audit Committee, which is responsible for monitoring the company’s activities and ensuring the effectiveness of the reporting and internal control systems of the company. The board of directors is also required to form a remuneration committee, responsible for setting policies governing the remuneration of directors, committee members and the management team; a nomination committee, responsible for setting policies that govern the nomination of directors and management, and reviewing the composition of the these bodies to ensure compliance with required standards; and a risk-management committee, which reviews and oversees the risks and provides recommendations to maintain an acceptable level of risk and continuation of the business.
• Conflicts of interest and related-party transactions: The board of directors is required to put into place a mechanism for dealing with situations that give rise to conflicts of interest. This process must ensure that board members and senior officers avoid transactions where they are conflicted or that compete with the company. The measures include disclosing interests and abstaining from voting on such matters. The CGRs also prohibit directors and senior officers from receiving gifts from anyone who does business with the company.
Protection of Shareholders
There has also been a push towards better protection of the shareholders of non-listed companies and listed companies alike through amendments to the Companies Regulations. The Companies Regulations apply to all types of firms, except companies formed by royal decree that explicitly state that the said regulations do not apply. The amendments primarily served to increase shareholders’ participation and protection, while making it easier for companies to do business. The most notable aspects of the recent amendments to the Companies Regulations include: a. Article 71, which deals with transactions in which a board member has direct or indirect interest. It has been amended to strengthen corporate governance and increase transparency, while improving the ease of doing business. As originally enacted, Article 71 required interested transactions to have prior approval from the General Assembly, and such approval needed to be renewed every year. The amendment removed these two requirements, meaning that the General Assembly’s approval of interested transactions can be obtained after the fact and need not be renewed annually. However, board members will be held liable for damages resulting from transactions that do not comply with the approval requirement, are not fair, or conflict with or damage the interests of the shareholders. The amendment thus maintains a robust enforcement mechanism to ensure good corporate governance while increasing the level of flexibility afforded to the board in managing the affairs of the company. b. Shareholders’ rights: The amendments afford shareholders more protection.
• The amendments allow shareholders to claim the costs incurred that relate directly to a derivative claim from the company, provided that the claim is made in good faith and is in the best interests of the company. This change ensures that shareholders are not left with out-of-pocket costs due to claims brought in favour of the company, and that therefore may contribute to promoting derivative claims and enforcing the rights of companies.
• The notice period required for holding annual general assemblies for a joint-stock company was increased from 10 to 21 days. Similarly, the deadline for submitting an internal auditor’s report and signed financial statements to the company’s head office has been extended from 10 to 21 days. These changes help ensure that shareholders are given sufficient time to review documents prior to convening in a general assembly and play a proactive role in the governance and decision-making of the company.
• Shareholders holding 10% or more of the shares of a limited liability company are entitled to request a General Assembly meeting. This change from the previous 50% shareholding requirement serves to enhance the rights of minority shareholders.
Saudi Arabia’s Competition Law and its implementing regulations came into effect on September 25, 2019. It is aimed at establishing and preserving an open and competitive market that is attractive to investors, and one that will allow new businesses and entrepreneurs to have a fair shot at entry. As such, the new Competition Law places restrictions on anti-competitive behaviour that would exclude new players in the market, such as collusion, mergers and other practices that were not properly regulated under the previous laws. The main aspects of the Competition Law are: a. Applicability and investigative powers: The Competition Law broadly applies to domestic and foreign natural or legal persons engaged in business or economic activities in Saudi Arabia, which includes entities operating outside the country if their activities have an adverse effect on competition within Saudi Arabia. However, government establishments and wholly owned state entities that are solely authorised by the government to sell goods or provide services in any given field are excluded from the law. Under the Competition Law, the General Authority for Competition (GAC) is tasked with policing corporate activities including investigating anti-competitive behaviour, imposing penalties and bringing lawsuits against entities that violate the law. b. Anti-competitive conduct: The Competition Law prohibits certain anti-competitive behaviours that intend to undermine competition whether by explicit, implicit, verbal or written agreements and contracts. For example, the Competition Law prohibits a range of exclusionary tactics and classifies some as per se violations of the Competition Law, without further inquiry into the actual effect of those tactics on competition or the intention of the parties engaged in such tactics. These activities include:
• Fixing prices or conditions of sale;
• Limiting the free flow of goods or services to or from the market;
• The exclusion of new entrants;
• Denying particular entity or entities access to goods or services;
• Colluding or coordinating with respect to bids for government tenders, auctions or other activities;
• Market-sharing through arrangements on any basis, including a geographic, customer, or seasonal basis;
• Tying arrangements; and
• Freezing or limiting manufacturing, development, marketing and other forms of investments. The Competition Law also restricts entities that are in a dominant position in the market or represent a large part of the market from engaging in oppressive or unconscionable business tactics that would suppress competition, such as discriminatory or predatory pricing, imposing trade conditions and refusal to deal or supply agreements. The Competition Law defines a “dominant position” as either an entity or group of entities with a combined market share of 40% or more, or an entity or group of entities with the ability to influence the market, including controlling prices, or supply and demand. c. Merger control: The Competition Law defines an “economic concentration” as “any action that results in a total or partial transfer of ownership of assets, rights, equity, stocks, shares or liabilities of an entity to another by way of merger, acquisition, takeover or the joining of two or more departments, or by any other means, whether directly or indirectly”. The Competition Law includes a worldwide turnover threshold; if one or more parties to an economic concentration have a worldwide turnover that exceeds SR100m ($26.7m), then they must notify the GAC of their intention to engage in the proposed transaction 90 days prior to completion of the transaction.
• Filing requirements and fees: Under the Competition Law, entities wishing to form an economic concentration must submit a report to the GAC describing the proposed transaction, including the parties to the transaction, the relevant markets and sectors, the likely effect of the transaction on competition, and the top customers and competitors in the market. The GAC has the discretion to request additional documents and information, as well as access, examine and make copies of any and all records, data, files and documents belonging to the parties that may assist the GAC in its assessment of the transaction. Along with the required documents, the parties have to pay a fee determined on a case-by-case basis by the GAC.
There are both criminal and civil penalties that apply to violations of the Competition Law. The Competition Law grants the GAC the power to initiate criminal proceedings against and/or impose fines on individuals and entities that fail to comply with the provisions of the Competition Law. For example, parties may be subject to fines of up to 10% of the total value of annual sales of the relevant transaction if the parties fail to notify the GAC by the notification deadline for an economic concentration, or if parties close a transaction without clearance from the GAC. The fines may be tripled if an individual or entity commits the same violation within three years of the first offence.
The CMA regulates the capital markets through a robust regime that maintains the delicate balance between promoting investment, and the transparency, protection and governance that sophisticated investors demand.
Foreign investors have been gradually granted access to Saudi capital markets, with the most recent regime being the foreign strategic investor (FSI) rules. Prior to the FSI rules, foreign investors could access capital markets through one of two routes, the first of which was through swap agreements between foreign investors and local investment funds, allowing the foreign investors to receive benefits of shares bought by the funds on their behalf without the direct voting rights attached to such shares.
The second route was introduced in 2015, when financial institutions with assets under management or custody of SR1.9bn ($506.5m) or more were permitted to trade directly in listed securities on the Tadawul under the rules for qualified foreign financial institutions (QFI). The QFI rules allowed foreign investors to exercise the rights attached to their shares, but limited foreign financial institutions to up to 10% of the shares or convertible debt instruments of a listed company.
The FSI rules allowed foreign investors to directly acquire shares, with no limit on the number of shares or convertible debt instruments that can be acquired. However, shares purchased under FSI rules are subject to a minimum lock-up period of two years. The FSI rules thus aim to attract foreign capital while ensuring that the influx of capital does not affect price stability. Firms looking to avoid the lock-up period can instead invest under swap arrangements or the QFI rules, provided they satisfy certain requirements.
Foreign Investment Licences
Foreign investors can also invest in many companies. The Ministry of Investment maintains a negative list of sectors in which foreign investment is prohibited, but has moved in recent years to gradually shrink the list. Foreign investors can now invest in printing and publishing, audiovisual and media services, land transportation, real estate brokerage and military equipment manufacturing. The ministry also introduced new foreign investment licences that correspond with the newly opened sectors for foreign investment.
Support for Small Firms
The General Authority for Small and Medium Enterprises – known as Monshaat – was established in 2016 under Vision 2030 and is tasked with supporting, organising and developing small and medium-sized enterprises (SMEs). The authority’s ultimate goal is to increase SMEs’ contribution to GDP from 20% to 35% by 2030.
Monshaat manages several initiatives that help SMEs start and run their businesses. For example, the recovery initiative – or Estrdad in Arabic – allows SMEs to recover fees related to establishing a business, including commercial registration and government licensing fees, thus lowering the financial burden during the first three years of operation. Moreover, the financing initiative allows SMEs to connect with licensed lenders regulated by the Saudi Arabian Monetary Authority through a Monshaat-developed online portal. Monshaat is also promoting alternative modes of financing, such as venture capital and financial technology-related solutions. Monshaat provides SMEs with support and technical development services, including a workspace, business consultation, ongoing training and business development services.
Tenders & Procurement
In line with Vision 2030, the government is funding major projects with the support of the private sector. To ensure the equal and fair participation of private businesses, Saudi Arabia issued the Government Tenders and Procurement Law (GTPL), which came into force in November 2019 and replaced the previous law issued in 2006. The GTPL provides a unified, electronic portal for government tenders and procurements with the goal of increasing transparency and reducing the influence of personal interests when the government decides which contractor or supplier to choose for a specific project.
The GTPL is a useful upgrade from its predecessor, as the new law is more in line with fast-developing infrastructure needs. The GTPL obliges government entities to prioritise localisation, from increasing local content to tapping local SMEs and companies. This is expected to promote the development of local companies and encourage investment. The range of template contracts available on the unified portal has been expanded to accommodate a wider variety of modern services. The GTPL also allows government entities to include arbitration clauses in contracts, provided that the entity obtained approval from the minister of finance. This is a welcomed change and should build the confidence of private companies bidding for government work.
The infrastructure around arbitration has been developing rapidly in recent years. In the past, arbitration proceedings were conducted on an ad hoc basis. However, in 2012 Saudi Arabia issued the Arbitration Law, with detailed implementing regulations issued in 2017. The Arbitration Law closely follows the UN Commission on International Trade Law’s model and is therefore closely in line with international principles of arbitration.
The Kingdom is quickly becoming a leading jurisdiction for arbitration in the region, with the Saudi Centre for Commercial Arbitration becoming the preferred venue for proceedings. The Arbitration Law and its implementing regulations provide both flexibility and procedural certainty. Parties to an arbitration agreement are free to agree to apply the laws and arbitration procedures of any legal system, provided that this does not conflict with sharia, or Islamic law. However, in the absence of an agreement on specific laws and procedures, the arbitrative tribunal will decide on which laws and procedures are appropriate according to the circumstances of each case. Improvements to the arbitration, judicial and enforcement environment have helped Saudi Arabia successfully enforce various foreign judgements and arbitrative awards.
Improved Bankruptcy Law
Saudi Arabia issued the Bankruptcy Law in March 2018, which supersedes the Law of Settlement Against Bankruptcy – issued in 1996 – and chapter 10 of the Commercial Courts Laws, issued in 1931. The Bankruptcy Law applies to natural and legal persons, domestic or foreign, who are engaged in commercial, profit-seeking activities. Debtors considered to hold small debts by the Bankruptcy Committee and Monshaat can benefit from simplified bankruptcy procedures.
The law introduces insolvency officials, whose role is to make the insolvency procedures more cost-efficient by protecting stakeholders’ interests while minimising the need for court involvement. It will be a vital part of economic modernisation as it improves the protection of creditors, provides debtors with alternatives to liquidation that can help them maintain the value of their enterprise and, if necessary, provides for a more efficient liquidation process. The key bankruptcy procedures are:
• Protective settlement: Debtors in financial distress can apply to the court for a protective settlement procedure, which gives debtors the opportunity to reach an agreement with creditors while maintaining management of the business. If the application is successful, the court will assign a date within 40 days, upon which the creditors can vote whether or not to accept the settlement proposal. The proposal must then be accepted by at least two-thirds of creditors by value within each class of creditors, and who must hold over 50% of any non-related debt. This process also allows debtors to apply for a discretionary stay against litigation and security enforcement for up to 180 days from the opening date of the procedure.
• Financial restructuring: Debtors in distress can also apply for financial restructuring. The restructuring process is supervised by the court and an independent insolvency official. During this time, and after the restructuring is concluded, further claims against the debtor are suspended. Similar to protective settlements, the financial restructuring proposal must be accepted by a sufficient percentage of creditors. If the proposal is successful, clauses in contracts that relate to termination upon insolvency procedures will be suspended. The debtor can also benefit from debt rescheduling, operational or financial adjustments, and debt-toequity conversions.
• Liquidation: A last resort for debtors is liquidation, which can be initiated by the regulator, debtors or creditors. However, creditors can only start the process if the unpaid debt is at least SR50,000 ($13,300). The liquidator adjudicates claims and makes appropriate distributions at the end of the process. An administrative liquidation procedure is applied if it is unlikely that there will be a distribution to creditors following liquidation. In this case, a representative of the Bankruptcy Commission will act as the liquidator to wind up the business.
OBG would like to thank Khoshaim & Associates for its contribution to THE REPORT Saudi Arabia 2020