As is commonly known, that the new corporate law came into force on 26/06/1444H, which has been approved by the Royal Decree No. (M/132) dated 01/12/1443H. The Law in its new version is considered as a legal and economic revolution for the Kingdom of Saudi Arabia, as it updated the provisions related to corporates withing the previous Law, eliminated others, and introduced new ones. This essay is devoted to introduce the new form of non-profit business entities developed by the new corporate law, named as "non-profit companies." The most essential question is: "In the presence of endowments, foundations, and charitable associations, what is the need for non-profit business entities?" ‘ The key objective of developing nonprofit companies is to enable non-profit entities to participate in the development of the national economy, as well as to provide the non-profit sector with independence and alternatives to expand its commercial activities, despite the fact they don't produce profits for the founders and shareholders, but rather for community contribution and charitable fields. Development of these forms of business, as well as its legalization, drafting the governing provisions, will result in mechanisms, governance, and practices that are in line with international and worldwide best practices in this field. The legislator defined the various kinds of non-profit companies and differentiated their definition, as follows: 1. Public non-profit company: It is the business that takes the form of a joint stock company and has no other form, and spends the profits earned from its activities in any of the contributions and public non-profit sectors that seek solely to service the society as a whole. Such sectors to be determined by the Ministry in collaboration with the National Center for Non-Profit Sector 2. Private non-profit company: It is a company that takes the form of a limited liability company, a joint stock company or a simplified joint stock company and has no other form and spends the profits from practicing its activity in any of the contributions and non-profit fields. The Law prohibits both kinds of non-profit companies from offering their shares for public subscription, which fits with its charity or non-profitable purposes, and it takes the form of a closed joint stock company in both kinds by the authority of the law. The legislator also defines the contributions and spending areas for public non-profit companies, which subsequently be determined by the ministry in coordination with the National Center for Non-Profit Sector. It allowed private non-profit companies to specify their channels and fields of spending’s in its Memorandum of Association or Articles of Association. Both types of the companies have the right to receive cash or in-kind payments for their company, goods, and services, as well as the right to participate in any legal activity that allows them to generate profits that can be spent in accordance with the sectors specified in their Memorandum of Association or Articles of Association. The Law additionally provides public non-profit companies the advantage, subject to the provisions of the relevant regulations and the company's Articles of Association, of accepting, managing, or investing donations, wills, and endowments in cash and in kind, and spending the proceeds in accordance with the statutory conditions. Public non-profit companies are distinguished in that their articles of association specify the sectors of spends and public non-profit areas in which they will operate, which is an essential requirement for authorizing the establishment of a public non-profit company. While the legislator left the door open for private non-profit companies to name their spending’s sectors in their articles of association or memorandum of association. The law stated that every partner or stockholder in a non-profit company is a member, and the Ministry has given the authority to manage company membership. In addition, it enables the companies as well to specify the conditions of their membership in their Memorandum of Association or Articles of Association. Companies must define the rights and responsibilities of each type of membership, and members shall define all rights associated with their membership, including the right to engage in deliberations of board meeting discussions and access to the company's records and papers. In line with the purposes of their incorporation, the Non-profit companies shall spend the earnings obtained from the practice of their activities only in the sectors specified in their Memorandum of Association or Articles of Association, with maintain the possibility of allocating a portion of its revenues to the expand company investments and the business permitted by the law. Non-profit companies are prohibited from distributing any of their profits to any of their members, managers, board members or employees in general, and members may file a lawsuit before the competent judicial authority on behalf of the company to request the recovery of any profits distributed or disposed of in violation of the provisions of Article (149) one hundred Ninety-Four of the Law. But companies may allocate remuneration or other reasonable benefits to their directors, managers or employees for the services and work they provide to the Company. In accordance with the exceptions enabled by the provisions of the new law on Companies, a personal creditor of a member of a public non-profit company may not claim that member's shares or rights thereto. As an exception to the relevant regulations, the Ministry shall in collaboration with the Zakat, Tax, and Customs Authority set the necessary controls to ensure that non-profit companies are not subject to the provisions of Zakat collection and tax exemption, and to deduct donations made to these companies when determining the taxpayer's tax base. Without prejudice to the relevant regulations and decisions, the legislator has allowed government agencies, public entities and institutions, universities, and other public legal persons - permitted to do so - to establish non-profit companies. It also authorized public sector employees to establish or participate in public non-profit companies. Eventually, it has been noted from the regulator's interest in introducing this new form of these companies, as well as the availability of several exceptions that encourage the development of this non-profit commercial sector. This will have a positive impact on the Kingdom of Saudi Arabia's economic indicators. As the law clearly distinguished between non-profit commercial entities that has business models which achieves sustainability for them by providing their services or products in exchange for money that returns to charitable fields, and between endowments, foundations and charitable associations that provide their services for free and their business models does not achieve sustainability, but relies on temporary sources. This allows for the flexibility and legal freedom to charitable business creators in the Kingdom of Saudi Arabia to choose the legal form that suits them & their proposed business models the best. Written by: Alya Al-Hussaini Lawyer & Legal advisor. Dr. Mohammed Al Muhanna & Partners Lawyers and Consultants team will receive all of your inquiries related to the above in particular and provide all practical and clear legal advice according to professional standards.
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April 09, 2023 - 11:43 AM
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Saudi Arabia's economy has witnessed growth in many sectors recently, which requires the contribution of regulators to review and develop all regulations in accordance with the 2030 vision. There is no doubt, that one of the most significant economic systems that reflects the interest of the Kingdom in the development of the economy is the amendments of laws governing business transactions, trading, and relative procedures associated with them, including the Corporate Law, where the new version of it had been issued by the Royal Decree No. (M/132) dated 1/12/1443H pursuant and ratified by Council of Ministers Resolution No. (678) dated 29/ 11/1443H. The new corporate law and its implementing regulations included substantial amendments that contributed to the growth of the Kingdom’s economy in the corporate sector, starting from the establishment of the company until its termination and liquidation, by creating a new form for companies, developing provisions for transformation and merging between them, enacting new mechanisms for distributing profits, issuing negotiable debt instruments, and other means. Amendments that aim to grow the Saudi corporate sector and attract foreign companies. In view of the large number of Saudi family companies and their strength in the Kingdom of Saudi Arabia, the corporate Law and its Implementing Regulations took care of organizing and controlling family companies in order to achieve the highest stages of their sustainability, growth and governance, with the possibility of concluding a family charter in the company’s articles of incorporation or in its articles of association regulating family ownership in the company. So, what is this family charter? What are its main advantages in the new corporate law? The definition of the Family Charter: It is a family document with a commercial purpose that organizes family ownership in the corporation, and it seems like a log of the documents of the corporation, which demonstrates the value it represents. It is also possible to describe it as a written agreement that governs how family members organize their ownership of the business in accordance with the controls agreed upon by the owners. This agreement is enforceable and binding in the event of future disagreements between the current partners or their heirs. Purpose of revising the Family Charter: As stated in article eleven of the new corporate law, paragraph one “the partners' agreement and the family charter: "The founders, partners or shareholders may whether during the period of incorporation of the company or thereafter, do the following: ... B- Concluding a family charter that includes family ownership in the company, its governance and management, labor policy, engagement policy for family members, profits distribution, management of shares or stocks, procedures of disputes settlement, etc. The most significant function of the family charter, according to the provisions of the article and what was stated in the definition of the family charter that we previously mentioned, is that it sets a preconception of all points that may be the subject of disagreement between partners or their heirs. The charter also contains important points related to the statement of the organization of family members' ownership of the company. The charter is concerned with establishing controls and resolutions to any disagreements that may occur between the partners after the transfer of the company's shares from the founding generation to their heirs. This prevents unintended jurisprudence or desires that may be divergent between the partners by setting clear, binding control In order to write the family charter, it is essential to refer to the most important rules that should be considered in the family charter as described in the new corporate law and to Identify whether the law defined them or left them unspecified? The Law did not specify a specific number or type of regulations that may be mentioned in the Family Charter, but left it up to the partners to organize the company at their convenience, meanwhile the Law specified some regulations, for example, but not limited to, according to what was mentioned in Article eleven mentioned above, so we find the regulations contained in the Law are: 1. Establishing family control in the company. 2. Corporate control and governance. 3. Company’s labor policy and family members' hiring rules. 4. Profits distribution and sale of shares or stocks. 5. A mechanism for resolving conflicts. And other regulations that the partners may implement and include in the family charter because the law did not limit the regulations that may be stated in the family charter. Position of provisions of the family charter and its obligation thereof: Paragraph2, Article 11 of the law allows the partners to draft the clause of the family charter independently, to include the clauses of the charter in the articles of incorporation, or to include it within the company's Articles of Association, as follows: "The family agreement or charter shall be legally binding and may be included in the company's Memorandum of Association or Articles of Association with no contradiction with any of their provisions. About the extent to which the family charter is binding on the partners, the organizer ended the dispute with a categorical text stating that the charter is binding and that it is binding on the partners, the text of the second paragraph of Article eleven, which states: "The family agreement or pact shall be binding..." However, the organizer imposed two requirements on the activity under the Family Charter: 1/ The Family Charter rules must not conflict with the Corporate Law. 2/ Not to conflict the company's articles of incorporation or Articles of association. This is stated in the second paragraph of Article eleven of the Law: "... Provided that it does not constitute a violation of the company's articles of incorporation or Articles of association” Amendment of the Family Charter: The organizer allows amending the family charter if it is part of the company's articles of incorporation or part of its articles of association subject to the amendment of the quorum of the articles of incorporation or the articles of association of each company individually. So, the quorum amendment in the family charter of the limited liability company, for example, is due to the quorum of its amendment in the system, and this applies to the family charter and so on in a type of company, and this is what is stipulated in Article four of the Implementing Regulations of the Corporate Law in Chapter One: "In the implementation of the provisions of paragraph (2) of Article (Eleven) of the Law, the quorum for amending the agreement of partners or shareholders or the family charter if it is part of the articles of incorporation or its Articles of Association shall be in accordance with the conditions prescribed for amending the Company's articles of incorporation or Articles of Association according to the form of the company." Written by: Muhannad Abdullah Al-Muzini Senior Lawyer & Legal advisor Dr. Mohammed Al Muhanna & Partners Lawyers and Consultants team will receive all of your inquiries related to the above in particular and provide all practical and clear legal advice according to professional standards.
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By virtue of Royal Decree No. (M/132) dated 01/12/1443 A.H, Kingdom of Saudi Arabia has recently issued the new law of companies and Regulations thereunder, which came into force on 26/6/1444 AH. The new Law is intended to promote KSA’s economic growth in interaction with other countries worldwide and maintain adaptation with global economic changes, and to add new regulations keeping pace with regional and international experiences and practices. The Law defined the types of companies authorized to exercise business in Saudi Arabia and the changes may arise after the establishment, such as the change of the company’s legal form, conversion, merging, or division. This article highlights the new variables enabled by the new law of companies in relation to the division of a company into two or more companies, as well as the requirements and controls thereunder. First: Procedures of division. The new Law vested partners and shareholders with the authority to divide their company into two or more companies, and the company resulting from the division to may take any legal form stipulated in Article (4) of the Companies Law, in accordance with the provision of Article (231) which states that “a company may be divided into two or more companies even if in the phase of liquidation, the company or companies resulting from the division may take any legal forms specified in Article (4) of the Law. According to the provisions of this article, the company results from the division may be incorporated in a form differs from the original company, either in the form of a general partnership company, limited partnership company, joint stock company, Simplified Stock Company, or limited liability company, and shall subject to the said Law. If the partners and shareholders decided, for example, that the company resulting from the division takes the form of a partnership company, then it shall be subject to the same incorporation, management, and dissolution regulations governing the General Partnership Company. In addition, the aforementioned Article (231) also authorizes to divide of the company, even if it was in liquidation, in order to preserve the existence and continuity of the company and to protect the rights of its partners, shareholders, and other stakeholders. Second: company’s division Controls The new Companies Law specified controls to divide companies that shall be met in accordance with the provision of Article (89) of the Implementing Regulations of the said Law: “The company may be divided into two or more companies, provided that the following controls shall be taken into consideration: A: That the decision to divide the company is made by the partners, general assembly, or shareholders of the company, subject to the division, in accordance with the equity stakes set out in the memorandum or articles of Association. B: Partners or shareholders of the company subject to the division, shall be granted shares or stocks in the company resulting from it in proportion to their ownerships in of the capital of the original company unless they agree to redistribute the stakes or shares among themselves or with others.” We can conclude from this article that vests partners and shareholders with additional powers by having an agreement to distribute shares and stocks among themselves or with new partners and shareholders based on the division. Third: Issuance of the division Decision The decision to divide the company into two or more companies is issued according to the conditions prescribed for amending the company’s memorandum or articles of association in determining the equity of shares for the issuance of the amendment decision on a regular basis, and the division decision shall include a statement of the number of partners and shareholders, and their individual shares in the company or companies resulting from the division, the company, subject of the division, the rights and obligations of these companies, and the method of distributing the assets, rights, and obligations between them. In accordance with the provisions of Article (90) of the Implementing Regulations of the Companies Law, the director of the company, subject matter of the division, or its board of directors shall prepare a “division decision proposal” containing a statement of the reasons for the division of the company, specifying the assets and liabilities, subject matter of the division, and how to divide them, and a report prepared by an accredited appraiser indicating the value fairness of the assets and liabilities subject matter of the division, and this requirement does not apply if the shares or stocks in the company resulting from the division distribute to the partners or shareholders in proportion to the ownership of each of them in the capital of the company, subject matter of the division, and an indication of the date that was taken as the basis for estimation, and the number of shares or stokes that obtained partners or shareholders in the company or companies resulting from the division, and mentioning any agreements, if any, with the creditors of the company subject matter to the division to transfer their claim rights to the company resulting from the division to which the debts and obligations devolved. In accordance with Article (91) of the Regulations of companies law, the Director of the company subject of the division, or company’s board of directors shall provide the partners or shareholders with a copy of the proposal for the division using modern technology or any other means stated in the memorandum of association or its articles of association at least twenty-one days prior to the date of the meeting of the partners, the General Assembly or the shareholders on the division decision. Therefore, the decision to divide the company shall become effective from the date of registering the amendment to the article of association of the company subject of the division or its articles of association with the commercial registration and the registration of the company resulting from division. Fourth: the divided company’s Debts and obligations The new Companies Law preserves the rights of the creditors of the company subject of the division, as all debts and obligations transferred to, after the issuance of the division decision, the newly formed company or companies resulting from the division. Furthermore, the Law enabled the creditors to jointly claim their rights directly from the company subject of the division, or from the company and the companies resulting from the division, unless otherwise agreed upon with the creditors in connection with transfer their rights and obligations to the company or companies resulting from the division. Written by: Muhammed Abdul Rahim Al-Zahrani Senior legal advisor Dr. Mohammed Al Muhanna & Partners Lawyers and Consultants team will receive all of your inquiries related to the above in particular and provide all practical and clear legal advice according to professional standards.
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