Saudi Arabia’s evolving business laws
Dr Hamid Harasani and Samaher Alsobeihy explore how Saudi Arabia has reformed its companies law per its Vision 2030 ambitions
Ever since Saudi Arabia unveiled its Vision 2030 in 2016, the government has implemented many initiatives with the goal of achieving this vision, which primarily focuses on diversifying the nation’s economy beyond its traditional reliance on hydrocarbons.
A primary component of Vision 2030 is the Financial Sector Development Program, which “aims to develop a diversified and effective financial sector to support the development of Saudi Arabia’s economy, diversify its sources of income, and stimulate savings, finances and investments.”
To achieve these aims, Saudi Arabia has accelerated its overhauling and modernisation of its legal system, promulgated various statutes while balancing its commitment to uphold Shariah law with the requirements of modern society. A major recent development is the recent enactment of Saudi Companies Law (SCL), which came into force in January 2023.
Overhauling the legal system
The new SCL replaces the previous Companies Law, which had only been in force since 2015. It aims at enhancing corporate governance in accordance with international best practices, stimulating investment (with a special focus on small to medium-sized businesses and venture capital), attracting investments and creating legal certainty to minimise disputes. The SCL, made up of 14 chapters and 282 articles, introduces many changes to Saudi corporate law.
The SCL has also liberalised company naming regulations. Article 5 of the SCL provides that companies may choose a trade name in Arabic or in any other language. However, it should be noted that as of the time of writing, companies may still encounter challenges when attempting to register foreign names in Saudi Arabia.
Article 5 also abolished the prohibition on naming companies after one or more of its shareholders, a ban that had been introduced on certain types of companies under the previous Companies Law. Moreover, Article 7 of the SCL explicitly states that while company by-laws must be in Arabic, they may include a side-by-side translation to any other language, providing companies with the flexibility to communicate their by-laws to non-Arabic speaking shareholders.
Article 11 of the SCL acknowledges the legal validity of shareholder agreements and family constitutions, a significant departure from the previous laws. Moreover, the law emphasises that such instruments will be legally binding, provided they do not contradict the SCL or the company by-laws. This provides companies with greater flexibility in structuring their internal affairs and can be particularly beneficial for family-owned businesses. For instance, a family constitution can be used to establish a shared vision for the company and delineate the roles and responsibilities of family members who are involved in the business.
The family constitution could also address issues such as succession planning, conflict resolution mechanisms and guidelines for profit distribution. Under Article 18 of the SCL, all companies must appoint a certified auditor to provide audited financial statements. To assist small and medium-sized companies in managing their financial obligations, they may dispense with the requirement to appoint a certified auditor if they can satisfy all the requirements set out in Article 19 of the SCL.
SCL provides greater flexibility and clarity in a number of key areas for businesses operating in Saudi Arabia. Some of the positive changes brought about by the SCL include the liberalisation of company naming regulations, the recognition of shareholder agreements and family constitutions, and exempting small and medium-sized companies from appointing certified auditors. Thus, businesses must remain aware of the new restrictions that have been implemented and ensure compliance with all relevant regulations and laws.
Dr Hamid Harasani is the managing partner and Samaher Alsobeihy is a licensed attorney at Harasani & Alkhamees Law Firm based in Riyadh, Saudi Arabia ha-law.sa/en