1. Introduction

On 27/6/1438 H. (26/3/2017 G.), the Saudi Arabian Minister of Commerce and Investment issued decision number 32565 (the "Ministerial Decision"), pursuant to his powers under Article 125 of the Companies Law. The Ministerial Decision comprises nine articles that touch on various topics affecting either joint stock companies (see Section 1 below), limited liability companies (see Section 2 below), or both said structure forms together (see Section 3 below).

The Ministerial Decision elaborates on the existing legal framework governing conflicts of interests and the protection of minority shareholders. The Ministerial Decision will come into force once it is published in the Official Gazette. To the best of the author's knowledge, this still has not happened. In the meantime, this update summarizes the Ministerial Decision.

2. Joint Stock Companies

2.1 Questionable Arrangements

The Board of Directors of joint stock companies must obtain the approval of the shareholders' ordinary general assembly for any contract or work entered into by the company and in which any director has any direct or indirect interest (the "Questionable Arrangements"). This rule is an extension of Article 71 of the Companies Law. The Ministerial Decision effectively extends the onus of obtaining shareholder approval from the interested director to the Board of Directors as a whole.

The Chairman of the Board must present the shareholders' ordinary general assembly with a report by the external auditors confirming that the Questionable Arrangements were conducted at a fair value and without harm to the shareholders, and particularly minority shareholders. Should shareholders sustain any harm, the liability of all directors may be engaged, except those who objected to the Questionable Arrangements and recorded their objection in the board meeting minutes.

2.2 Dual/Overlapping Functions

The Chairman of a joint stock company cannot hold any executive functions, even if the Bylaws specify otherwise.

3. Limited Liability Companies

3.1 Dividend Distribution

At the level of limited liability companies, dividends must be paid to the shareholders within 30 days of their approval.

3.2 New Share Issuances to New Shareholders

At the level of limited liability companies, newly issued shares may not be granted to new shareholders except with the unanimous consent of all existing shareholders.

4. Limited Liability and Joint Stock Companies

4.1 Bulk Sale of Assets

For joint stock companies and limited liability companies alike, a decision to sell 50% or more of the company's assets - through one or multiple transactions in a 12-month period - requires the approval of the shareholders. For joint stock companies, this decision must be taken during an ordinary general meeting unless the company's Bylaws provide otherwise.

4.2 Requirement to Offer to Buy All Shares

For joint stock companies and limited liability companies alike, any acquisition that brings a shareholder's share in a company at or beyond 50% triggers an obligation on that shareholder to offer to buy all remaining shares in the company within 60 days. The shareholder's offer terms and price must be equivalent to those of the most favorable transaction conducted by such shareholder during the preceding 12-month period.

This rule will certainly affect how existing and prospective private equity transactions are examined, structured and carried out.

5. Conclusion

The Ministerial Decision elaborates on the legal framework governing conflicts of interests and the protection of minority shareholders. That said, the rule described under Section ‎4.2 should be taken into account by private equity practitioners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.