infopaksm corporate governance and directors' duties guide

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

InfoPAKSM

Corporate Governance and Directors' Duties Guide: Saudi Arabia

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Corporate Governance and Directors’ Duties Guide: Saudi Arabia

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Corporate Governance and Directors' Duties Guide: Saudi Arabia

January 2016

Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 tel +1 202.293.4103 fax +1 202.293.4107 www.acc.com

This InfoPAKSM provides a Q&A that gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors' duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.

To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool at http://crossborder.practicallaw.com/4-501-7404.

The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg.

This material was developed by PLC. For more information about PLC, visit their website at http://www.practicallaw.com/. The information in this InfoPAKSM should not be construed as legal advice or legal opinion on specific facts, and should not be considered representative of the views of Practical Law or of ACC or any of its lawyers, unless so stated. This InfoPAKSM is not intended as a definitive statement on the subject, but rather to serve as a resource providing practical information to the reader.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks

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Contents

I. Corporate Governance Trends ....................................................................................................... 6

A. What Are the Main Recent Corporate Governance Trends and Reform Proposals in Your Jurisdiction? ....... 6

II. Corporate Entities ............................................................................................................................ 8

A. What Are the Main Forms of Corporate Entity Used in Your Jurisdiction? ............................................................. 8

III. Legal Framework .............................................................................................................................. 9

A. Outline the Main Corporate Governance Legislation and Authorities That Enforce It. How Influential Are Institutional Investors and Other Shareholder Groups in Monitoring and Enforcing Good Corporate Governance? List Any Such Groups with Significant Influence in This Area. ............................................................. 9

B. Has Your Jurisdiction Adopted a Corporate Governance Code? ............................................................................. 11

IV. Corporate Social Responsibility and Reporting .......................................................................... 13

A. Is It Common for Companies to Report on Social, Environmental and Ethical Issues? Highlight, Where Relevant, Any Legal Requirements or Non-Binding Guidance/Best Practice on Corporate Social Responsibility. ......................................................................................................................................................................... 13

V. Board Composition and Restrictions ........................................................................................... 13

A. What Is the Management/Board Structure of a Company? ......................................................................................... 13

B. Are There Any General Restrictions or Requirements on the Identity of Directors? ......................................... 14

C. Are Non-Executive, Supervisory or Independent Directors Recognised or Required? ....................................... 15

D. Are the Roles of Individual Board Members Restricted? .............................................................................................. 16

E. How Are Directors Appointed and Removed? Is Shareholder Approval Required? ............................................. 16

F. Are There Any Restrictions on a Director's Term of Appointment? ....................................................................... 16

VI. Directors' Remuneration ............................................................................................................... 17

A. Do Directors Have to Be Employees of the Company? Can Shareholders Inspect Directors' Service Contracts? ................................................................................................................................................................................ 17

B. Are Directors Allowed or Required to Own Shares in the Company? ................................................................... 17

C. How Is Directors' Remuneration Determined? Is Its Disclosure Necessary? Is Shareholder Approval Required? ................................................................................................................................................................................. 17

VII. Management Rules and Authority ................................................................................................ 19

A. How Is a Company's Internal Management Regulated? For Example, What Is the Length of Notice and Quorum for Board Meetings, and the Voting Requirements to Pass Resolutions at Them? ............................... 19


Copyright © 2016 Practical Law Company (PLC) & Association of Corporate Counsel

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B. Can Directors Exercise All the Powers of the Company or Are Some Powers Reserved to the Supervisory Board (if Any) or a General Meeting? Can the Powers of Directors Be Restricted and Are Such Restrictions Enforceable Against Third Parties? ............................................................................................................. 20

C. Can the Board Delegate Responsibility for Specific Issues to Individual Directors or a Committee of Directors? Is the Board Required to Delegate Some Responsibilities, for Example for Audit, Appointment or Directors' Remuneration? .............................................................................................................................................. 20

VIII. Directors' Duties and Liabilities ................................................................................................... 21

A. What Is the Scope of a Director's General Duties and Liability to the Company, Shareholders and Third Parties? ...................................................................................................................................................................................... 21

B. Briefly Outline the Regulatory Framework for Theft, Fraud, and Bribery That Can Apply to Directors. ....... 22

C. Briefly Outline the Potential Liability for Directors under Securities Laws. ............................................................ 22

D. What Is the Scope of a Director's Duties and Liability under Insolvency Laws? .................................................... 23

E. Briefly Outline the Potential Liability for Directors under Environment and Health and Safety Laws. ............. 24

F. Briefly Outline the Potential Liability for Directors under Anti-Trust Laws. .......................................................... 24

G. Briefly Outline Any Other Liability That Directors Can Incur under Other Specific Laws. ................................ 24

H. Can a Director's Liability Be Restricted or Limited? Is It Possible for the Company to Indemnify a Director Against Liabilities? .................................................................................................................................................................. 25

I. Can a Director Obtain Insurance Against Personal Liability? If So, Can the Company Pay the Insurance Premium? ................................................................................................................................................................................. 25

J. Can a Third Party (Such As a Parent Company or Controlling Shareholder) Be Liable As a De Facto Director (Even Though Such Person Has Not Been Formally Appointed As a Director)? ................................. 25

IX. Transactions with Directors and Conflicts .................................................................................. 26

A. Are There General Rules Relating to Conflicts of Interest Between a Director and the Company? ............... 26

B. Are There Restrictions on Particular Transactions Between a Company and Its Directors? ............................. 26

C. Are There Restrictions on the Purchase or Sale by a Director of the Shares and Other Securities of the Company He Is a Director of? ............................................................................................................................................ 26

X. Disclosure of Information .............................................................................................................. 27

A. Do Directors Have to Disclose Information about the Company to Shareholders, the Public or Regulatory Bodies? ...................................................................................................................................................................................... 27

XI. Shareholder Rights ......................................................................................................................... 28

A. Company Meetings ................................................................................................................................................................ 28

B. Minority Shareholder Action ............................................................................................................................................... 31

XII. Internal Controls, Accounts and Audit ........................................................................................ 32

A. Are There Any Formal Requirements or Guidelines Relating to the Internal Control of Business Risks? ...... 32


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B. What Are the Responsibilities and Potential Liabilities of Directors in Relation to the Company's Accounts? ................................................................................................................................................................................. 32

C. Do a Company's Accounts Have to Be Audited? ........................................................................................................... 32

D. How Are the Company's Auditors Appointed? Is There a Limit on the Length of Their Appointment? ......... 33

E. Are There Restrictions on Who Can Be the Company's Auditors? ......................................................................... 33

F. Are There Restrictions on Non-Audit Work That Auditors Can Do for the Company That They Audit Accounts for? .......................................................................................................................................................................... 33

G. What Is the Potential Liability of Auditors to the Company, Its Shareholders and Third Parties if the Audited Accounts Are Inaccurate? Can Their Liability Be Limited or Excluded? ................................................... 33

H. What Is the Role of the Company Secretary (or Equivalent) in Corporate Governance? .................................. 33

XIII. Online Resources ............................................................................................................................ 34

A. The Ministry of Commerce and Industry (MOCI) ......................................................................................................... 34

B. The Capital Market Authority (CMA) .............................................................................................................................. 34

C. The Saudi Arabian Monetary Agency (SAMA) ................................................................................................................ 34

XIV. About the Authors ......................................................................................................................... 34

A. Jonathan Reardon, Senior Associate ................................................................................................................................. 34

B. Asim Almalik, Associate ....................................................................................................................................................... 35



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I. Corporate Governance Trends

A. What Are the Main Recent Corporate Governance Trends and Reform Proposals in Your Jurisdiction?

Corporate governance in Saudi Arabia is principally focused on listed companies although it is increasingly becoming a key issue for the large number of family-owned companies in Saudi Arabia.

1. Capital Market Authority Strategic Plan

The Capital Market Authority (CMA) is responsible for the regulation of listed companies in Saudi Arabia. The CMA's Strategic Plan 2015-2019:

■ Outlines the CMA's vision and initiatives to make the Saudi capital market (Tadawul) a pioneer market trusted by investors.

■ Seeks to provide the necessary fairness, efficiency and transparency required in securities transactions.

Some of the important initiatives are outlined below.

2. Foreign Investment in Listed Securities

The CMA is working on finalising the rules for qualified foreign financial institutions' investment in listed shares and the process for their implementation.

The CMA is also planning to assess the feasibility of allowing foreign shareholders to own strategic shareholdings in listed companies in co-operation with other government bodies.

This is likely to increase the numbers of foreign directors and the level of foreign involvement in Saudi Arabia listed companies.

2. Enhancing the Governance Practices of Authorised Persons

The CMA will review and develop corporate governance standards for "authorised persons" who carry on securities business or registered activities in Saudi Arabia to instil best international corporate governance standards in such "authorised persons".

This may lead to changes to the "authorised persons" rules of the CMA, which regulate the licensing and conduct of "authorised persons".


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3. Improving the Regulatory Environment

The CMA plans to improve the regulatory environment by improving clarity and moving to a disclosure-based regulatory approach, through comprehensive review of the Capital Market Law's (Capital Market Law, Royal Decree No M/30 dated 2/6/1424H (Capital Market Law)) implementing regulations.

4. Improving the Disclosure Requirements

The CMA is working on a number of initiatives to improve disclosure requirements for listed companies, "authorised persons" and others to improve capital market transparency and promote compliance with the Capital Market Law.

5. Family Companies

As was identified by the Pearl Initiative Survey in 2012 (covering key issues for family businesses in the Gulf Cooperation Council countries including Saudi Arabia) the governance of family-owned companies is recognised by such companies as an important concern, particularly with respect to improving transparency, efficiency and access to capital. This is particularly relevant as ownership of these companies passes to the next generation, although change may take some time.

6. Corporate Social Responsibility

A growing number of companies are recognising the importance of reporting on their corporate social responsibility activities.



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II. Corporate Entities

A. What Are the Main Forms of Corporate Entity Used in Your Jurisdiction?

1. Limited Liability Companies

Limited liability companies are the most common form of company in Saudi Arabia. A limited liability company must have a minimum of two and a maximum of 50 shareholders. The liability of shareholders for the debts of a limited liability company is generally limited to the extent of their respective interest in the capital of that company.

2. Joint Stock Companies

Joint stock companies must have a minimum of five shareholders and can be either "open" (which means that their shares can be offered to the public) or "closed" (meaning their shares cannot be offered to the public). There are high minimum capital requirements (SAR25 million for closed joint stock companies and SAR50 million for open joint stock companies). The liability of shareholders for the debts of a joint stock company is generally limited to the extent of their respective interest in the capital of the joint stock company.

All companies listed on the Saudi Stock Exchange (the Tadawul) are open joint stock companies.

Certain types of activities must be carried out by a joint stock company (either open or closed) for example, banking and finance businesses.

There are several other forms of corporate entity available in Saudi Arabia, for example, professional companies used for the provision of professional services.


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III. Legal Framework

A. Outline the Main Corporate Governance Legislation and Authorities That Enforce It. How Influential Are Institutional Investors and Other Shareholder Groups in Monitoring and Enforcing Good Corporate Governance? List Any Such Groups with Significant Influence in This Area.

1. Sharia Law and Saudi Legislation

Saudi legislation is based on Islamic law (Sharia law) the main sources of which are the Qur'an and the writings (Sunnah) detailing the sayings and actions of the Prophet Mohammed.

Sharia law is supplemented by decrees, ministerial decisions, laws and regulations issued by the Saudi Government.

Saudi legislation is interpreted by reference to Sharia law principles and where there are gaps in the legislation these may be supplemented by reference to Sharia law. In the event of conflict between Saudi legislation and Sharia law, Sharia law is likely to prevail.

2. The Companies Law

The legal and regulatory framework applying to limited liability companies and joint stock companies is primarily set out in the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law).

The Companies Law has various provisions relating to joint stock companies but is largely silent on issues related to corporate governance and management of limited liability companies. However this does not mean that Saudi courts would determine, for example, that directors of limited liability companies (typically referred to as managers) do not owe duties to the limited liability company or its shareholders. Saudi courts may apply Sharia law principles to supplement the Companies Law.


In addition to the provisions of the Companies Law, open joint stock companies are also subject to the Capital Market Law, Royal Decree No M/30 dated 2/6/1424H (Capital Market Law) which sets out the framework for the regulation of listed companies. In



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keeping with this, the Capital Market Authority (CMA) has issued various implementing regulations including:

■ The listing rules, regulating the public offering, registration and admission to listing of securities in Saudi Arabia.

■ The corporate governance regulations, regulating the management of joint stock companies listed on the Saudi Stock Exchange (Tadawul) and constituting guiding principles for such companies (unless and to the extent that the CMA provides for any of the regulations to be binding on listed joint stock companies).

■ The merger and acquisition regulations, which apply to takeovers and all situations involving restricted purchases or offers for shares relating to a listed company.

■ The market conduct regulations, which regulate market conduct including market manipulation, insider trading, untrue statements and the conduct of "authorised persons".

In addition, any joint stock company which is involved in banking or is an authorised financial adviser is also subject to:

■ The "authorised persons" rules of the CMA, which regulate the licensing and conduct of persons authorised by the CMA to carry on securities business or registered activities in Saudi Arabia.

■ The banking control law and finance companies control law, which regulate banks and finance companies in Saudi Arabia and the various related rules and regulations of the Saudi Arabian Monetary Agency (SAMA).

■ The principles of corporate governance for banks operating in Saudi Arabia issued by SAMA.

4. Regulatory Authorities

The main authorities regulating corporate governance issues are:

■ The Ministry of Commerce and Industry (MOCI) which regulates companies and general business activities in Saudi Arabia.

■ The CMA, which regulates the Saudi capital market (Tadawul), supervises the conduct of listed companies in Saudi Arabia and also exercises an enforcement function.

■ The SAMA, which supervises the banking, financial and insurance sectors in Saudi Arabia.


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B. Has Your Jurisdiction Adopted a Corporate Governance Code? The corporate governance regulations issued by the Capital Market Authority (CMA) regulate the management of joint stock companies listed on the Saudi Stock Exchange (Tadawul) to ensure their compliance with best corporate governance practices for the protection of the rights of shareholders and other stakeholders. Areas covered include:

■ Disclosure in the board of directors' report.

■ Formation, function, responsibilities and meetings of the board of directors.

■ Committees of the board of directors including, audit, nomination and remuneration committees.

■ Conflicts of interest of directors.

The corporate governance regulations are mainly a set of guiding principles and operate on a "comply or explain" basis, except to the extent that the CMA from time to time provides for the regulations to be considered mandatory.

The board of directors' report, appended to the annual financial statements of a listed joint stock company, must include details of the provisions of the corporate governance regulations that were implemented, as well as those not implemented and explain the reasons for not implementing them.

The following provisions of the corporate governance regulations are mandatory for listed companies:

■ Article 5 paragraphs (i) and (j) dealing with minutes and the result of shareholder meetings.

■ Article 9 dealing with the board of directors' report.

■ Article 10 paragraphs (b) (c) and (d) respectively:

• providing for the board functions to include setting and supervising internal control systems (including in relation to risk management);

• preparing an internal corporate governance code consistent with the corporate governance regulations; and

• supervising and monitoring the effectiveness of the internal corporate governance code and setting out specific policies, standards and procedures for the membership of the board of directors, for approval by the general assembly of shareholders and subsequent implementation.

■ Article 12 paragraphs (c) (e) and (g) respectively providing that the majority of the board must be non-executive directors. The independent members of the board must be at least two, or one third of all members (whichever is greater) and on a person ceasing to be a board member for any reason, the company must



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promptly notify the CMA and the Tadawul and specify the reasons for the termination.

■ Article 14 dealing with the audit committee.

■ Article 15 dealing with the nomination and remuneration committee.

If a person is in breach of the mandatory provisions of the corporate governance regulations, the potential sanctions under the Capital Market Law, Royal Decree No M/30 dated 2/6/1424H (Capital Market Law) which can be sought by the CMA include:

■ A warning.

■ An order to cease or refrain or take corrective action.

■ Indemnity for persons suffering damage as a consequence of the violation or an order obliging the violator to pay to the CMA the gains realised as a consequence of the violation.

■ Suspension of trading.

■ Fines.

The CMA has established a department to monitor compliance with the requirements of the corporate governance regulations.

According to the CMA annual report of 2013, during that year:

■ The CMA reviewed 808 condensed financial statements and 789 detailed financial statements to ensure they met disclosure requirements.

■ There were 43 cases of violation of the corporate governance regulations under investigation by the CMA (41 cases in 2012).

■ There were 12 sanctions decisions against persons in violation of the corporate governance regulations, of which nine were enforced.


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IV. Corporate Social Responsibility and Reporting

A. Is It Common for Companies to Report on Social, Environmental and Ethical Issues? Highlight, Where Relevant, Any Legal Requirements or Non-Binding Guidance/Best Practice on Corporate Social Responsibility.

While it is not a legal requirement, many listed companies in Saudi Arabia engage in corporate social responsibility activities and include details of these activities in their annual reports.

A number of companies participate in the Saudi Arabian Responsible Competitiveness Index (SARCI) which is sponsored by the Saudi Arabian General Investment Authority (SAGIA), the King Khalid Foundation and international think tank AccountAbility. SARCI encourages companies in Saudi Arabia to apply policies and adopt programmes, which support the development of sustainable social, economic and environmental policies and analyses how Saudi companies build their competitiveness by managing social and environmental matters.

V. Board Composition and Restrictions

A. What Is the Management/Board Structure of a Company?

1. Structure

Limited liability companies can either have one manager or a board of directors. A limited liability company with more than 20 shareholders must have a supervisory board composed of at least three shareholders to oversee and advise management.

Joint stock companies are administered by a board of directors.



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2. Management

Limited liability companies are managed by a manager or board of directors (directors of limited liability companies are often referred to as "managers").

Joint stock companies are managed by their board of directors, which has power to delegate to committees of the board or individual board members. The board elects from its members a chairman and a managing director.

3. Board Members

The board is comprised of all the directors of the company.

4. Employees' Representation

Directors do not have to be employees. Employees have no right to board representation.

5. Number of Directors or Members

A limited liability company with more than 20 shareholders must have a supervisory board with a minimum of three members.

The number of directors of a joint stock company is specified in the articles of association but must be a minimum of three. The corporate governance regulations additionally provide for the board of a listed company to have a maximum of 11 directors.

B. Are There Any General Restrictions or Requirements on the Identity of Directors?

1. Age

There are no age restrictions on being a director.

2. Nationality

There are generally no nationality requirements but the board of directors of a listed joint stock company must have a majority of Saudi directors.

3. Gender

There are no gender restrictions or quotas.


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C. Are Non-Executive, Supervisory or Independent Directors Recognised or Required?

1. Recognition

The Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) does not distinguish between executive and non-executive directors. Supervisory directors are only recognised in the context of limited liability companies with more than 20 shareholders.

2. Board Composition

As mandatory requirements of the corporate governance regulations, the majority of the board members of a listed joint stock company must be non-executive directors and at least two directors, or one third of all directors of a listed joint stock company must be independent.

The corporate governance regulations provide on an elective basis that directors of listed joint stock companies should not act as directors of more than five joint stock companies at the same time.

3. Independence

The corporate governance regulations define an independent director as one who enjoys complete independence. Various examples are cited when a director will not be independent, including:

■ Holding, or being a representative of a legal person holding, 5% or more of the shares of the company or any group company.

■ Acting as a senior executive of the company or any group company in the previous two years.

■ First degree relation to any director or senior executive of the company or any group company.

■ Acting as a board member of any other group company.

■ Employment with or having a controlling interest in any affiliate (such as the auditors or main suppliers) of the company or any group company in the previous two years.



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D. Are the Roles of Individual Board Members Restricted? The roles of individual board members are not generally restricted. In relation to listed joint stock companies, the corporate governance regulations provide that the position of the chairman of the board of directors should not be combined with any other executive position such as CEO or managing director or general manager (although such combination is permitted for limited liability companies and closed joint stock companies).

E. How Are Directors Appointed and Removed? Is Shareholder Approval Required?

1. Appointment of Directors

In limited liability companies directors are appointed pursuant to the articles of association or subsequent shareholders' resolution.

In joint stock companies the ordinary shareholders' meeting appoints directors (with the exception of the first board which can be stated in the company's articles of association for a term of up to five years).

2. Removal of Directors

In limited liability companies, directors are removed by shareholders' resolution.

Joint stock companies' articles of association specify the provisions for retirement or removal of directors. However, the ordinary shareholders' meeting can remove all or any of the directors even if the articles of association provide otherwise.

The board of a joint stock company can remove the chairman or managing director.

F. Are There Any Restrictions on a Director's Term of Appointment?

There is no restriction on the term of appointment of a director of a limited liability company.

Directors of joint stock companies are appointed for a maximum of three years (except for the first board of directors which can be appointed for up to five years). Directors of joint stock companies are however eligible for reappointment unless the articles of association provide otherwise.


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VI. Directors' Remuneration

A. Do Directors Have to Be Employees of the Company? Can Shareholders Inspect Directors' Service Contracts?

1. Directors Employed by the Company

Directors do not have to be employees of the company.

2. Shareholders' Inspection

Generally shareholders do not have a right to inspect directors' service contracts, unless this is specified in the articles of association.

B. Are Directors Allowed or Required to Own Shares in the Company?

Directors of a joint stock company must own (or one of the shareholders must pledge such shares on behalf of the director) a minimum of SAR10,000 in value of qualification shares to be deposited with a bank and held as a guarantee in respect of the director's statutory liability.

C. How Is Directors' Remuneration Determined? Is Its Disclosure Necessary? Is Shareholder Approval Required?

1. Determination of Directors' Remuneration

In limited liability companies there is no restriction on how directors' remuneration can be agreed.

For all joint stock companies the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) provides that the articles of association must specify how directors are to be remunerated. The remuneration must not exceed 10% of the net profits of the company after specified deductions and reserves and after distribution of a dividend of not less than 5% of the company's capital.

The corporate governance regulations also require on a mandatory basis that listed joint stock companies establish a nomination and remuneration committee, the duties of which



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include drawing up clear policies for the remuneration of directors and senior executives and performance standards.

2. Disclosure

The Companies Law provides that the annual board reports of all joint stock companies must contain details of all amounts received by directors during the course of the year whether in their capacity as directors, employees, executives or service providers.

Additionally for listed joint stock companies, the corporate governance regulations and the listing rules require on a mandatory basis that the annual report of the board of directors include details on the compensation and remuneration (defined as salaries, allowances, profits, annual and periodic performance bonuses, long and short term incentive schemes and any rights in rem) paid to each of:

■ The chairman.

■ The directors of the board.

■ The five executives who have received the highest compensation and remuneration.

■ The CEO

■ The chief finance officer.

3. Shareholder Approval

There is no requirement for shareholder approval of directors' remuneration.


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VII. Management Rules and Authority

A. How Is a Company's Internal Management Regulated? For Example, What Is the Length of Notice and Quorum for Board Meetings, and the Voting Requirements to Pass Resolutions at Them?

A company's internal management is regulated by the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) and the articles of association (and in the case of joint stock companies by any bye-laws they may have adopted).

The Companies Law does not specify the length of notice and quorum for board meetings.

The Ministry of Commerce and Industry (MOCI) approved model form of articles of association for a limited liability company provides as follows:

■ Board meetings can be convened by any director giving notice to the other directors. No length of notice period is specified.

■ The quorum for board meetings is three directors.

■ Resolutions are passed by a majority of directors present or represented. The chairman does not have a casting vote.

In the case of joint stock companies the Companies Law provides as follows:

■ Board meetings are convened by the chairman in the manner prescribed in the articles of association. No length of notice period is specified.

■ The quorum for board meetings is at least one half of all directors, subject to a minimum of three directors, unless the articles of association provide for a larger proportion or number.

■ Resolutions are passed by a majority of directors present or represented. The chairman has a casting vote, unless the articles of association provide otherwise.



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B. Can Directors Exercise All the Powers of the Company or Are Some Powers Reserved to the Supervisory Board (if Any) or a General Meeting? Can the Powers of Directors Be Restricted and Are Such Restrictions Enforceable Against Third Parties?

1. Directors' Powers

Directors have power to manage and administer companies in accordance with the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) and the company articles of association, subject to any matters that are reserved for shareholder approval. All shareholders' agreements should also be taken into account by the directors.

2. Restrictions

The directors of joint stock companies cannot enter into loans for more than three years, or sell or mortgage the real estate or business of the company, or release debtors, unless authorised to do so in the articles of association, or by shareholder resolution (unless such matters fall within the scope of the company's objects).

Various matters are reserved for different levels of shareholder approval, for example amending the articles of association, increasing shareholder liability and so on.

C. Can the Board Delegate Responsibility for Specific Issues to Individual Directors or a Committee of Directors? Is the Board Required to Delegate Some Responsibilities, for Example for Audit, Appointment or Directors' Remuneration?

The articles of association of a limited liability company can provide for the delegation of powers to an executive manager.

The board of a joint stock company has power to delegate to committees of the board or individual board members.

In the case of listed joint stock companies, the corporate governance regulations provide for:

■ The board to set up a suitable number of committees as required for the board to perform effectively.

■ The board to delegate certain functions to an audit committee.


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■ The board to delegate certain functions to a nomination and remuneration committee.

VIII. Directors' Duties and Liabilities

A. What Is the Scope of a Director's General Duties and Liability to the Company, Shareholders and Third Parties?

The Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) is generally silent on the fiduciary duties of directors.

However in the case of both limited liability companies and joint stock companies, the Companies Law provides that directors are jointly responsible for damage suffered by the company, shareholders or third parties due to their mismanagement of the company's affairs, breach of the Companies Law or, the provisions of the articles of association. Claims must be brought within three years of the company having knowledge of the wrongful act.

In addition for joint stock companies the Companies Law provides that:

■ Directors must not have any interest in the company's business or contracts, unless authorised by the shareholders on an annual basis.

■ Directors must not be involved in any competing business, unless authorised by the shareholders on an annual basis.

■ Directors are prohibited from disclosing confidential information to third parties or to shareholders apart from at a general meeting otherwise they can be removed and held liable for damages.

In the case of listed joint stock companies the corporate governance regulations additionally provide that directors must carry out their duties in a responsible manner, in good faith and with due diligence in an informed way.

The listing rules provide that directors and senior executives of listed joint stock companies must exercise their powers and carry out their duties in such a way as to serve the interests of the company.

Directors are liable to fines and in some cases imprisonment for:

■ Deliberately overstating the value of in kind contributions.

■ Receiving or distributing fictitious profits.



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■ Including false data in the accounts or reports, or omitting to include material information in such reports with a view to concealing the financial position of the company.

■ Failing to consider the mandatory rules of the Companies Law and related regulations and decisions.

■ Failing to comply with the Ministry of Commerce and Industry (MOCI's) instructions without reasonable cause.

■ Failing to deliver required documents to MOCI.

■ Impeding the work of the auditor.

■ Failing to ensure that documents issued by the limited liability company bear its name.

The Sharia law principles of accountability, trust, fairness and transparency are considered to impose additional fiduciary duties on directors of all types of company, for example, to avoid conflicts of interest and to act in the best interests of the company.

B. Briefly Outline the Regulatory Framework for Theft, Fraud, and Bribery That Can Apply to Directors.

If theft or fraud is proved a director is criminally liable.

Under the Combating Bribery Law, Royal Decree M/36 (Combating Bribery Law) bribery of public officials is a criminal offence with both those making or accepting bribes subject to a maximum SAR1 million fine or up to ten years imprisonment. "Public official" is defined as including an employee, chairman or director of:

■ A company that manages or operates a public facility.

■ A company that performs a public service.

■ A joint stock company.

■ A company in which the government has a holding.

■ A company carrying out banking operations.

C. Briefly Outline the Potential Liability for Directors under Securities Laws.

The Capital Market Law, Royal Decree No M/30 dated 2/6/1424H (Capital Market Law) and its implementing regulations set out various sanctions and penalties for violations in relation to securities.

Directors and others breaching the Capital Market Law and its implementing regulations can be subject to:


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■ Warnings.

■ Corrective or aversive action orders.

■ Travel bans.

■ Bans on acting as directors of listed companies.

1. Liability for Prospectuses

Directors, senior officers and others can be liable for damages if material matters or facts are incorrectly stated or omitted from prospectuses.

2. Information on Securities

Any person who makes or is responsible for making untrue statements of material fact, or omissions of material fact, that mislead a person in relation to a securities transaction can be liable for damages.

3. Market Manipulation

Any person involved in market manipulation can be liable for damages and also can be liable to fines or imprisonment for up to five years.

4. Insider Trading

Any person involved in insider trading may be liable to fines or imprisonment for up to five years.

D. What Is the Scope of a Director's Duties and Liability under Insolvency Laws?

There is no specific insolvency legislation in Saudi Arabia. Insolvency and liquidation is dealt with under the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law).

Directors' powers cease from the time that a liquidator is appointed.

The company's liquidator can bring a claim against the directors where their mismanagement has caused damage to the company or its shareholders.



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E. Briefly Outline the Potential Liability for Directors under Environment and Health and Safety Laws.

The Environmental Law and other environmental regulations contain a range of provisions to:

■ Preserve, protect and develop the environment and protect it from pollution.

■ Protect public health from activities and acts that harm the environment.

■ Conserve and develop natural resources.

Directors can have criminal liability under the Environmental Law.

There is no specific health and safety legislation in Saudi Arabia but a range of regulations including the Labour Law contain provisions relating to health and safety and directors can be liable for violations of such provisions.

F. Briefly Outline the Potential Liability for Directors under Anti-Trust Laws.

The Competition Law does not contain any provisions making directors personally or criminally liable for breach of this law.

G. Briefly Outline Any Other Liability That Directors Can Incur under Other Specific Laws.

Generally, directors may have liability under the provisions of various sector-specific laws.

1. Anti-Commercial Fraud Law

Directors can be liable for the sale of products not conforming to approved standard specifications or inspection and testing requirements.

2. Anti-Cyber Crime Law

Directors can be liable to imprisonment or fines as persons inciting, assisting or collaborating, in a range of crimes specified under this law.

3. Anti-Money Laundering Law

Directors can be liable to imprisonment for up to two years and fines for various money laundering related matters.


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H. Can a Director's Liability Be Restricted or Limited? Is It Possible for the Company to Indemnify a Director Against Liabilities?

Claims under the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) relating to mismanagement or breach of this law or the articles of association must be brought within three years of the person becoming aware of the misconduct. These provisions appear to reject the possibility that shareholders can ratify wrongful acts by directors.

It is not common to see provisions for indemnifying a director against liabilities. Generally under Sharia law indemnities are only enforceable in relation to actual losses and not indirect losses or loss of profits.

I. Can a Director Obtain Insurance Against Personal Liability? If So, Can the Company Pay the Insurance Premium?

It is possible for a director to be covered by a directors' and officers' liability insurance policy. The policy would have to be Sharia law compliant to be enforceable in Saudi Arabia.

J. Can a Third Party (Such As a Parent Company or Controlling Shareholder) Be Liable As a De Facto Director (Even Though Such Person Has Not Been Formally Appointed As a Director)?

There is no concept in Saudi Arabia of liability as a de facto director.



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IX. Transactions with Directors and Conflicts

A. Are There General Rules Relating to Conflicts of Interest Between a Director and the Company?

For joint stock companies the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) and corporate governance regulations provide that:

■ Directors must not have any interest in the company's business or contracts, unless authorised by the shareholders on an annual basis.

■ Directors must declare interests in proposed transactions.

■ Directors must not be involved in any competing business, unless authorised by the shareholders on an annual basis.

For all companies the Sharia law principles of accountability, trust, fairness and transparency are considered to impose additional fiduciary duties on directors to avoid conflicts of interest and to act in the best interests of the company.

B. Are There Restrictions on Particular Transactions Between a Company and Its Directors?

The Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) and corporate governance regulations provide that joint stock companies cannot make cash loans to directors or guarantee any third party loans to directors (this excludes banks and other finance companies whose objects allow them to do so on the same basis as transactions with the public).

C. Are There Restrictions on the Purchase or Sale by a Director of the Shares and Other Securities of the Company He Is a Director of?


There are no legal restrictions on the purchase or sale by a director of shares in a limited liability company. However, there may be restrictions in the articles of association or a shareholders' agreement.


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A director must own joint stock company shares worth at least SAR10,000 which must be deposited into a designated bank as a guarantee for directors' liability. If a claim has been brought against the directors, the shares cannot be transferred until the period for hearing the action has elapsed or a decision has been rendered on such action.

3. The Listing Rules

Under the listing rules:

■ Directors and senior executives and persons related to them are prohibited from dealing in securities during certain closed periods, before and until publication of the interim and annual financial statements of the company.

■ A director must notify the company and the Capital Market Authority (CMA) at the end of the relevant trading day of certain changes in their holding of securities of the company.

■ Persons specified in the prospectus as holding shares at the date of the prospectus may be restricted from dealings in those shares.

Directors are subject to the market manipulation and insider trading provisions of the market conduct regulations.

X. Disclosure of Information

A. Do Directors Have to Disclose Information about the Company to Shareholders, the Public or Regulatory Bodies?


Limited liability companies must provide their annual financial statements, report on operations and report on appropriation of net profit to the shareholders and Ministry of Commerce and Industry (MOCI).



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Joint stock companies must publish in a newspaper and register with the Ministry of Commerce and Industry (MOCI) a copy of their annual financial statements. Listed companies must provide interim and annual statements (including a board report) to the Capital Market Authority (CMA) and the shareholders.

Listed companies must notify the CMA and the public of certain material developments which may lead to share price movements or affect the company's ability to meet its commitments and comply with certain other disclosure and notification provisions.

XI. Shareholder Rights

A. Company Meetings

1. Does a Company Have to Hold an Annual Shareholders' Meeting? If So, When? What Issues Must Be Discussed and Approved?

a. Limited Liability Companies

Limited liability companies must hold an annual shareholders' meeting within six months of the end of the financial year to:

■ Approve the annual accounts and profit distribution report.

■ Consider the reappointment or appointment of the auditor.

■ Agree on the auditor's remuneration.

b. Joint Stock Companies

Joint stock companies must hold a general meeting within six months of the end of the company's financial year to:

■ Consider and approve the joint stock company's annual accounts, the proposed distribution of profit, the directors' report and auditor's report.

■ Consider the reappointment or appointment of the auditor.


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■ Agree on the auditor's remuneration.

■ Deal with any other matters not requiring an extraordinary general meeting.

2. What Are the Notice, Quorum and Voting Requirements for Holding Meetings and Passing Resolutions?


The limited liability company's articles of association or a shareholders' agreement may set out notice, quorum and voting requirements, subject to the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law).

The annual shareholders' meeting is convened by notice from the managers/directors or auditor. Any shareholder meeting can be convened at any time by the directors, the supervisory board, the auditor or shareholders representing at least 50% of the capital.

A quorum is 50% of the share capital unless the articles of association provide for a greater percentage.

Shareholder resolutions are normally passed by an absolute majority vote except for certain matters specified in the Companies Law, unless the articles of association require a higher majority.

Limited liability shareholders can pass written resolutions.


Joint stock company shareholder meetings are convened by notice from the board of directors in the manner prescribed in the articles of association.

25 days' notice of meetings (including an agenda) must be given by publication in the official gazette and in a local daily newspaper or by registered mail to shareholders depending on whether all the joint stock company's stock is nominative or not. Notices and agendas must be sent to the Ministry of Commerce and Industry (MOCI) within the 25 day period specified.

For listed joint stock companies the corporate governance regulations recommend at least 20 days' notice and publication on the Saudi Stock Exchange (Tadawul), the joint stock company's website and in two major newspapers.

A quorum at shareholder meetings is 50% of the share capital unless the articles of association provide for a greater percentage. There are lower quorum requirements at reconvened shareholder meetings if such quorum is not available at the first meeting.



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3. Are Specific Voting Majorities Required by Statute for Certain Corporate Actions?


The Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law) provides that:

■ Unanimous consent is required to change the company's nationality or increase the financial obligations of the shareholders.

■ 75% shareholder approval is required to amend the articles of association (although in practice 100% is required).

■ An absolute majority is required for all other shareholder resolutions.


Resolutions of the ordinary general meeting are passed by absolute majority vote of the shares represented, unless the articles of association of the company provide for a higher proportion.

Resolutions of an extraordinary general meeting are passed by a two-thirds majority vote of the shares represented.

The following resolutions require a three-fourths majority vote of the shares represented at the meeting:

■ An increase or a decrease in capital.

■ Extension of the term of the company.

■ Termination of the company prior to expiry of the term specified in its articles of association.

■ Merger of the company.

The company's articles of association shall prescribe the manner of voting at shareholder meetings.

4. Can Shareholders Call a Meeting or Propose a Specific Resolution for a Meeting? If So, What Level of Shareholding Is Required to Do This?


Shareholders representing at least half of the capital can request a shareholders' meeting.


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The board of directors must call a general meeting, if so requested by shareholders representing at least 5% of the capital. If such a meeting is not convened within one month from the due date set, shareholders representing at least 2% of the capital can request the Ministry of Commerce and Industry (MOCI) to convene a general meeting.

For listed joint stock companies, the corporate governance regulations provide that the directors must take into account matters which shareholders require to be listed on the agenda for the shareholders' meeting and that shareholders holding 5% or more of the shares are entitled to add items to such agenda.

B. Minority Shareholder Action

1. What Action, if Any, Can a Minority Shareholder Take if It Believes the Company Is Being Mismanaged and What Level of Shareholding Is Required to Do This?


Unless the articles of association provide otherwise, a majority vote is required to remove the directors. The directors are liable to the shareholders for mismanagement/breach of the articles of association, and breach of the Companies Law, Royal Decree No M/6 of 1385H as amended (Companies Law).


Every joint stock company shareholder has the right to institute an action against a joint stock company's directors if their wrongful act has prejudiced the shareholder's interests personally.

The board of directors must call a general meeting, if so requested by shareholders representing at least 5% of the capital. If such a meeting is not convened within one month from the due date set, shareholders representing at least 2% of the capital can request the Ministry of Commerce and Industry (MOCI) to convene a general meeting.

The Companies Law provides that shareholders representing at least 5% of the capital may request the grievances board to investigate the affairs of a joint stock company if the acts of the joint stock company's directors or auditors have aroused the shareholders' suspicion. Such an investigation may, if the complaint is found to be true, lead to the appointment of an interim manager and dismissal of the directors.



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XII. Internal Controls, Accounts and Audit

A. Are There Any Formal Requirements or Guidelines Relating to the Internal Control of Business Risks?


There are no formal requirements or guidelines relating to the internal control of business risks for limited liability companies although such provisions may be included in the articles of association or a shareholders' agreement.


The corporate governance regulations require the boards of listed joint stock companies to implement and supervise rules for internal control systems including risk management, by forecasting risks, disclosing them transparently and reviewing such control systems annually.

B. What Are the Responsibilities and Potential Liabilities of Directors in Relation to the Company's Accounts?

The directors of all companies are responsible for the preparation and filing of the annual accounts.

For listed joint stock companies, the audit committee must review the auditor's comments on the financial statements, take follow-up action and review the financial statements before presentation to the board. The listing rules set out requirements with regard to the standards, approval and disclosure of interim and final accounts.

For all companies, directors are liable to fines and imprisonment for misstatements or material omissions in the accounts with a view to concealing the financial position of the company.

C. Do a Company's Accounts Have to Be Audited? A company's accounts, for both limited liability companies and joint stock companies must be audited.


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D. How Are the Company's Auditors Appointed? Is There a Limit on the Length of Their Appointment?

In all cases the articles of association regulate the process for appointing auditors and the length of their appointment.

However, for joint stock companies, the auditors must be appointed or reappointed annually by their shareholders.

E. Are There Restrictions on Who Can Be the Company's Auditors? The company's auditor must be an independent registered auditor in Saudi Arabia. A person cannot act as auditor of a company if he has a direct or indirect interest in it.

Additionally, listed companies must ensure that the auditors (and their partners/employees) comply with the Saudi Organisation for Certified Public Accountants rules (SOCPA Rules) with regard to share ownership to ensure independence.

F. Are There Restrictions on Non-Audit Work That Auditors Can Do for the Company That They Audit Accounts for?

There are no restrictions on non-audit work that auditors can do for the company under Saudi law. However, auditors must comply with the rules and regulations applicable to their profession including the Saudi Organisation for Certified Public Accountants rules (SOCPA Rules).

G. What Is the Potential Liability of Auditors to the Company, Its Shareholders and Third Parties if the Audited Accounts Are Inaccurate? Can Their Liability Be Limited or Excluded?

The auditors are liable to the company, shareholders and others for damage suffered as a result of errors by the auditor in performing the audit work. The auditors may also have criminal liability if they intentionally falsified or misstated the accounts.

H. What Is the Role of the Company Secretary (or Equivalent) in Corporate Governance?

The role of the company secretary is not dealt with under Saudi law. The role of any company secretary would be regulated under the articles of association and/or the bye-laws of the company, or set by resolution of the board.



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XIII. Online Resources

A. The Ministry of Commerce and Industry (MOCI) W www.mci.gov.sa

Description. Official website of MOCI with English language versions of the Companies Law and other corporate laws and regulations.

B. The Capital Market Authority (CMA) W www.cma.org.sa

Description. Official website of the CMA with English language versions of the Capital Market Law and implementing regulations including the listing rules.

C. The Saudi Arabian Monetary Agency (SAMA) W www.sama.gov.sa

Description. Official website of SAMA with access to English language versions of laws and regulations relating to the banking, financial and insurance sectors.

XIV. About the Authors

A. Jonathan Reardon, Senior Associate Al Tamimi & Company

T +966 11 416 9666

F +966 11 416 9555

E [email protected]

W www.tamimi.com


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Professional qualifications. Solicitor, England and Wales

Areas of practice. Corporate Law; M&A; commercial law.

Non-professional qualifications. MA (Hons) in Law, Cambridge University

Recent transactions:

■ Advising on the disposal of shares in a Saudi listed company.

■ Advising on the corporate governance framework for a Saudi group.

■ Advising on various aspects of the Saudi Capital Market Law.

■ Advising on the Saudi aspects of a listing of a healthcare group.

■ Advising on the Saudi aspects of a major global merger of two listed groups.

■ Advising on the corporatisation of a business unit of a Saudi government entity.

■ Advising on the establishment of various joint ventures in Saudi Arabia.

■ Advising on the establishment of a major manufacturing plant in Saudi Arabia.

■ Advising on a major acquisition of shares in a Saudi entity.

B. Asim Almalik, Associate Al Tamimi & Company

T +966 11 416 9666

F +966 11 416 9555

E [email protected]

W www.tamimi.com

Professional qualifications. Licensed as a Lawyer in Saudi Arabia

Areas of practice. Corporate law; commercial law; corporate structuring; Islamic law.

Non-professional qualifications. Master of Laws in Comparative Law LL.M, California Western School of Law; Bachelor of Islamic Law (Sharia) (Hons), Al Imam Muhammad Ibn Saud Islamic University

Languages. Arabic and English.

infopaksm corporate governance and directors' duties guide

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