EXECUTIVE SUMMARY
The new Companies Law grants founders significant flexibility to customize share transfer rules in the Articles of Association of closed joint stock companies. This flexibility is strategic strength if leveraged wisely from inception, and a source of risk if left to loose drafting.
Saudi Arabia’s new Companies Law, issued by Royal Decree No. M/132 of 1443H, has brought a fundamental transformation to the rules governing closed joint stock companies — particularly share transfers. This transformation opens new investment opportunities, but it requires precise understanding of what has changed and what has not.
In this article, we examine the new legal framework for purchasing shares in closed joint stock companies, with focus on the rules investors and founders must know before contemplating any transaction.
- The New Definition of Closed Joint Stock Companies
The new Companies Law clearly distinguishes between listed and closed joint stock companies. Closed companies operate under a less stringent regulatory framework but retain the legal form of a joint stock company with all that entails: separation of ownership and management, and ability to issue multiple share classes.
Distinguishing criteria:
▪ Listed company: shares listed on the stock market (Tadawul) and subject to CMA oversight.
▪ Closed company: shares not publicly traded, governed primarily by the Companies Law and the company’s Articles of Association.
2. New Rules for Share Transfers
Key points introduced by the new law:
▪ General principle: free transferability of shares in joint stock companies, except as restricted by the Articles.
▪ Broad latitude in the Articles to impose restrictions on share transfers — such as General Assembly approval, board approval, or other shareholder approval.
▪ Ability to restrict transfers to certain classes of shareholders (e.g., not to competitors, or Saudis only).
▪ Ability to tie share ownership to holding a specific management position (common in professional service companies).
▪ Allowance of Preferred Shares with distinctive transfer rules.
3. Pre-emption Rights — The New Flexibility
The new law gives founders significant flexibility in customizing pre-emption rights in the Articles:
▪ Period: a period longer or shorter than the default (30 days) may be set for exercise.
▪ Exceptions: certain transfers may be excepted from pre-emption — such as intra-group transfers, transfers to heirs, or transfers among existing shareholders.
▪ Conditions: the right’s exercise may be made subject to specific conditions, such as matching the price offered by an external party.
▪ Priority order: a priority order among shareholders may be set (e.g., founders first, then others).
4. Restrictions on Non-Saudi Ownership
Despite the Equal Rights Investment Law that facilitates foreign investment, restrictions remain in specific sectors:
▪ Sectors that absolutely prohibit non-Saudi ownership (such as Hajj and Umrah services, certain media activities).
▪ Sectors requiring a minimum Saudi ownership percentage (such as some professional services).
▪ Sectors requiring additional approvals from regulators (such as financial and banking sector).
Practical point: before any purchase transaction, verify the company’s registered activities in the Commercial Registry and the resulting foreign ownership conditions.
5. Documentation and Registration Requirements
After agreeing on the transaction, the legal implementation phase includes:
▪ Formal documentation of the SPA per regulatory requirements.
▪ If the company requires internal approvals (board, General Assembly), obtaining and documenting them in minutes.
▪ Updating the shareholders’ register with the ownership transfer.
▪ Registering the change at the Ministry of Commerce via the relevant platform.
▪ Updating data at other relevant regulators (CMA, SAMA, etc.) if the company is subject to them.
Core Takeaway
The new law has granted significant scope to customize share transfer rules in the Articles of Association — and this flexibility is a great strength if leveraged wisely from company inception. But it is also a source of risk if left to loose or inconsistent drafting.
Recommendation: when establishing a new closed joint stock company, or restructuring an existing one, invest in drafting the Articles with high precision and forward vision for likely scenarios (new investor entry, founder exit, partner disputes). This investment protects the company from countless disputes over its life.