Corporate Governance And Directors' Duties Guide: Saudi Arabia

8 Corporate Governance and Directors’ Duties Guide: Saudi Arabia 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. Copyright 2016 Practical Law Company (PLC) & Association of Corporate Counsel

9 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. 3. Joint Stock Companies 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 For more ACC InfoPAKs, please visit http://www.acc.com/infopaks

10 Corporate Governance and Directors’ Duties Guide: Saudi Arabia 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: 4. 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. 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. Copyright 2016 Practical Law Company (PLC) & Association of Corporate Counsel

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

12 Corporate Governance and Directors’ Duties Guide: Saudi Arabia 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. Copyright 2016 Practical Law Company (PLC) & Association of Corporate Counsel

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

14 Corporate Governance and Directors’ Duties Guide: Saudi Arabia 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. Copyright 2016 Practical Law Company (PLC) & Association of Corporate Counsel

15 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

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.