New social media requirements for Saudi Arabia
On 28 June 2022, the Kingdom of Saudi Arabia (“KSA”) approved a new Companies Law via Cabinet Decision No. 678/1443 (the “Companies Law” or the “Law”), which will come into force 180 days from Friday 22 July 2022 (i.e. on 4 January 2023). The Companies Law sets out updated rules for the incorporation, management and dissolution of companies established in KSA. In this article we focus on the liabilities that arise under the Companies Law in relation to managers, directors, shareholders, liquidators and auditors.
Pursuant to Article 26 of the Companies Law, the manager of a company (which may be the general manager of a limited liability company or a partner in a partnership) and each member of the board of directors owes a duty of care and loyalty to the company. That duty requires the manager or board member to:
Article 27 expands on the definition of a conflict of interest. It prohibits a manager or a board member from having any direct or indirect interest in the business or contracts concluded by the company without the consent of the shareholders. It also prohibits a manager or board member from participating in any business that would compete with the company or exploit the company's assets, information or investment opportunities for the purposes of generating a direct or indirect interest for that person.
Article 28 imposes a liability on a manager or board member for any damage resulting from a violation of the Law, the company's constitutional documents, an act of negligence or any other failure to discharge that person’s functions. That liability will be owed to the company, its shareholders and any third parties who suffer loss as a result of the manager or board member’s acts of omissions. Liability may be joint or several and there is no contracting out of that liability.
A board member may be excused from liability if that person voted against the decision of the board which resulted in the company suffering a loss, although absence from a meeting will not be grounds to avoid liability.
Article 28.3 provides that a company may provide insurance coverage to the general manager and each board member for any liability arising under the Law.
Article 29 sets out who may bring a claim against the general manager or a board member for violation of Article 28 and provides that such claims may be brought by:
Article 29(2) is a particularly important because it allows for derivative actions by a shareholder where a resolution has been made by a majority of the shareholders at a general assembly or by a majority of the board during a board of directors meeting.
Article 30 provides that except in fraud and forgery cases, the time limit for any claim against a manager or board member shall be five years from the end of the fiscal year in which the wrongful act was committed, or three years from the end of term of office of the manager or board member who committed the wrongful act, whichever is the later.
While these provisions may seem to throw the door open to disgruntled shareholders to sue managers or board members, there are some limits to this cause of action. Pursuant to Article 31, a manager or board member will have a defence to any claim brought against them for liability arising out of a management decision or board resolution if:
Article 32 provides that where a lawsuit is brought against a manager or director, the Court may charge the company with the legal costs associated with that lawsuit if the lawsuit is ultimately found to be in the interests of the company.
If a partner or shareholder is found liable under the Law, Articles 33 and 34 provide that that person's liability may be enforced against that persons shares.
The provisions described above apply to the managers and directors of all types of companies set out in the Companies Law. In addition to these general provisions there are some specific provisions that relate to particular types of companies. These include:
Pursuant to Article 48, in the case of a general partnership, where a partner is ordered by the Court to pay a debt of the company, he or she may have recourse against the other partners in proportion to what each of them has paid for their shares in the company.
Limited Partnership Company
Pursuant to Article 53, an unlimited partner may not interfere in external management activities. If they do so, they may be personally liable for the company’s debts and liabilities arising out of that interference.
Joint Stock Companies
Article 71 sets out specific rules relating to directors duties to disclose any interest they may have in the business and contracts concluded on behalf of the company. Pursuant to Article 71.2, if a board member fails to disclose an interest in the business or the company’s contracts, the company or any stakeholder may bring an action against the director to invalidate the contract or require the director to disgorge any profit they have made from it.
Pursuant to Article 71.3, that liability attaches not only by the director who holds the interest, but by any member of the board of directors who fails to take action to address that conflict. However, a director will be relieved of liability if he or she explicitly recorded their objection to the conflict in the minutes of the relevant board meeting.
Simplified Joint Stock Company
Pursuant to Article 143, the liability provisions that apply to the directors of joint stock companies apply equally to simplified joint stock companies.
Professional companies are companies that are set up to carry out professional services such as legal services, accountancy services or consulting. Pursuant to Article 209, each partner or shareholder of a professional company is personally liable for their professional errors toward the company. That liability will be owed to the company, the other partners in the company and any third parties who suffer a loss as a result of the partner’s professional errors.
Article 210 makes provision for professions to obtain professional indemnity insurance to cover liability for errors at the discretion of the Minister.
There are no specific provisions in the Companies Law that deal with the liability of shareholders (other than the general principle of limited liability). However, Part 13 of the Law lays down penalties for a wide range of conduct that would potentially apply to shareholders.
Part 12 of the Companies Law sets out the provisions relating to the dissolution and liquidation of companies.
Article 258 provides that the liquidator shall be responsible for compensating the company, its partners, shareholders or any third parties for loss arising out of any decision made by the liquidator which exceeds the limits their powers or as a result of errors committed in the performance of his or her duties.
A claim, other than in fraud and forgery cases, against a liquidator must be brought within five years from the date the company is removed from the commercial register.
There are no specific provisions in the Companies Law that deal with the liability of auditors. However, Part 13 of the Companies Law lays down a number of penalties for auditors who:
We discuss the penalties under the Law in the section below.
Part 13 of the Companies Law sets out the penalties for breaches of the Law.
Pursuant to Article 260, a penalty of imprisonment for a period not exceeding three years and a fine not exceeding SAR 5 million, or either one of those two penalties shall be imposed on any manager, official, board member, auditor or liquidator who intentionally records false or misleading data or information in:
Article 261 provides for a penalty of imprisonment for a period not exceeding one year and the fine not exceeding SAR 1 million, or either one of those two penalties for:
Article 262 provides for a fine not exceeding SAR 500,000 on:
Article 263 provides that in the event of repeat offenses, the penalties set out in Articles 260 and 261 shall be doubled.
In addition to the penalties set out and Articles 261 and 262, Article 264 provides for a range of alternative sanctions which include:
The new Companies Law is a significant step forward in the modernisation of the KSA’s economy and regulatory environment. Significantly, the Law introduces a number of concepts that will be familiar to practitioners of company law in common law jurisdictions. These concepts will be developed further when new Regulations are passed to give effect to the provisions of the Law.
In the interim, managers, directors, shareholders, liquidators and auditors of companies registered in KSA should take note that the Companies Law imposes duties and obligations on them which, if breached, may result in potentially serious civil and criminal liability.
Persons in those positions should therefore seek advice on the potential liabilities that may be imposed on them under the Companies Law and, if necessary, make appropriate insurance arrangements.