The Companies Law, issued by Royal Decree No. M/132 dated 1/12/1443 AH corresponding to 4/7/2022 CE, published in the Official Gazette (Umm Al-Qura), provides a comprehensive regulatory framework for the shares of a joint stock company and the amendment of its capital in Part Four (Joint Stock Company). Chapter Four (Shares, Debt Instruments, and Sukuk Issued by a Joint Stock Company) sets out the rules governing shares in its First Section (Shares) under Articles 103 to 116, and the provisions governing debt instruments and Sukuk in its Second Section under Articles 117 to 120. Chapter Six (Amendment of the Capital of a Joint Stock Company) sets out the rules of the First Section (Capital Increase) under Articles 126 to 131, a critical financial rule in Article 132 (Company Losses), and the rules of the Second Section (Capital Reduction) under Articles 133 to 137. The Executive Bylaw of the Companies Law, published in the Official Gazette on 25/6/1444 AH, then sets out the detailed provisions on shares and capital amendment in Part Two thereof (Joint Stock Company Not Listed on the Stock Exchange) across chapters covering the company's purchase of its own shares, rules for pledging shares, rules for issuing and converting shares, sale of shares by public auction, and the issuance and sale of pre-emption rights arising from a capital increase. The rules on shares and capital are thus fully developed and divided between the substantive provisions in the Law itself and the procedural details in the implementing regulations.
This article focuses on the shares and capital amendment of a joint stock company: the nominal nature of shares and their value, issuance, division, and consolidation; the types and classes of shares (ordinary, preferred, and redeemable) and the shareholder rights attached to them; the company's purchase of its own shares, encumbrance of shares, pledge of shares, and treasury share rules; the methods of increasing capital and the conditions for increasing issued or authorised capital; the shareholder's pre-emption right to subscribe to new shares, its suspension, transfer, waiver, and the distribution of new shares; the loss threshold that obligates the board of directors to convene the extraordinary general assembly; the methods of reducing capital, the conditions for the reduction decision, and the requirement of equality among shareholders; and the reduction procedures and creditor protection through notification, objection, and recourse to the competent court. All texts and figures are reproduced verbatim from the official texts published in the Official Gazette (Umm Al-Qura), with precise reference to the scope of application and the degree of legal binding for each provision.
The preliminary answer can be summarised in a single sentence: the shares of a joint stock company are nominal and indivisible as against the company, with their nominal value determined in the company's articles of association. The types of shares are divided into ordinary shares, preferred shares, and redeemable shares. A company may purchase its own shares or pledge them if its articles of association so permit, provided that the treasury shares do not exceed ten percent (10%) of the total class of shares being purchased at any time. Capital is increased by issuing new shares in exchange for cash or in-kind contributions, or against debts of a determinate amount that are immediately payable with the consent of the relevant creditors, or by capitalising reserves that the extraordinary general assembly decides to merge into the capital, or against debt instruments or Sukuk. The extraordinary general assembly has the authority to increase issued or authorised capital, provided that the issued capital has been fully paid up. The shareholder has a pre-emption right to subscribe to new shares issued in exchange for cash contributions. If the company's losses reach half (50%) of the issued capital, the board of directors must disclose this and its recommendations within sixty (60) days and convene the extraordinary general assembly within one hundred and eighty (180) days. Capital is reduced by cancelling a number of shares, reducing the nominal value per share, returning part of it to the shareholder or releasing the shareholder from all or part of the unpaid amount, or by the company purchasing a number of its own shares and cancelling them, while notifying creditors to object at least forty-five (45) days before the extraordinary general assembly meeting and settling matured debts or providing adequate security for contingent debts, as will be detailed below with official figures and texts in the following sections.
The Regulatory Framework for Shares and Capital Amendment of a Joint Stock Company
The rules governing shares and capital amendment are set out in the Companies Law in Part Four (Joint Stock Company). Chapter Four (Shares, Debt Instruments, and Sukuk Issued by a Joint Stock Company) governs shares in its First Section (Shares) under Articles 103 to 116, and the provisions on debt instruments and Sukuk in its Second Section under Articles 117 to 120. Chapter Six (Amendment of the Capital of a Joint Stock Company) governs the rules of the First Section (Capital Increase) under Articles 126 to 131, Article 132 (Company Losses), and the rules of the Second Section (Capital Reduction) under Articles 133 to 137. The Executive Bylaw of the Companies Law then sets out the detailed provisions on shares and capital amendment in Part Two thereof (Joint Stock Company Not Listed on the Stock Exchange). Chapter Three thereof (Company Purchase of Its Own Shares) governs the rules for the company's purchase of its own shares and the use of treasury shares under Articles 34 to 45. Chapter Four (Rules for Pledging Shares) governs the pledge of a shareholder's shares under Articles 46 to 50. Chapter Five (Rules for Issuing and Converting Shares) governs the rules for issuing preferred and redeemable shares, converting types and classes of shares, and dividing or consolidating shares under Articles 51 to 54. Chapter Six (Sale of Shares by Public Auction) governs the procedures for selling shares whose holders have defaulted on payment under Articles 55 and 56. Chapter Seven (Issuance and Sale of Pre-emption Rights Arising from a Capital Increase) governs the rules for acquiring and exercising pre-emption rights and selling or waiving them under Articles 57 to 61. Article 33 of the Bylaw governs the nominal value of shares and the use of the share premium.
The provisions of the Law and the Executive Bylaw must be read as complementary: the Law sets out the general rules on shares and capital amendment, while the Bylaw sets out the procedural details and specific requirements. The Law delegates certain matters to the implementing regulations in specific instances. For example, Article 108 refers to the regulations to determine the rules for the types and classes of shares that may be issued. Article 103 refers to the competent authority to establish the rules for dividing or consolidating shares. Article 114 refers to the regulations to establish the rules for implementing the company's purchase of its own shares, encumbrance of shares, and pledge of shares. Article 130 refers to the regulations to determine the rules for selling or waiving pre-emption rights. The two documents are thus complementary in establishing the substantive legal principles and the procedural details.
Shares: Nominal Nature, Issuance, and Nominal Value
Article 103 of the Companies Law (Company Shares) establishes the nominal nature of shares and the rules of indivisibility and nominal value: "1. The shares of a joint stock company shall be nominal and indivisible as against the company. If a share is owned by multiple persons, they must designate one of them to act on their behalf in exercising the rights attached to it, and such persons shall be jointly and severally liable for the obligations arising from ownership of the share. 2. The company's articles of association shall determine the nominal value of its shares, and shares of the same type or class shall have equal nominal value. 3. Subject to paragraph (2) of this Article, shares may be divided into shares of a lower nominal value or consolidated to represent shares of a higher nominal value, and the competent authority shall establish the rules necessary therefor." Shares are therefore nominal and indivisible as against the company, with joint and several liability for the obligations arising from shared ownership of a single share. The nominal value is determined in the company's articles of association, and shares of the same type or class must have equal nominal value, with the possibility of dividing or consolidating shares at a lower or higher nominal value in accordance with the rules established by the competent authority.
Article 105 of the Companies Law (Issuance of Company Shares) governs the conditions of issuance: "1. Company shares shall be issued in exchange for cash or in-kind contributions. 2. The amount paid for shares issued in exchange for cash contributions must not be less than one-quarter (25%) of their nominal value as determined in the company's articles of association, and the paper or electronic share certificate for a joint stock company not listed on the stock exchange shall state the amount paid. In all cases, the remaining amount must be paid within five (5) years from the date of issuance. 3. Shares representing in-kind contributions shall be issued only after full payment of their value, and shall not be delivered to their holders until the ownership of such contributions has been transferred in full to the company." A share is therefore issued in exchange for cash or in-kind contributions, with a minimum payment of one-quarter for cash shares and the remainder due within five years from the date of issuance. In-kind contribution shares are issued only after full payment and transfer of ownership to the company. Article 106 of the Companies Law (Nominal Value of Shares) establishes the rule prohibiting issuance below nominal value: "Shares may not be issued at less than their nominal value. They may be issued at more than that value if the company's articles of association so provide or if the extraordinary general assembly so approves, in which case the premium shall be placed in a separate account within shareholder equity, and the regulations shall determine the rules for its use." Issuance below nominal value is therefore prohibited, while issuance above nominal value is permitted with the premium placed in a separate account within shareholder equity. Article 33 of the Executive Bylaw provides further detail: "Shares may not be issued at less than their nominal value. They may be issued at more than that value if the company's articles of association so provide or if the extraordinary general assembly so approves, in which case the premium shall be placed in a separate account within shareholder equity and may not be distributed as cash dividends. It may be used to increase capital by issuing free shares, or to write off losses after exhausting any reserves previously formed from profits."
Article 54 of the Executive Bylaw (Rules for Dividing and Consolidating Shares) sets out the procedures for dividing or consolidating shares: "Subject to Article 103 of the Law, the following conditions must be met to divide shares into shares of a lower nominal value or to consolidate them to represent shares of a higher nominal value: (a) The company's articles of association must permit such action. (b) The board of directors must prepare a proposal for the division or consolidation setting out the reasons therefor and their impact on shareholders, the proportion of shares each shareholder will hold after the division or consolidation, and must provide shareholders with the proposal at least twenty-one (21) days before the date set for convening the extraordinary general assembly. (c) The extraordinary general assembly must approve the division or consolidation."
Types and Classes of Shares and Shareholder Rights Attached to Shares
Article 108 of the Companies Law (Types and Classes of Shares) defines the categories of shares: "1. The types of shares that a company may issue are divided into: ordinary shares, preferred shares, and redeemable shares. The company's articles of association may provide for different classes of shares and may grant certain rights or privileges or impose restrictions on certain classes. 2. Shares of the same type or class shall carry equal rights and obligations, and each type or class of shares shall have the rights attached thereto in accordance with the company's articles of association." The three types of shares (ordinary, preferred, and redeemable) are thus identified, with the possibility of different classes being provided for in the articles of association. Rights and obligations are equal for shares of the same type or class. Article 51 of the Executive Bylaw (Rules for Issuing Shares) sets out the rules for issuing preferred and redeemable shares: "1. A company may issue preferred shares or redeemable shares, which may include classes that grant different rights or privileges or impose restrictions on certain classes, subject to the following requirements: (a) The company's articles of association must permit such action. (b) The issued capital must have been fully paid up. (c) A special meeting composed in accordance with Article 89 of the Law must approve the issuance, from among the holders of shares or any class thereof who are prejudiced by the issuance, in addition to the approval of the extraordinary general assembly. (d) The notice convening the extraordinary general assembly must include a proposal to issue types or classes of shares, setting out the rights, privileges, or restrictions attaching to the proposed types or classes. (e) The company's articles of association must set out the rights, privileges, or restrictions attaching to the types or classes of shares to be issued. (f) The proportion of issued preferred shares or redeemable shares and their classes combined must not, at any time, exceed fifty percent (50%) of the company's capital. (g) The value of the preferred shares or redeemable shares must be paid in full upon subscription."
Article 109 of the Companies Law (Conversion of Shares) and Article 110 (Amendment of Rights or Obligations Attached to Shares) govern conversion and amendment. Article 109 provides: "2. The conversion of a type or class of shares into another type or class requires the approval of the extraordinary general assembly. Excluded from this requirement are cases where the share issuance resolution provides for automatic conversion into another type or class upon the occurrence of specified conditions or after the expiry of a specified period." Article 110 provides: "1. If the company's shares are of different types or classes, or if the company's articles of association permit the issuance of different types or classes of shares, then the amendment or cancellation of any of the rights, obligations, or restrictions attached to shares, or the conversion of any type or class of shares into another type or class if such conversion results in the amendment or cancellation of the rights or obligations attached to the type or class of shares being converted, or the issuance of shares of a particular type or class that would prejudice the rights of another class of shareholders, shall require the approval of a special meeting composed in accordance with Article 89 of the Law, from among the shareholders who are prejudiced by the amendment, cancellation, conversion, or issuance, in addition to the approval of the extraordinary general assembly." Conversion of a type or class of shares into another therefore requires the approval of the extraordinary general assembly, with protection for the adversely affected shareholders through a special meeting in accordance with Article 89 of the Law.
Article 107 of the Companies Law (Rights Attached to Shares) sets out the rights vested in the shareholder: "The following rights shall be vested in the shareholder and attached to the share: the right to dispose of it; the right to attend the shareholders' meetings, participate in their deliberations, and vote on their resolutions; the right to receive a share of the net profits decided for distribution; the right to elect members of the board of directors; the right to inspect the company's records and documents without breaching the confidentiality of information; the right to supervise the board of directors' activities; the right to bring liability proceedings against board members; the right to challenge the invalidity of shareholders' meeting resolutions; and the right to receive a share of the company's assets upon liquidation, all subject to the terms and conditions set out in the law or the company's articles of association." Article 53 of the Executive Bylaw provides that preferred shares or redeemable shares do not carry the right to vote in the general meetings of shareholders, although preferential rights over ordinary shares may be granted to them. The rights attached to a share therefore include the right of disposal, attendance, voting, a share of profits, election of the board, inspection, supervision of board activities, liability proceedings, challenge of invalid resolutions, and a share of assets upon liquidation.
Company Purchase of Its Own Shares, Encumbrance, Pledge, and Treasury Share Rules
Article 114 of the Companies Law (Purchase, Encumbrance, and Pledge of Shares) establishes the general rule: "1. A company may purchase its own shares or encumber them if its articles of association so permit, and shares purchased by the company shall not carry voting rights at shareholders' meetings. 2. Shares may be pledged, and the pledgee creditor shall be entitled to collect dividends and exercise the rights attached to the share, unless the pledge agreement provides otherwise. The pledgee creditor may not attend or vote at shareholders' meetings." A company may therefore purchase its own shares or pledge them if its articles of association so permit, while shares purchased by the company are denied voting rights at shareholders' meetings. The pledge of shares is permitted, with the pledgee creditor collecting dividends and exercising the rights attached to the share unless otherwise agreed, but without the right to attend or vote at general meetings.
Article 34 of the Executive Bylaw (Rules for the Company's Purchase of Its Own Shares) sets out the detailed requirements: "A company may purchase its own ordinary or preferred shares if its articles of association so permit, subject to the following requirements: (a) The purpose of the purchase must be to reduce the company's capital or to retain the ordinary shares purchased as treasury shares. (b) The treasury shares must not, at any time, exceed ten percent (10%) of the total class of shares being purchased. (c) The value of the shares being purchased must have been paid in full. (d) The debit balance of the treasury shares must not exceed the retained earnings balance." The purposes of the purchase are thus limited to reducing capital or retaining the shares as treasury shares, with treasury shares capped at ten percent (10%) of the total class of shares being purchased, the value of the shares must be paid in full, and the debit balance of the treasury shares must not exceed the retained earnings balance. Article 35 of the Executive Bylaw provides: "The company shall purchase its own shares pursuant to a resolution of the extraordinary general assembly approving the purchase, with a maximum limit on the number of shares to be purchased and the purposes thereof. The resolution shall delegate to the board of directors the authority to complete the purchase in one or more stages within a maximum period of twelve (12) months from the date of approval. The company must announce the approval and its terms immediately upon issuance. The extraordinary general assembly may, at any time, decide to change the purposes of the share purchase."
Articles 38 and 39 of the Executive Bylaw govern the effect of purchasing preferred shares and the retention period for treasury shares. Article 38 provides: "Preferred shares shall be cancelled upon the company's completion of their purchase, and the company must take the necessary legal procedures to reduce its capital." Article 39 provides: "The extraordinary general assembly, in its resolution approving the company's purchase of its own shares, may determine the period during which the company may retain the treasury shares and the consequences of the expiry of that period without disposing of them." Articles 43 and 44 of the Executive Bylaw govern the rules for selling treasury shares. Article 43 permits the sale of treasury shares by the board of directors in one or more stages, subject to the condition that the company's articles of association permit such sale and that the board's decision does not conflict with the extraordinary general assembly's resolution approving the purchase of those shares. Article 44 provides for the shareholders' pre-emption right to purchase treasury shares when sold for cash consideration, in proportion to their shareholding in the total issued capital, within the period specified in the resolution. Article 45 of the Executive Bylaw requires that the company's articles of association permit the encumbrance of its shares, that the encumbrance serves as security for a debt of the company, that it is in the company's and the shareholders' interest as determined by the board of directors, and that it is approved by the general assembly.
Capital Increase: The Four Methods and Conditions for the Increase
Article 126 of the Companies Law (Methods of Capital Increase) sets out the four methods: "Capital shall be increased by one of the following methods: (a) Issuing new shares in exchange for cash or in-kind contributions. (b) Issuing new shares against debts of a determinate amount that are immediately payable, with the consent of the relevant creditors. The issuance must be at the value determined by the extraordinary general assembly after obtaining the opinion of an expert or a licensed valuer or more, and after the board of directors has prepared a statement on the origin and amount of such debts, which must be signed by the board members who shall be liable for its accuracy, accompanied by an auditor's report. (c) Issuing new shares in the amount of reserves that the extraordinary general assembly decides to merge into the capital. Such shares must be issued in the same form and on the same terms as the existing shares of the same type or class, and shall be distributed to shareholders free of charge in proportion to their existing shareholding. (d) Issuing new shares in exchange for debt instruments or Sukuk." The methods of increase thus range from issuance in exchange for cash or in-kind contributions, issuance against determinate immediately payable debts with creditor consent and a board statement on their origin and amount accompanied by an auditor's report, issuance of free shares in the amount of reserves merged into capital distributed to shareholders free of charge in proportion to their shareholding, and issuance in exchange for debt instruments or Sukuk.
Article 127 of the Companies Law (Increase of Issued or Authorised Capital) sets out the conditions for the increase: "1. The extraordinary general assembly may decide to increase the company's issued capital, or its authorised capital if applicable, provided that the issued capital has been fully paid up. Full payment is not required if the unpaid portion relates to shares issued in exchange for the conversion of debt instruments or Sukuk into shares and the conversion period has not yet expired. 2. The extraordinary general assembly may, in all cases, allocate the shares issued upon increasing the capital or part thereof to the employees of the company and its subsidiaries or some of them. Shareholders may not exercise their pre-emption right when the company issues shares allocated to employees. The competent authority shall establish the rules and procedures for allocating shares to employees of the company or its subsidiaries or some thereof. 3. In all cases, the nominal value of the increase shares must be equal to the nominal value of the original shares of the same type or class." The condition for increasing issued or authorised capital is that the issued capital has been fully paid up, with the exception for shares issued in exchange for debt instruments and Sukuk whose conversion period has not yet expired. The extraordinary general assembly may allocate the issued shares or part thereof to employees of the company and its subsidiaries without shareholders exercising their pre-emption right therein. The nominal value of the increase shares must equal the nominal value of the original shares of the same type or class.
Pre-emption Right to Subscribe to New Shares
Article 128 of the Companies Law (Pre-emption Right to Subscribe to New Shares) establishes the pre-emption right: "A shareholder who owns a share at the time the extraordinary general assembly issues its resolution approving the increase of issued capital, or the board of directors approves the increase within the limits of the authorised capital, shall have the pre-emption right to subscribe to new shares issued in exchange for cash contributions. The shareholder shall be notified of this right, if it exists, by registered letter to his address in the shareholders' register, or by modern technological means, together with the capital increase resolution and the terms, mechanism, commencement date, and expiry date of the subscription, taking into account the type and class of share held." The shareholder who owns a share at the time the increase resolution is issued thus has the pre-emption right to subscribe to new shares issued in exchange for cash contributions, and must be notified of this right through the capital increase resolution and the subscription terms by registered letter or by modern technological means, taking into account the type and class of share held.
Article 129 of the Companies Law (Suspension of the Pre-emption Right) sets out the cases in which the right may be suspended: "The extraordinary general assembly may, if the company's articles of association so provide, suspend the pre-emption right for shareholders to subscribe to a capital increase in exchange for cash contributions, or grant the pre-emption right to non-shareholders in the cases it considers to be in the company's interest." Article 130 of the Companies Law (Sale or Waiver of the Pre-emption Right) provides: "A shareholder in a joint stock company may sell or waive his pre-emption right for consideration or without consideration, in accordance with what is determined by the regulations." Article 59 of the Executive Bylaw provides further detail: "A registered shareholder may sell or transfer to a third party, whether a shareholder or not, all or part of his pre-emption rights at the price and on the terms agreed upon, during the subscription period for new shares specified in the capital increase resolution issuing new shares in exchange for cash contributions, provided that such period is not less than fifteen (15) days."
Article 131 of the Companies Law (Distribution of New Shares) sets out the distribution rule: "New shares shall be distributed to holders of pre-emption rights who requested to subscribe, in proportion to their pre-emption rights out of the total pre-emption rights resulting from the capital increase, provided that the number of shares they receive does not exceed the number they requested and taking into account the type and class of share held." Article 57 of the Executive Bylaw provides that each registered shareholder shall receive pre-emption rights in proportion to the shares he owns in the company's capital at the close of business on the day the extraordinary general assembly meets. A shareholder may not exercise his pre-emption right when the company issues shares allocated to employees, or if the extraordinary general assembly decides to suspend the pre-emption right or grant it to non-shareholders in the cases it considers to be in the company's interest.
Company Losses: The Half-of-Issued-Capital Threshold
Article 132 of the Companies Law (Company Losses) establishes the critical capital threshold: "If the losses of a joint stock company reach half (50%) of the issued capital, the board of directors must disclose this and its recommendations regarding such losses within sixty (60) days from the date it becomes aware of the losses reaching this level, and must convene the extraordinary general assembly within one hundred and eighty (180) days from the date of such awareness, to consider the continuation of the company together with any necessary measures to address such losses or to dissolve the company." If the losses reach half of the issued capital, the board of directors must disclose this and its recommendations within sixty (60) days from the date it becomes aware of the losses, and must convene the extraordinary general assembly within one hundred and eighty (180) days from the date of such awareness, to consider the continuation of the company together with the necessary measures to address the losses or to dissolve the company. This threshold constitutes an early legal barrier between the company's continuation and its dissolution, at which point the decision to continue shifts from the ordinary general assembly to the extraordinary general assembly.
This threshold connects with two chapters of the Law's provisions. On the one hand, significant losses are a condition for the capital reduction decision, as will be seen in the following section, since the extraordinary general assembly may reduce capital when the company has suffered losses. On the other hand, the threshold triggers the convening of the extraordinary general assembly, which must observe the special quorum requirements set out in Article 93 of the Law. The board of directors must therefore time the disclosure and the convening within the two prescribed periods to protect shareholders' rights in making a prior decision regarding the company's continuation.
Capital Reduction: Methods, Conditions for the Decision, and Equality
Article 133 of the Companies Law (Methods of Capital Reduction) sets out the four methods: "Capital shall be reduced by one of the following methods: (a) Cancelling a number of shares equal to the amount required to be reduced. (b) Reducing the nominal value per share by cancelling a portion thereof equal to the loss suffered by the company. (c) Reducing the nominal value per share by returning part of it to the shareholder or releasing the shareholder from all or part of the unpaid portion of the share value. (d) The company purchasing a number of its own shares equal to the amount required to be reduced and then cancelling them." The methods of reduction thus range from cancelling a number of shares equal to the amount required to be reduced, reducing the nominal value per share by cancelling a portion equal to the loss, reducing the nominal value per share by returning part to the shareholder or releasing the shareholder from the unpaid amount, and the company purchasing a number of its own shares and cancelling them.
Article 134 of the Companies Law (Issuance of the Capital Reduction Decision) sets out the conditions for the decision: "The extraordinary general assembly may decide to reduce the capital if it exceeds the company's needs or if the company has suffered losses. In the latter case only, capital may be reduced below the minimum set out in Article 159 of the Law." The same Article provides: "The reduction decision may not be issued unless a statement prepared by the board of directors on the reasons necessitating the reduction, the company's obligations, and the effect of the reduction on their performance has been read out at the general assembly, accompanied by an auditor's report. It shall be sufficient to make the statement available to shareholders in cases where the general assembly decides to adopt the resolution by circulation." The extraordinary general assembly thus decides on the reduction if the capital exceeds the company's needs or if the company has suffered losses, and capital may not be reduced below the minimum set out in Article 159 of the Law except in the case of losses alone. The decision may not be issued unless a statement prepared by the board of directors on the reasons for the reduction, the company's obligations, and the effect of the reduction on their performance has been read out, accompanied by an auditor's report. Article 136 of the Companies Law (Equality Among Shareholders) provides: "Equality among shareholders holding shares of the same type and class must be observed when reducing capital."
Capital Reduction Procedures and Protection of Creditors and Shareholders
Article 135 of the Companies Law (Capital Reduction Procedures) governs creditor protection when the reduction results from an increase of capital beyond the company's needs: "1. If the capital reduction results from an increase of capital beyond the company's needs, creditors must be invited to lodge their objections, if any, to the reduction at least forty-five (45) days before the date set for convening the extraordinary general assembly to adopt the reduction decision, together with a statement showing the amount of capital before and after the reduction, the date of the meeting, and the date on which the reduction takes effect. If any creditor objects to the reduction and submits his documents to the company within the said period, the company must pay his debt if it is due or provide him with adequate security for its payment if it is not yet due. A creditor who has notified the company of his objection to the reduction and has not been paid his due debt or provided with adequate security for its payment if it is not yet due may petition the competent court before the date set for convening the extraordinary general assembly to adopt the reduction decision, and the competent court may, in this case, order the payment of the debt or the provision of adequate security or the postponement of the meeting, as appropriate." Creditors must therefore be invited to lodge their objections at least forty-five (45) days before the extraordinary general assembly meeting to adopt the reduction decision, with a statement showing the amount of capital before and after the reduction, the date of the meeting, and the date on which the reduction takes effect. If a creditor objects and submits his documents, the company must settle the matured debt or provide adequate security for the contingent debt. The objecting creditor may petition the competent court before the assembly meeting, which shall order payment or the provision of security or the postponement of the meeting.
Paragraph (2) of Article 135 of the Companies Law sets out the effect of the reduction against the creditor: "2. The reduction may not be relied upon against a creditor who has submitted his claim within the period specified in paragraph (1) of this Article unless his due debt has been settled or adequate security has been obtained for its payment." The reduction may not therefore be relied upon against a creditor who has submitted his claim within the prescribed period unless his due debt has been settled or adequate security has been obtained for the contingent debt. Article 137 of the Companies Law (Reduction by Purchasing Company Shares) governs the fourth method of reduction: "1. If the capital reduction is achieved by purchasing a number of the company's shares for cancellation, shareholders must be invited to tender their shares for sale, by notifying them of the company's intention to purchase the shares by registered letters to their addresses in the shareholders' register, or by publishing the invitation through modern technological means. 2. If the number of shares tendered for sale exceeds the number the company has decided to purchase, the sale tenders must be reduced proportionately. 3. The price of shares purchased from joint stock companies not listed on the stock exchange shall be determined at fair value, while shares of listed joint stock companies shall be purchased in accordance with the stock exchange rules." If the reduction is achieved by purchasing a number of the company's shares for cancellation, shareholders must be invited to tender their shares for sale by registered letters or by publication through modern technological means. If the number of shares tendered exceeds the number to be purchased, the sale tenders are reduced proportionately. The price of shares in companies not listed on the stock exchange is determined at fair value, while shares in listed companies are purchased in accordance with the stock exchange rules.
Official Sources and References
This article is based on the following official legal sources, which are the authoritative reference for all figures, dates, and provisions set out in the sections above. It is always advisable to consult these official links for the complete texts and any subsequent updates:
- Companies Law issued by Royal Decree No. M/132 dated 1/12/1443 AH – Full text in the Official Gazette (Umm Al-Qura)
- Executive Bylaw of the Companies Law issued on 25/6/1444 AH – Full text in the Official Gazette (Umm Al-Qura)
- New Companies Law – Ministry of Commerce (Regulatory overview and practical applications)
- Governance Code for Unlisted Joint Stock Companies – Ministry of Commerce (Advisory guidance for unlisted joint stock companies)
Methodological note: All figures, dates, competences, and degrees of legal binding reproduced in this article have been taken verbatim from the official texts cited above and published in the Official Gazette (Umm Al-Qura). The statutory provisions are reproduced as they appear in their original legal source without alteration. Readers are advised to consult these sources to verify any subsequent updates to the texts and their effect on the resulting obligations.
Frequently Asked Questions on Capital Amendment and Treasury Shares
We set out below answers to the most commonly discussed questions among company owners, boards of directors, and advisors regarding shares and the capital amendment of a joint stock company under the Companies Law and the Executive Bylaw:
What types of shares may a joint stock company issue?
The types of shares that a company may issue are divided into ordinary shares, preferred shares, and redeemable shares. The company's articles of association may provide for different classes of shares and may grant certain rights or privileges or impose restrictions on certain classes. Shares of the same type or class shall have equal nominal value with the rights attached thereto in accordance with the company's articles of association, pursuant to Articles 103 and 108 of the Companies Law.
What are the rules for the company's purchase of its own shares and holding them as treasury shares?
A company may purchase its own shares if its articles of association so permit, provided that the purpose of the purchase is limited to reducing the company's capital or retaining the shares as treasury shares, that the treasury shares do not exceed ten percent (10%) of the total class of shares being purchased at any time, that the value of the shares being purchased has been paid in full, and that the shares purchased by the company do not carry voting rights at shareholders' meetings, pursuant to Article 114 of the Companies Law and Article 34 of the Executive Bylaw.
What are the methods of increasing the capital of a joint stock company?
Capital is increased by one of the following methods: issuing new shares in exchange for cash or in-kind contributions; or issuing new shares against debts of a determinate amount that are immediately payable with the consent of the relevant creditors; or issuing new shares in the amount of reserves that the extraordinary general assembly decides to merge into the capital and distributing them to shareholders free of charge; or issuing new shares in exchange for debt instruments or Sukuk, pursuant to Article 126 of the Companies Law.
What is the shareholder's pre-emption right to subscribe to new shares?
A shareholder who owns a share at the time the extraordinary general assembly issues its resolution approving the increase of issued capital, or the board of directors approves the increase within the limits of the authorised capital, shall have the pre-emption right to subscribe to new shares issued in exchange for cash contributions. He must be notified of this right by registered letter or by modern technological means, and he may sell or waive his pre-emption right for consideration or without consideration. The extraordinary general assembly may suspend the pre-emption right if the company's articles of association so permit, pursuant to Articles 128 and 129 of the Companies Law.
When must the board of directors convene the extraordinary general assembly due to losses?
If the losses of a joint stock company reach half of the issued capital, the board of directors must disclose this and its recommendations regarding such losses within sixty (60) days from the date it becomes aware of the losses reaching this level, and must convene the extraordinary general assembly within one hundred and eighty (180) days from the date of such awareness, to consider the continuation of the company together with any necessary measures to address such losses or to dissolve the company, pursuant to Article 132 of the Companies Law.
What are the methods of reducing capital and the protections for creditors?
Capital is reduced by cancelling a number of shares equal to the amount required to be reduced, or by reducing the nominal value per share by cancelling a portion equal to the loss, or by returning part of the nominal value to the shareholder or releasing the shareholder from the unpaid amount, or by the company purchasing a number of its own shares and cancelling them. If the reduction results from an increase of capital beyond the company's needs, creditors must be invited to lodge their objections at least forty-five (45) days before the extraordinary general assembly meeting, with settlement of matured debts or the provision of adequate security for contingent debts, pursuant to Articles 133 and 135 of the Companies Law.
Conclusion: Well-Regulated Capital Amendment Balancing Shareholder and Creditor Protection
The rules governing shares and capital amendment of a joint stock company under the Saudi Companies Law can be summarised in three pillars: shares with controlled identity and value, based on the nominal nature of the share and its indivisibility as against the company, the determination of its nominal value in the company's articles of association, the prohibition of issuance below nominal value, and the regulation of its three types (ordinary, preferred, and redeemable), their classes, the rights attached to them, and their conversion subject to the approval of the extraordinary general assembly and the protection of a special meeting for adversely affected shareholders; capital increase through four methods and pre-emption rights, based on issuance in exchange for cash or in-kind contributions, or against immediately payable debts with creditor consent, or by capitalising reserves, or against debt instruments and Sukuk, subject to the condition that the issued capital has been fully paid up, and the shareholder's pre-emption right to subscribe to new shares issued in exchange for cash contributions and his right to sell or waive it in accordance with the regulations, with the loss threshold at half of the issued capital that obligates the board of directors to disclose within sixty (60) days and convene the extraordinary general assembly within one hundred and eighty (180) days; and capital reduction with graduated creditor protection, based on the four methods of reduction, with capital not permitted to fall below the minimum except in the case of losses alone, equality observed among shareholders of the same type and class, creditors invited to object at least forty-five (45) days before the extraordinary general assembly meeting, settlement of matured debts or the provision of adequate security for contingent debts with recourse to the competent court which may order payment or security or the postponement of the meeting, and the reduction not being relied upon against the creditor unless his debt has been settled or he has obtained security. At Novalegal for Legal Consultancy and Advisory Services, we provide our specialised consultancy on the structuring of the capital of Saudi companies, advising you on the issuance of shares and the amendment of their types and classes, the company's purchase of its own shares and the management of treasury shares, capital increase and reduction in accordance with the provisions of the Companies Law and the Executive Bylaw, and dealing with creditor objections before the competent courts, and we are pleased to accompany you towards a well-regulated capital amendment that safeguards the rights of all parties.