Conversion, Merger, and Division of Companies under the Saudi Companies Law: The Complete Guide | Nova Legal

The Statutory Framework for the Conversion, Merger, and Division of Companies

Corporate restructuring is organized within the Companies Law in Part Ten (Conversion, Merger, and Division of Companies): Chapter One (Conversion of Companies) sets out the rules of transition into another form in Articles from (20 after 200) to (24 after 200); Chapter Two (Merger of Companies) sets out the rules of merger in Articles from (25 after 200) to (30 after 200); and Chapter Three (Division of Companies) sets out the rules of division in Articles from (31 after 200) to (34 after 200). The Implementing Regulations of the Companies Law then elaborate the provisions of this Part in its Chapter Six (Conversion, Merger, and Division of Companies) in its Articles from (86) to (92): the Regulations provide in Article Eighty-Seven thereof the controls for the merger of a company into a company wholly owning it or owned by the same partners or shareholders, in Article Eighty-Eight the provisions on the obligation to purchase shares or sell them, and in Articles from Eighty-Nine to Ninety-Two the controls for the division of companies, the proposal of the division resolution, the provision thereof to the partners or shareholders, and the effectiveness of its resolution.

The texts of the Law and the Implementing Regulations must be read as integrated: the Law lays down the general rules for conversion, merger, and division, while the Implementing Regulations elaborate the procedures and controls, and the provisions of the Law delegate to the regulations in defined places. Thus Article 26 after 200 delegated to the regulations the controls regulating the merger of a company into a company wholly owning it, and Article 34 after 200 delegated to the regulations the controls relating to the division of the company according to its form, so that the two instruments integrate in defining the statutory framework and the procedural details.

Conversion of a Company into Another Form: The Resolution, Conditions, and Special Forms

Article 20 after 200 of the Companies Law (Conversion of the Company into Another Form) establishes the general rule of conversion: "1- A company may be converted into another form of companies by a resolution issued in accordance with the procedures prescribed for amending its articles of incorporation or articles of association, and after fulfilling the establishment, registration, and publication requirements prescribed for the form into which the company is converted. 2- Unanimous consent of the partners or shareholders is required for the conversion of a company into a simplified joint stock company. 3- Owners of sole proprietorships may transfer their assets into any form of companies established pursuant to the provisions of the Law. That establishment does not discharge the owners of sole proprietorships from their liabilities for the debts and obligations of the sole proprietorships arising prior to the establishment of the company, unless the creditors expressly accept such discharge"; thus conversion is permitted into any form of companies by a resolution issued in accordance with the procedures prescribed for amending the articles of incorporation or articles of association and after fulfilling the establishment, registration, and publication requirements of the new form, with unanimous consent of the partners or shareholders required for conversion into a simplified joint stock company, and the liability of the owners of sole proprietorships remaining in place for the debts of their proprietorships arising prior thereto unless the creditors expressly accept the discharge.

Paragraph (4) of the same Article prescribes a special route for converting family companies into a joint stock company: "Without prejudice to the possibility of conversion pursuant to paragraph (1) of this Article and subject to the establishment, registration, and publication requirements prescribed for the joint stock company, a general partnership, a simple partnership, or a limited liability company may be converted into a joint stock company if so requested by the partners owning more than half of the capital, unless the articles of incorporation provide for a lower proportion, provided that all of the company's quotas are owned by persons connected by kinship or lineage, or include property owned by a waqf or derived from a bequest of one of the partners. Any condition contrary to what is set out in this paragraph shall be void"; accordingly these three forms may convert into a joint stock company upon the request of the partners owning more than half of the capital, unless the articles of incorporation provide for a lower proportion, on condition that all of the company's quotas are owned by persons connected by kinship or lineage or include property owned by a waqf or derived from a bequest, and any condition contravening this shall be void.

Article 21 after 200 (Conversion of a Non-Profit Company) regulates the special forms of conversion: "1- Subject to the provision of paragraph (1) of Article (20 after 200) of the Law, a private non-profit company — other than a public one — may be converted into any form of companies unless its articles of incorporation or articles of association provide otherwise, provided that whatever exceeds the capital upon establishment, whether from profits, reserves, endowments, or otherwise, is spent in the non-profit sectors and fields specified in its articles of incorporation or articles of association, and any exemptions obtained are returned. The regulations shall determine the provisions hereof. 2- Any company may be converted into a public or private non-profit company by unanimous consent of the partners or shareholders"; accordingly a private non-profit company — excluding public ones — may convert into any form of companies, with whatever exceeds the capital spent in non-profit fields and exemptions returned, and any company may convert into a public or private non-profit company by unanimous consent of the partners or shareholders, with the regulations determining the rules thereof pursuant to Article 86 of the Implementing Regulations, which obliges a private non-profit company wishing to convert to furnish the Ministry with evidence that it has disposed of whatever exceeded its capital in the non-profit sectors and fields.

Objection to Conversion, the Personality of the Company, and the Discharge of General Partners

Article 22 after 200 of the Companies Law (Objection to the Conversion Resolution) grants the objectors the right of withdrawal: "Without prejudice to the provisions governing the assignment of quotas or shares prescribed according to the form of the company, the partners or shareholders who object to the conversion resolution may withdraw from the company by submitting a written request to it within (fifteen) days from the date of issuance of the resolution. In such case, the value of their quotas or shares shall be paid in accordance with the agreed value or pursuant to a report prepared by one or more certified appraisers setting out an estimate of the fair value of their quotas or shares on the date of conversion, unless the company's articles of incorporation or articles of association provide otherwise. The objector may, in the event of dispute, resort to the competent judicial authority"; thus a partner or shareholder who objects to the conversion resolution is entitled to withdraw from the company by written request within fifteen days from the date of issuance of the resolution, the value of his quotas or shares being paid in accordance with the agreed value or pursuant to a certified appraiser's report estimating their fair value on the date of conversion, with resort to the competent judicial authority in the event of dispute.

Article 23 after 200 (Personality of the Company after Conversion) defines the statutory effect of conversion: "The conversion of a company does not result in the creation of a new legal person; the company retains its rights and remains liable for its obligations arising prior to the conversion"; thus the legal personality is not renewed by conversion, and the company remains the same, retaining its rights and remaining liable for its obligations arising prior thereto. Article 24 after 200 (Discharge of the Liability of the General Partners) completes the protection of creditors: "The conversion of a general partnership or a simple partnership into any form of companies does not discharge the general partners from their liability for the company's debts arising prior to the conversion, unless the creditors expressly accept such discharge, or none of them objects to the partners' resolution of conversion within (thirty) days from the date of his notification thereof by registered letter or by modern means of technology"; thus the general partners remain liable for the company's debts arising prior to the conversion unless the creditors expressly accept the discharge, or none of them objects to the conversion resolution within thirty days from his notification thereof by registered letter or by modern means of technology.

Merger: Its Forms, Proposal, Consideration, and Valuation

Article 25 after 200 of the Companies Law (Merger Proposal) defines the forms of merger and the controls of its proposal: "1- A merger takes place by the absorption of one or more companies into another existing company, or by the amalgamation of two or more companies to establish a new company. 2- A merger proposal must be prepared for approval by each company party thereto in accordance with the procedures prescribed for amending its articles of incorporation or articles of association; the merger proposal shall specify its terms, and shall state the nature and value of the consideration, including the number of quotas or shares allocated to the merged company in the capital of the acquiring company or the company resulting from the merger, and a statement of the ability of each company party to the merger to pay its debts. 3- Subject to what the relevant laws provide, a company — even if in liquidation pursuant to the provisions of the Law — may merge into another company of the same form or of another form. 4- A merger shall not be valid except after the valuation of the assets of each company party thereto. 5- The consideration in a merger shall be quotas or shares in the acquiring company or the company resulting from the merger"; accordingly the forms of merger are confined to the absorption of one or more companies into an existing company (merger by absorption) or the amalgamation of two or more companies to establish a new company, the merger proposal is prepared for approval by each company party in accordance with the procedures prescribed for amending its articles of incorporation or articles of association, stating the terms of the merger and the nature and value of the consideration, the number of quotas or shares allocated to the merged company in the capital of the acquiring or resulting company, and a statement of each party's ability to pay its debts; the merger is not valid except after the valuation of the assets of each company party thereto; and the consideration consists of quotas or shares in the acquiring or resulting company.

Paragraph (6) of Article 25 after 200 delegates the procedural controls to the competent authority: "The competent authority may determine the controls and procedures for implementing what is set out in this Article, including cash consideration for the purchase of fractional quotas or shares, or compensation of the partner or shareholder objecting to the merger resolution, and the controls governing the vote of a partner or shareholder who has an interest therein other than his interest in his capacity as a partner or shareholder in the company"; thus the competent authority may lay down implementing controls for the cash consideration for fractional quotas or shares, the compensation of objectors, and the controls of voting where the partner or shareholder has a conflicting interest in the company.

The Merger of a Company into a Company Wholly Owning It or Owned by the Same Partners

Article 26 after 200 of the Companies Law (Merger of a Company into a Company Owning It) establishes the delegating rule: "The regulations shall determine the controls regulating the merger of one or more companies into a company wholly owning them, or the merger of two or more companies wholly owned by the same partners or shareholders, and may exempt those cases from some of the provisions set out in this Part"; thus the regulations govern the controls of intra-group merger, with the power to exempt those cases from some of the provisions of the Part. Article 87 of the Implementing Regulations (Merger of a Company into a Company Wholly Owning It or Owned by the Same Partners or Shareholders) elaborates this: "1. The merger of one or more companies into another company wholly owning them takes place by a resolution issued by the acquiring company, without the need for a merger resolution to be issued by the company or companies being merged. Each director in the company, or its board of directors, shall prepare a statement of financial solvency in respect of each company party to the merger indicating the ability of the acquiring company to meet the debts and obligations relating to the company or companies being merged upon the effectiveness of the merger. 2. In the case referred to in paragraph (1) of this Article, the requirement to prepare a merger proposal and to value the assets of each company party thereto, set out in Article (25 after 200) of the Law, shall not apply. 3. The merger of two or more companies owned by the same partners or shareholders takes place by a resolution issued by each company party thereto. In this case, the merger provisions set out in the Law shall apply, except for the valuation of the assets of each company party to the merger."

The regulation thereby simplifies the merger of a company into the company wholly owning it, since the merger resolution is issued by the acquiring company alone, without need for a resolution from the merged company, coupled with the preparation of a statement of financial solvency indicating the ability of the acquiring company to meet the debts and obligations upon the effectiveness of the merger; the requirement to prepare a merger proposal and to value the assets of each company party thereto does not apply in this case. It likewise simplifies the merger of companies owned by the same partners or shareholders through a resolution issued by each company party, with the application of the merger provisions of the Law except for the valuation of assets; hence merger within the group or under the same ownership is procedurally easier than merger with third parties.

Protection of the Creditors of the Merged Company: Announcement, Objection, and Recourse to the Judicial Authority

Article 27 after 200 of the Companies Law (Objection to the Merger Resolution) regulates the protection of creditors in three graduated stages. The first stage is announcement and objection: "Each company party to the merger shall announce it at least (thirty) days before the date set for taking the resolution on the merger proposal and voting thereon. Any creditor of the merged company may object to the merger by registered letter to the company, or by any other means specified by the announcement referred to in paragraph (1) of this Article, within (fifteen) days from the date of the announcement; and the company shall pay the debt of the objecting creditor if it is due, or provide sufficient security for its payment if it is deferred"; thus each company party announces the merger at least thirty days before the date set for taking and voting on the resolution, any creditor of the merged company may object by registered letter or by any other means specified by the announcement within fifteen days of its date, and the company must pay the debt if due or provide sufficient security if deferred.

The second stage is recourse to the judicial authority under paragraph (3) of the same Article: "A creditor who has notified the company of his objection to the merger pursuant to paragraph (2) of this Article, and whose debt has not been paid by the company if due, or who has not been provided with sufficient security for its payment if deferred, may submit the matter to the competent judicial authority during a period of not less than (ten) days before the date set for taking the merger resolution; and in such case the competent judicial authority may order the payment of the debt if due, or the provision of security for its payment if deferred; and if it finds that the merger will result in substantial damage to the objecting creditor and that neither the merged company nor the acquiring company is able to pay the debt or provide the security, it may order the suspension or postponement of the merger, provided that its ruling to that effect is issued before the merger resolution takes effect."

The third stage is compensation after effectiveness: "If the competent judicial authority has not ruled on the creditor's objection before the merger resolution takes effect, and it is subsequently established that the objecting creditor's claim is well-founded, it may issue a ruling compensating him for the damage sustained by him as a result of the merger"; thus the protection graduates from the objection submitted to the company to litigation before the competent judicial authority, which may order payment or the provision of security and may order the suspension or postponement of the merger in cases of substantial damage before its effectiveness, together with the power to issue a ruling compensating the creditor for the damage sustained where it has not ruled on his objection before effectiveness and his claim is proven.

The Effectiveness of the Merger Resolution and Its Effect on the Transfer of Rights and Obligations

Article 28 after 200 of the Companies Law (Effectiveness of the Merger Resolution) determines the moment of effectiveness: "The merger resolution shall take effect and be deemed effective from the date of entering the data of the merged company in the register of the acquiring company at the Commercial Register; otherwise, the merger resolution shall take effect and be deemed effective from the date of registration of the company resulting from it at the Commercial Register"; thus the effectiveness of the merger depends upon registration at the Commercial Register, whether by entering the data of the merged company in the register of the acquiring company or by registering the company resulting from the merger.

Article 29 after 200 (Rights, Obligations, Assets, and Contracts of the Merged Company) establishes the transfer effect of the merger: "All rights and obligations, assets, and contracts of the company or companies being merged shall transfer, upon the effectiveness of the merger resolution, to the acquiring company or the company resulting from the merger. The acquiring company or the company resulting from the merger shall be deemed a successor to the company or companies being merged"; thus, upon the effectiveness of the merger resolution, all rights, obligations, assets, and contracts of the merged companies transfer to the acquiring or resulting company, which is deemed their successor, so that the continuity of the financial liability and patrimony is fully achieved in the entity emerging from the merger.

The Obligation to Purchase Shares or Sell Them upon Reaching Ninety Percent: The Compulsory Acquisition

Article 30 after 200 of the Companies Law (Obligation to Purchase Shares and Sell Them) establishes the acquisition regime in the joint stock company: "1- Without prejudice to the provisions of the Capital Market Law, where a person, or more than one person acting in concert, increases his ownership to the extent that it reaches — individually or jointly with the persons acting in concert with him — (ninety percent) or more of the shares of a joint stock company carrying voting rights, whether directly or indirectly, or contracts unconditionally to purchase such percentage, he must disclose that to the shareholders of the company. Any of the shareholders of the company may — within (ninety) days from the date of disclosure — submit a request to the owner of the percentage or to the purchaser to make an offer to purchase his shares, and the owner of the percentage or the purchaser must make an offer to whoever submits such request to purchase his shares."

Paragraph (2) of the same Article prescribes the reverse route for acquiring the remaining shares: "Without prejudice to the provisions of the Capital Market Law, a shareholder whose ownership reaches (ninety percent) of the shares of a joint stock company carrying voting rights, whether directly or indirectly, and a party contracting unconditionally to purchase such percentage, may apply to the competent authority within a period not exceeding (sixty) days from the date his ownership reaches that amount or from the date of the unconditional contract to purchase such percentage, seeking approval to make a mandatory offer compelling the other shareholders to sell their shares to him"; and paragraph (3) sets out the protection of price and the objection thereto: "Any shareholder in a joint stock company may, within (sixty) days from the date of an offer to purchase his shares in the company pursuant to paragraph (1) of this Article, or from the date of the mandatory offer to purchase his shares in the company pursuant to paragraph (2) of this Article, resort to the competent judicial authority to object to the purchase price; and — in the case of a mandatory offer pursuant to paragraph (2) of this Article — the effectiveness of the mandatory offer may not be suspended except by a decision of the competent authority, and the mandatory offer shall be settled within (seven) days from the expiry of the period granted to the shareholders for objection, unless the competent judicial authority orders otherwise."

The regulation thus balances enabling exit upon ownership reaching ninety percent or more of the voting shares — requiring the owner of the percentage to disclose to the shareholders and to make an offer to purchase the shares of any shareholder applying within ninety days — and compelling the other shareholders to sell their shares through a mandatory offer following the approval of the competent authority applied for within sixty days, with the right of any shareholder to object to the purchase price before the competent judicial authority within sixty days, and the prohibition of suspending the effectiveness of the mandatory offer except by a decision of the competent authority. Article 88 of the Implementing Regulations (Obligation to Purchase Shares or Sell Them) sets out the implementing controls thereof.

Division of Companies: The Resolution, Proposal, Debts, and Joint and Several Liability

Article 31 after 200 of the Companies Law (Form of the Company Resulting from the Division) permits division: "A company may be divided into two or more companies, even if it is in liquidation. The company or companies resulting from the division may take any of the forms of companies set out in Article (4) of the Law"; thus division into two or more companies is permitted even if the company is in liquidation, and the resulting companies may adopt any of the five forms set out in Article 4. Article 32 after 200 (Division Resolution) defines the content of the resolution: "The resolution dividing a company shall be issued in accordance with the procedures prescribed for amending its articles of incorporation or articles of association. The division resolution must include a statement of the number of partners or shareholders, the share of each of them in the company or companies resulting from the division and in the divided company, the rights and obligations of those companies, and the manner of distributing the assets, rights, and obligations among them"; thus the division resolution issues in accordance with the procedures prescribed for amending the articles of incorporation or articles of association, and includes a statement of the number of partners or shareholders, the share of each, the rights and obligations of the companies, and the manner of distributing the assets, rights, and obligations.

The Implementing Regulations elaborate the controls of division in Article 89 thereof (Controls for the Division of Companies): "A company may be divided into two or more companies, subject to observance of the following controls: (a) The division resolution shall be issued by the partners, the general assembly, or the shareholders of the divided company in accordance with the quorum prescribed for amending its articles of incorporation or articles of association. (b) The partners or shareholders of the divided company shall be granted quotas or shares in the company resulting from the division in proportion to what each of them owns of the capital of the divided company, unless they agree to redistribute the quotas or shares among themselves or with others."; and Article 90 thereof (Proposal of the Division Resolution of the Company) provides: "1. The director of the divided company, or its board of directors, shall prepare the division proposal, containing at least the following: (a) The reasons for the division. (b) Identification of the assets and liabilities constituting the subject of the division, and the manner of dividing them. (c) A report prepared by a certified appraiser showing the fair value of the assets and liabilities constituting the subject of the division, and the date adopted as the basis for the valuation. (d) The number of quotas or shares to be received by the partners or shareholders in the company resulting from the division. (e) Any agreement with the creditors of the divided company on the transfer of their claim rights to the company resulting from the division to which the debts and obligations have devolved, if any. 2. The requirement of valuing the assets, debts, and liabilities set out in sub-paragraph (c) of paragraph (1) of this Article shall not apply if the quotas or shares in the company resulting from the division are to be distributed to the partners or shareholders in proportion to the ownership of each of them of the capital of the divided company."; Article 91 obliges the furnishing of the partners or shareholders with a copy of the division proposal by modern means of technology or by any other means, at least twenty-one days before the date set for the convening of their meeting to vote on the division resolution; and Article 92 provides that "the division resolution shall take effect and be deemed effective from the date of registering the amendment of the articles of incorporation of the divided company, or its articles of association, at the Commercial Register, and the registration of the company resulting from it at the Register."

Article 33 after 200 of the Companies Law (Debts and Obligations of the Divided Company) establishes the rule of succession and joint and several liability: "The company resulting from the division is a successor to the divided company within the limits of what has devolved to it pursuant to the division resolution. Nevertheless, the creditors of the divided company may claim against the two companies or the companies resulting from the division for the performance of the debts and obligations incurred by the divided company, and the two companies or the companies shall be jointly and severally liable for the performance of such debts and obligations; save in the cases in which an agreement is reached with the creditors on the transfer of their claim rights to the company resulting from the division to which the debts and obligations have devolved"; thus the company resulting from the division is a successor to the divided company within the limits of what devolved to it pursuant to the division resolution, yet the creditors of the divided company retain the right to claim against all the resulting companies for the performance of the company's prior debts, with joint and several liability therefor, save in the cases of agreement with the creditors on the transfer of their claim rights to the resulting company to which those debts devolved. Article 34 after 200 (Controls of Division) provides: "The regulations shall determine the controls relating to the division of the company, including the procedures, conditions, and requirements that must be met for the division, according to the form of the company."

Official Sources and References

This article relies on the following official statutory sources, which are the authoritative reference for all texts and figures set out in the sections above, and it is always preferable to review these official links to consult the full texts and the latest updates:

• Companies Law issued by Royal Decree No. (M/132) dated 1/12/1443H — Full text in the Official Gazette (Umm Al-Qura)
• Implementing Regulations of the Companies Law issued on 25/6/1444H — Full text in the Official Gazette (Umm Al-Qura)
• New Companies Law — Ministry of Commerce (summary of the regulation and its practical applications)
• Corporate Governance Regulations for Unlisted Joint Stock Companies — Ministry of Commerce (applicable to unlisted joint stock companies)

Methodological note: All figures, deadlines, competencies, and degrees of enforceability transmitted in this article have been taken verbatim from the official texts cited above and published in the Official Gazette (Umm Al-Qura), and the texts of the Articles are read as they appear in their statutory source without alteration. It is recommended to consult these sources to verify any subsequent updates to the texts and their effect on the resulting obligations.

Frequently Asked Questions on the Conversion, Merger, and Division of Companies

We set out below the answers most commonly discussed among company owners, boards of directors, and practitioners regarding the conversion, merger, and division of companies under the Companies Law and the Implementing Regulations:

Conclusion: Disciplined Restructuring between Freedom of Conversion and Protection of Creditors

The governing rules for the conversion, merger, and division of companies under the Saudi Companies Law can be summarized along three axes: disciplined freedom of conversion, founded upon the permissibility of converting a company into any other form by a resolution issued in accordance with the procedures prescribed for amending its articles of incorporation or articles of association and after fulfilling the establishment, registration, and publication requirements of the new form, with unanimous consent required for conversion into a simplified joint stock company, without the creation of a new legal person and without discharging the general partners from their prior debts; merger with graduated protection of creditors, founded upon the twin modes of absorption and amalgamation and upon a proposal stating the consideration and the value of each company after the valuation of its assets, coupled with the announcement of the merger thirty days in advance, the objection of creditors within fifteen days, the payment of the debt if due or provision of sufficient security if deferred, its effectiveness upon the registration of the merged or resulting company at the Commercial Register, and the transfer of the rights, obligations, assets, and contracts to the successor, culminating in the acquisition regime upon ownership reaching ninety percent or more of the voting shares through disclosure and the purchase offer or the mandatory offer with the authorization of the competent authority; and a division that splits the entity and disciplines the debts, founded upon the permissibility of dividing a company into two or more companies even if in liquidation, the division resolution in accordance with the procedures for amending the articles of incorporation or articles of association, a proposal stating the assets, liabilities, and their valuation in proportion to the ownership of the partners, with the resulting companies remaining successors to the divided company within the limits of what devolved to them and jointly and severally liable for its debts save in cases of agreement with the creditors. At Nova Legal for Legal Consultancy, we provide our specialized advisory services for the restructuring of Saudi companies, accompanying you in the conversion, merger, and division of companies and the drafting of proposals and contracts, and handling the objections of partners and creditors before the competent judicial authorities in compliance with the provisions of the Companies Law and the Implementing Regulations; we are pleased to accompany you toward disciplined restructuring that preserves the rights of all parties.