Governance of Non-Listed Companies and LLCs in Saudi Arabia: Are the Ministry of Commerce Regulations Mandatory or Non-Binding? | Nova Legal

The Regulatory Framework: The Corporate Governance Regulations for Non-Listed Joint Stock Companies and Their Issuance Data

The Corporate Governance Regulations for Non-Listed Joint Stock Companies were issued by the decision of the Minister of Commerce and Investment No. (44239) dated 14/8/1439H corresponding to 29/4/2018AD, based on the Companies Law issued by Royal Decree No. (M/3) dated 28/1/1437H, and were published in the Official Gazette Umm Al-Qura in issue No. (4747) dated 5/10/2018AD, and they are the regulations organizing governance practices in joint stock companies not listed on the Saudi financial market, and they were prepared by the Ministry of Commerce and Investment in coordination with the Capital Market Authority based on the best practices and relevant international standards, taking into account the observations of those concerned and specialists in this field.

The regulations, in their first article (Definitions), defined the most important terms that determine their scope of application, including the company as "the joint stock company not listed on the financial market", and the Ministry as the Ministry of Commerce and Investment, and the regulations as the Corporate Governance Regulations for Non-Listed Joint Stock Companies. This definition is the gateway through which the scope enters: everything stated in the regulations of rules is directed exclusively to the non-listed joint stock company, and does not extend to other forms of companies.

The regulations were built on a comprehensive organizational structure comprising eleven chapters, including: preliminary provisions, shareholders' rights, the board of directors, company committees, internal control, auditors, stakeholders, professional standards, disclosure and transparency, the application of governance rules, and final provisions. Article Three specified their objectives as setting an effective legal framework for the company's governance, and in particular activating the role of shareholders in the company and facilitating the exercise of their rights, protecting the rights of shareholders and stakeholders, achieving transparency and justice in the management of the company, and consolidating the principles of accountability and oversight, in a manner that contributes to enhancing the sustainability of non-listed companies and their ability to grow and attract financing.

Scope of Application: Who Is Covered by the Regulations and Who Is Not?

Determining the scope of application is the first test of legal accuracy in this topic, as the first article of the regulations confines the company subject to them as "the joint stock company not listed on the financial market", i.e., the company founded by one or more persons of natural or legal personality, whose capital is divided into tradable shares, and the company alone is responsible for the debts and obligations arising from the exercise of its activity, and the shareholder's liability in it is limited to paying the value of the shares he subscribed to, in accordance with the definition of Article (58) of the Companies Law.

What enhances the accuracy of this scope is that the regulations were issued before the introduction of the two types of the simplified joint stock company and the professional company in the new Companies Law, so their references are confined to the non-listed joint stock company within the meaning stated in their first article, without other types of companies. In contrast, the Corporate Governance Regulations issued by the Capital Market Authority define the governance framework for companies listed on the financial market, which we have already detailed in our article on governance compliance in listed companies.

This precise determination of the scope is not a verbal exercise, but rather it has a direct practical effect: when business owners resort to the Ministry of Commerce regulations searching for the obligations of their limited liability company, they find that they do not apply to them, and the opposite is true when the non-listed joint stock company treats itself as bound by everything stated in the regulations, thus bearing burdens that are not binding on it. Hence the importance of marking this article with scope accuracy first.

The Decisive Answer: Mandatory or Non-Binding? The Text of Article Two

The second article of the Corporate Governance Regulations for Non-Listed Joint Stock Companies settles the question of binding force by an explicit text that does not admit interpretation, as it literally provides as follows:

1. These regulations set out the non-binding (guidance) rules and standards organizing the management of the company to ensure compliance with the best corporate governance practices that guarantee the protection of the rights of shareholders and stakeholders.

2. These regulations are considered non-binding (guidance) for non-listed joint stock companies, except for the provisions that the Companies Law or another law or regulation or a decision provides are mandatory.

3. A company owned or controlled by a family should prepare a family charter; with the aim of promoting and nurturing the family business values, in a manner that achieves the continued success, growth and maximization of the value of the company, and ensures the orderly transition of the successive generations in the company, and establishes a sound and fair balance between the interests of family members and the interest of the company.

4. What is stated in these regulations does not prejudice the powers of the competent authorities in issuing regulations and instructions to organize the companies subject to their supervision.

The general rule therefore is clear: the principle of guidance (non-binding) is the origin in the provisions of these regulations, and binding force is the exception that is only established if taken from an explicit regulatory text - in the Companies Law, or in another law or regulation, or in a decision - that makes the provision mandatory. This wording means that the non-listed joint stock company is not bound merely by what is stated in the regulations, but rather is considered in violation when it violates a provision imposed by a higher regulatory source, and the regulations then are a tool of statement and detail of that mandatory provision.

It is noted in the second article two paragraphs of great practical importance: the first of them is the family charter in paragraph (3), which the regulations obliged companies owned or controlled by a family to prepare to organize the transition of the company between generations, and it came in the wording "should" which reflects its non-binding nature in the very source, although its preparation is practically considered one of the strongest tools for the sustainability of family companies and avoiding their disputes. And the second of them is paragraph (4) which affirmed the independence of the competent authorities in issuing their regulations and instructions, paving the way for what we will present later of the multiplicity of sources of binding force.

What Actually Became Mandatory After the New Companies Law M/132 and the Implementing Regulations?

The new Companies Law was issued by Royal Decree No. (M/132) dated 1/12/1443H corresponding to 30/6/2022AD, and its article two hundred and eighty-one provided for its application after one hundred and eighty days from the date of its publication in the Official Gazette, so its enforcement began on 19/1/2023AD. And in its article two hundred and eighty the new law replaced the Companies Law issued by Royal Decree No. (M/3) dated 28/1/1437H -the law on which the governance regulations relied at the time of their issuance- and repealed everything conflicting with it of provisions. This legislative development necessitates re-reading the relationship between the regulations and the contemporary regulatory sources.

The governance obligations to which non-listed joint stock companies are subject today derive their binding force -with varying degrees- from the texts of the Companies Law itself, the most prominent of which are: the requirement that the number of board members not be less than three members in accordance with Article (67), that the membership term be specified in the company's articles of association provided it does not exceed four years with the permissibility of re-election in accordance with Article (68), the obligation of a board member to disclose immediately upon his knowledge of any direct or indirect interest for him in the businesses and contracts executed for the company's account, and his non-participation in voting on a decision in this regard, in accordance with Article (71), the controls of the remuneration of board members which are determined by the ordinary general assembly in accordance with Article (76), and the obligation that the board of directors of the joint stock company convene at least four times a year in accordance with Article (80). These are mandatory provisions by virtue of the Companies Law itself, and in them the exceptional rule established by the second article of the regulations is manifested.

The Ministry of Commerce issued the Implementing Regulations of the Companies Law by the decision of the Minister of Commerce No. (284) dated 23/6/1444H corresponding to 16/1/2023AD, and they were published in the Official Gazette, and their article ninety-five provided for the applicability of their provisions from the date of the enforcement of the law. The Implementing Regulations included a number of governance provisions implementing the Companies Law, the most prominent of which are in its eleventh article the duties of care and loyalty to which the manager of the company or a member of its board of directors is committed, including the exercise of powers in accordance with the law and its regulations, acting in good faith to achieve the interest of the company, and performing tasks objectively and impartially, in addition to the provisions of indirect interest in the businesses and contracts in accordance with its seventeenth article, the controls of licensing competition works in accordance with its eighteenth article, the controls of the remuneration of board members in accordance with its twenty-first article, in addition to provisions specific to non-listed joint stock companies regarding shareholders' assemblies, the sale of treasury shares, and the pledge of shares.

From here the applicable practical rule can be deduced: the non-listed joint stock company is bound by what the Companies Law M/132 and the Implementing Regulations expressly imposed of governance rules, while the rules that the governance regulations (Decision 44239) were alone in stipulating remain, without a binding regulatory basis, a non-binding (guidance) reference to best practices, and the regulations themselves remain the broadest and most comprehensive text clarifying the contents of governance in these companies.

What About Limited Liability Companies (LLCs)? The Precise Position

Here is the point of precision that many writers overlook: the Corporate Governance Regulations for Non-Listed Joint Stock Companies do not apply to limited liability companies at all, because their first article confined the company subject to them to "the joint stock company not listed on the financial market", which is a legal form fundamentally different from the limited liability company, whose capital is not divided into tradable shares and which is not subject to the system of general assemblies of shareholders, but rather its management is organized in accordance with the chapter specific to it in the Companies Law.

The governance framework for LLCs emanates directly from the Companies Law M/132, which defined the limited liability company in its Article (156) as a company founded by one or more persons of natural or legal personality, and its legal personality is separate from the financial personality of each partner in it or the owner of it, and the company alone is responsible for its debts and obligations, and the owner or partner in it is not responsible for them except to the extent of his share in the capital. The law organized the management of this company in several explicit articles: by virtue of Article (160) the company is managed by one or more managers from the partners or from others, and the partners appoint the managers in the articles of association or in a separate contract for a specified or unspecified term, and it is permissible by a decision of the partners to form a board of managers if they are multiple, and Article (161) determines the method of managing the company and the majority required for the issuance of decisions, and the manager has -in accordance with Article (162)- the right to represent the company before the judiciary, arbitration tribunals, and third parties, and the company is bound by his acts that fall within its purpose, and the law also required in Article (163) the partners, in the event of the vacancy of the position of the sole manager, to appoint a new manager within fifteen days from the date of knowledge of that, and permitted in Article (164) the dismissal of managers with the manager partner not participating in the voting on the decision of his dismissal.

And the most important features of mandatory governance in LLCs are manifested in Article (157) pertaining to the limited liability company owned by one person, which required that the decisions of the owner issued with the powers of the manager, the board of managers, and the general assembly be in writing and recorded in a special register at the company, and the preparation of articles of association for it; and in Article (181) which provided that if the losses of the company reach half of its capital, the managers or the auditor -if any- must invite the partners to take a decision to continue the company or dissolve it, otherwise the company is dissolved and the managers are jointly and severally liable for compensating the damage that befalls the company, the partners, or third parties due to the violation of the provisions of the law. Also, the duties of care and loyalty stipulated in the eleventh article of the Implementing Regulations apply to the managers of LLCs, as they are general provisions organizing the management of companies.

And the precise conclusion for the position of LLCs: there is no separate "guideline" issued by the Ministry of Commerce that applies to limited liability companies, but rather these companies are committed -in a mandatory manner- to the governance provisions stipulated in the Companies Law and the Implementing Regulations as previously explained, and the optional application of general best governance practices -such as separating management from oversight, documenting partners' decisions, and conflict of interest policies- is a sound non-binding (guidance) reference that raises the efficiency of the company and its attractiveness to financiers, not an independent-source regulatory obligation.

The Most Prominent Axes of the Corporate Governance Regulations for Non-Listed Joint Stock Companies

The Corporate Governance Regulations for Non-Listed Joint Stock Companies are the broadest reference that these companies are guided by in building their governance system, and their non-binding provisions are distributed over main axes that can be summarized as follows:

• Shareholders' rights: the regulations set rules for activating the role of shareholders and facilitating the exercise of their rights, including the right to attend the general assemblies and vote on them, the right to review the financial statements and reports, equality among shareholders without discrimination, and the rules of the meetings of the general assemblies and the issuance of their decisions.
• The board of directors: the regulations organized the formation of the board of directors, the number of its members and the method of their election, the membership term, the board's meetings, its powers and responsibilities, the controls of members' remuneration, and the fiduciary duties incumbent upon them toward the company and shareholders, including the commitment to good faith, care, and loyalty.
• Company committees: the regulations explained on a non-binding (guidance) basis the formation of the committees emanating from the board of directors such as the audit committee, the remuneration committee, the nominations committee, and other specialized committees, in accordance with the company's need, circumstances, and size.
• Internal control: the regulations set out the rules for establishing a sound internal control system and risk management, and defining the responsibility of the board of directors for the effectiveness of these systems and supervising them.
• Auditors: the regulations organized the appointment of the auditor, his powers, duties, and the controls of his relationship with the board of directors and the audit committee, in a manner that ensures his independence and objectivity.
• Stakeholders: the regulations took into account the rights of stakeholders from employees, creditors, suppliers, and customers, and set rules for dealing with them and achieving a balance between their interests and the interest of the company.
• Disclosure and transparency: the regulations included the rules of disclosing financial and non-financial information, preparing periodic reports, and disclosing conflicts of interest and transactions with related parties, in a manner that achieves transparency before shareholders and stakeholders.
• The family charter: the regulations gave special attention to family companies by the text of paragraph (3) of the second article on the preparation of a family charter that organizes the relationship of the family with its company and the transition of the company between generations, as we have mentioned above.

Many of these axes have been codified -with respect to non-listed joint stock companies- in mandatory texts by the Companies Law M/132 and the Implementing Regulations as we presented in the fourth section, which practically means that companies that apply the axes of the regulations consciously find themselves in most cases compliant with the mandatory provisions in the law, and that the gap between "non-binding (guidance)" and "mandatory" narrows to the extent that the provision moves from a non-binding (guidance) source to a regulatory text.

The Practical Compliance Guide for Non-Listed Companies and LLCs

Based on the precise distinction above, each category of companies can practically build a governance compliance program as follows:

• For the non-listed joint stock company: adopting a family charter if it is owned or controlled by a family, in accordance with Article Two/3 of the regulations; forming a board of directors of no less than three members and controlling the membership term to a maximum of four years; convening the board's meetings at least four times a year and documenting them in official minutes; approving a system of disclosure of the interests of board members in the businesses and contracts in accordance with Article (71) of the law; adopting written governance policies including remuneration, related party dealings, internal control, and risk management; appointing an independent auditor; and preparing periodic financial statements and disclosing them to shareholders.
• For the limited liability company: determining the method of management in the articles of association or in the decision of the partners in accordance with Article (160) and Article (161) of the law; appointing a manager or a board of managers and documenting the decisions of appointment and dismissal; documenting the decisions of the partners in writing and proving them in the company's register, and allocating articles of association for the company owned by one person in accordance with Article (157); appointing a new manager within fifteen days when the position of the manager becomes vacant in accordance with Article (163); inviting the partners when the losses reach half of the capital in accordance with Article (181); and the commitment of the company's managers to the duties of care and loyalty in accordance with the eleventh article of the Implementing Regulations.
• For both categories of companies together: preparing a register of decisions and minutes documenting the governance decisions; adopting a written conflict of interest policy requiring immediate disclosure and non-participation in voting; conducting a periodic governance review in cooperation with a specialized legal advisor; and keeping pace with the updates of the Companies Law, the Implementing Regulations, and the regulations issued by the competent authorities.

It is worth noting that compliance with the requirements of governance -even in its non-binding form- has become a criterion examined by banks, investment funds, and financing partners when evaluating non-listed companies and LLCs, so the sound application of it is no longer a regulatory luxury, but rather a competitive advantage in accessing financing and attracting partners, in addition to documented governance being a legal shield that protects managers from personal accountability in disputes, as in the case of Article (181) of the law relating to the dissolution of the company when losses exceed half of the capital.

Comparative Table: What Is Mandatory and What Is Non-Binding (Guidance) in Governance?

The following table brings together the precise practical conclusion to the question "mandatory or optional?", distributed according to the source of the obligation and the type of company, and it is a conclusion extracted from the official texts referred to in each line:

The table reflects the conclusion of the golden rule: the source of binding force is the regulatory text, and the source of guidance is the governance regulations and whatever other best practice references. Therefore, the answer to the question "is governance mandatory for the non-listed company?" is correctly: the governance obligations stipulated in the Companies Law and the Implementing Regulations are mandatory, and what is other than that in the governance regulations is non-binding (guidance), and whenever a provision is transferred to the law it becomes binding by force of law.

The Relationship Between the Ministry of Commerce Regulations and the Capital Market Authority Regulations

The distinction between the two governance regulations -the Capital Market Authority regulations and the Ministry of Commerce regulations- represents a turning point at which common mistakes recur, so its boundaries must be precisely encompassed: the Corporate Governance Regulations issued by the Capital Market Authority apply to joint stock companies listed on the financial market, and their binding force is graded between the main market and the parallel market as we explained in our article dedicated to that topic; while the Corporate Governance Regulations for Non-Listed Joint Stock Companies apply to non-listed joint stock companies, and they are non-binding (guidance) in origin by virtue of their second article. And the non-listed joint stock company falls under the scope of the primary supervisory authority over its establishment and compliance, which is the Ministry of Commerce, without being subject to the regulatory powers of the Capital Market Authority over listed companies unless later circumstances arise such as listing or public offering.

And between the two regulations there is a substantive convergence in content, as both derive from the same international principles of governance and from the provisions of the Companies Law, however the decisive difference lies in the intensity of binding force and the nature of the supervisory authority: while the Capital Market Authority regulations -in the greater part of them- are a direct obligation on listed companies whose violation is subject to the Authority's procedures, the Ministry of Commerce regulations -in their origin- are a non-binding (guidance) framework, a number of whose rules have been transformed into mandatory provisions by virtue of the Companies Law and the Implementing Regulations as we have detailed. This graded understanding is what companies should adopt when designing their governance system and assessing the degree of compliance required of them.

Official Sources and References

This article relied on the following official regulatory sources, which are the reliable source for all the decisions, articles, and texts mentioned in the sections above, and reference is always preferred from these official links to view the full texts and the latest amendments:

• Corporate Governance Regulations for Non-Listed Joint Stock Companies – the official page in the systems and regulations register at the Ministry of Commerce
• The full text of the Corporate Governance Regulations for Non-Listed Joint Stock Companies (the approved translation issued by the Ministry of Commerce and Investment)
• The Companies Law issued by Royal Decree No. (M/132) – the Official Gazette (Umm Al-Qura)
• The Implementing Regulations of the Companies Law (the decision of the Minister of Commerce No. 284) – the Official Gazette (Umm Al-Qura)
• The Companies Law M/132 – the official page of the Capital Market Authority
• The Implementing Regulations of the Companies Law – the official file published on the Ministry of Commerce website

Methodological note: all the decisions, articles, and texts quoted in this article were mentioned verbatim from the official sources mentioned above (the Corporate Governance Regulations for Non-Listed Joint Stock Companies by the decision of the Minister of Commerce and Investment No. 44239, the Companies Law M/132, and the Implementing Regulations of the Companies Law by the decision of the Minister of Commerce No. 284), and it is advised to refer to these sources to verify any updates or amendments occurring to the regulatory texts, and the consequences of any amendment on the scope of binding force and guidance described in this article.

Frequently Asked Questions About the Governance of Non-Listed Companies and LLCs

We provide below answers to the most frequently asked questions among the owners of non-listed companies and LLCs about the nature of the governance obligation and its sources:

Conclusion: A Precise Reading Between Binding Force and Guidance

The precise answer to the question "mandatory or optional?" is summarized in the systematic distinction between two sources: the Corporate Governance Regulations for Non-Listed Joint Stock Companies which their second article made non-binding (guidance) in origin, and the Companies Law M/132 and the Implementing Regulations which made a number of governance rules mandatory by their explicit text. As for limited liability companies, they are completely outside the scope of the governance regulations, and are subject to their governance framework stipulated directly in the Companies Law, from organizing management and representation to the duties of care and loyalty and dissolution when losses exceed half of the capital. This distinction is not an academic detail, but rather it is the essence of the legal protection that spares the company the burdens of unrequired obligations, and spares its managers accountability for violations of mandatory provisions to which they did not give the necessary care.

We invite the owners of non-listed joint stock companies and LLCs to review their governance status in light of the new Companies Law and the Implementing Regulations, and to adopt the non-binding best practices as an investment in the sustainability of the company and its attractiveness to financing, not merely formal procedures. At Nova Legal for Law and Legal Consulting, we offer our specialized consultations in incorporating companies and organizing their management, reviewing articles of association and the basic systems of companies in a manner consistent with the Companies Law M/132 and the Implementing Regulations, preparing the family charter and governance policies, and representing companies in their disputes, and we are pleased to accompany you toward sound management and sound, sustainable governance.