Algunos datos sobre la situación del Citizen Engagement

1. Share Capital Requirements

In building the corporation’s capital, the Law requires a set of demands to be met.235 _{First, the}

Law presupposes that the capital suffices to embark upon the business purposes,236 _{yet the}

corporation’s capital, in all cases, shall not be less than 500,000 Saudi Riyals ($ 133,333).237 _To

ensure the seriousness of the incorporators and their solvency to carry out the business, the Law demands that at least 25% of the corporation’s capital be advanced and paid up upon the incorporation.238

232 _{For a long time, the competent authority was only the Notaries of the Ministry of Justice. Recently, the}

Ministry of Justice has licensed a number of lawyers to be also authorized notaries alongside the Public Notaries across the region.

233 _{In practice, the notarization requires incorporators to provide three documents: a letter for the Ministry}

addressing the Public Notary and authorizing the notarization; incorporation’s resolution; and the bylaws as approved and stamped by the Ministry.

234 _{Article 12 (1, 2).}

235 _{Building the corporate capital in close corporations differs from public corporations. In the latter, it is}

jointly regulated by the Capital Market Authority and the Ministry of Commerce and Investments because it involves initial public offerings. Such a difference is the requirement of underwriting. As far as close corporations are concerned, this thesis assumes only the incorporation process of close corporations. See Article 58.

236 _{Article 54.}

237 _{No distinction is drawn between listed corporations and unlisted ones. On the contrary, the predecessor}

required that share capital of listed corporations be no less than 10 million Saudi Riyals ($ 2,66 million), whereas the capital of unlisted corporation would not be less than 2 million Saudi Riyals ($ 533,333). One may see the huge drop in the share capital as statutory encouragement for businesses to transform to or form joint-stock corporations. This form of entity is no longer a vehicle deployed for massive business projects, but it is now available relatively for all business objectives.

238 _{In the past, the paid-in capital required by the Law was at least 50% of share capital. Evidently, the}

lowering of the percentage of paid up share capital and the lowering of the minimum share capital reflect the leniency of the 2015 Law and the statutory encouragement to carry out business purposes in the form of joint-stock corporations.

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Second, the corporate capital is to be divided into negotiable, nominal shares of equal value.239

The Law also requires that par value per share be 10 Saudi Riyals ($ 2,66)240 _{unless otherwise}

permitted by the Minister.241 _{Furthermore, the share capital (all or portion of it)}242 _{is to be banked}

to a company-under-incorporation account with an accredited bank in the region.243 _{The access to}

this account is reserved for only the board of directors after the declaration of the incorporation.244

Joint-stock corporations’ shares have several statutory features. First, all shares, in general, have equal value.245 _{This helps in several ways: it eases the calculating process of voting during}

the shareholder assembly and eases the distribution process of dividends. Another feature is that they are indivisible vis-à-vis the corporation.246 _{Therefore, if a group of individuals possesses a}

share, they must select one of them to exercise the rights attached to this share. By the same token, all individuals are jointly liable for any obligation arising from the ownership of this share.247

Inheritance and gifts are a common cause for such devolution.

Last but not least, if some incorporators advance in-kind contributions (e.g., lands, buildings, cars),248 _{it is of the incorporators’ responsibilities to ensure accurate evaluation of their shares.}249

In addition, the ownership of shares issued against in-kind contributions is transferred only after a

239 _{Article 52.}

240 _{It is unclear why the Law has set the par value at ten Saudi Riyals, yet going over past IPOs in the}

Saudi market, one may conclude that 10 Saudi Riyals has always fostered small investors and low-income people to enter the market and make profits out of these IPOs.

241 _{Article 105 (2).}

242 _{In case the share capital is not paid up in-full, the remaining of share value must be paid within five}

years from the date of the issuance of shares. See Article 106 (2).

243 _{Article 59.} 244 _Id. 245 _{Article 52.} 246 _{Article 105 (1).} 247 _Id. 248 _{Article 56.}

249 _{In doing so, the Law requires that the incorporation request be accompanied with a report with an}

estimate of the fair value of these contributions that is executed by an appraiser or accredited valuator. See Article 61 for further procedural information.

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payment-in-full value is made and full transfer of the ownership of their in-kind contributions to the corporation is completed.250

2. Share Capital Classes

In principle, the share capital of the corporation consists of “common” shares that entail equal rights for and obligations upon their holders.251_{Nonetheless, corporations may decide to issue}

another class of shares that entails different rights and obligations, which is known as “preferred” shares.

Under the Law, the issuance of preferred shares requires the following: first, the corporation’s bylaws allow the issuance of such a class; second, the extraordinary general assembly of the corporation votes in favor of the issuance of preferred shares.252 _{In all cases, the Law recognizes}

preferred shares as non-voting shares, which do not entitle their holders to vote in shareholder general assemblies.253

Instead, preferred shares grant their holders the right to receive a higher percentage of the corporation’s earnings, provided that the corporation has set aside its statutory reserve.254 _Holders

of preferred shares are first in line to receive their portions, before any distribution of dividends to shareholders.255 _{In addition, since the preferred shares are non-voting shares, which cannot be cast}

250 _{Article 106 (3).}

251 _{Further details and explanations of these rights and obligations are provided later in the next chapter}

under the umbrella of minority shareholder rights.

252 _{The issuance of preferred shares involves an increase in the share capital of the corporation, which is}

one of few exceptional instances the Law sets a higher voting-passage percentage for than the default percentage stipulated in the Law for decisions by extraordinary assembly. See infra Chapter 3. Part II. A. 2. b.

253 _{Article 114.}

254 _{The Law obliges joint-stock corporations to build a statutory reserve. In doing so, corporations must}

put 10% of its net profits by every year, and they may cease putting aside the 10% portion upon two conditions: first, the statutory reserve has reached 30% of the corporation’s paid-in share capital; second, the corporation’s ordinary general assembly votes in favor of discontinuing setting aside 10% of its net profits for the reserve. In other words, the board of directors may not make such a decision. See Article 129 (1).

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upon any corporate matter, the Law protects the interests of their holders in a variety of ways. For instance, besides the fact that they are first in line, the Law prevents the corporation from issuing any class of shares that would have priority over the existing preferred shares, or to modify their agreed-upon percentage of the corporation’s net profits unless such issuance is approved by the holders of existing shares.256 _{Another protective aspect of this class of shares is that in the failure}

of the corporation to pay— for three consecutive years— the holders of these shares the percentage to which they are entitled, the Law grants these holders several temporary rights. They have the right to attend shareholder assemblies and cast their votes, or they may appoint a number of representatives of them as a class to the board of directors, proportional to their shares in the corporation’s capital. Such a right continues until their overdue profits are paid in full.257