Mapa de estudios metodológicos

A. Overview

Due to the universal structure of the corporation, minority shareholders in Saudi Arabia, presumably like their counterparts in other parts of the world, suffer from inherent issues to which the close corporation structure gives rise.465 _{In short, the minority shareholders often have}

expectations while they are making investments, but these expectations are not necessarily met. That makes these disappointed shareholders want to exit the entity, yet the fact that disposing of their shareholdings for fair value ⎯with no escape through the market⎯is relatively problematic and makes them stuck in an awkward position, as displayed earlier in chapter one.

Saudi Arabia has recently carried out a range of significant reforms to enhance business environments and captivate foreign investments. That requires the modernization of the regulatory framework governing the business domain, and the reinforcement and the protection of businesspeople and entrepreneurs’ rights. To this end, one of the primary steps the country has taken is the enactment of the Saudi Companies Law of 2015. 466

To this point, the Law has earned an excellent reputation for its strong protection for investors. According to the World Bank Group Report of 2017, the region ranks the 10th globally in protecting minority investors, whereas it was reported 36th in the 2016 Report.467 _{Moreover, the}

Report highlights the existence of a strong conflict of interest regulation, which exceeds the regional average.468 _{All together symbolizes the governmental determination to move forward and}

† Hereinafter “the Law” refers to the Saudi Companies Law of 2015, unless otherwise noted.

465 _{See supra Chapter 1. Part II.} 466 _{See supra Chapter 2. Part I. A (4).}

467 _{See The World Bank, Doing Business 2018: Reforming to Create Jobs, Country Tables, p. 190 (15ed.}

Oct. 2017).

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ensure a business climate for entities of all sizes. Nevertheless, a question arises, how has Saudi Arabia set this unprecedented record in such a short period? And why?

To begin with, unlike the orthodox method utilized in protecting minority shareholders and curbing opportunistic and oppressive conduct of majority, the Saudi legislature has taken an unconventional approach in addressing the issues of minority shareholders and protecting their interests. In the United States, for instance, oppression of minority shareholders in close corporations are squarely handled by the judicial intervention ex post, which has created judicially established principles (e.g., heightened duty on controlling shareholders, partner-like duty, mandatory buyouts, and the judicial consideration of the minority’s reasonable expectations) in deciding oppression claims brought by minority shareholders.469 _{The judicial protection comes as}

a result of the minority shareholders’ failure to contract against oppression and opportunism by the controlling shareholders. In this sense, corporate laws play a gap-filling role, leaving the governance rules of the corporation to shareholders to decide how they want to manage and run their businesses (contractarian view).470

A number of writings on the minority’s issues in the United States advocate for, and rely on heavily, the judicial intervention to curb opportunism and oppression by controlling shareholders. This appears to mesh well with the contractarian view of the corporations besides an effective judicial system that is sophisticated to execute its functions of applying fairness and resolving shareholder squabbles. The same can be said about minority shareholder dilemma in Saudi Arabia except for the part of the effective judiciary that would rectify the situation ex post.

The commonplace failure of shareholders to bargain for their protection alongside the limited role of the Saudi judiciary led Saudi lawmakers to intervene and take a different route in protecting

469 _{See supra Chapter 1. Part III. B.} 470 _{See supra Chapter 1. Part III. C.}

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minority investors, including close corporations’ shareholders. The newness of the Saudi approach is represented by an assortment of prescriptive rules that shareholders must adhere to in governing their business, setting a benchmark for effective corporate governance for the corporations in the region. The general theme of these rules is centered around empowering shareholders as a class with agenda-setting supremacy.471

This core chapter seeks to convince the reader that the statutory protection for minority shareholders⎯through a set of compulsory corporate governance rules⎯is an effective approach to blocking the way ahead of controlling shareholders from engaging in any abusive or opportunistic conduct toward the minority at the first place. The unsophistication of both the judiciary and shareholders of close corporations in the region necessitates the governmental intervention to eliminate, or at least minimize, the issues generated by the locked-in structure of the close corporations, such as illiquidity of shares, selective repurchase of shares, dilution of interests, and management expectations.

Another dimension of this chapter is to contribute to the ongoing debate over the minority shareholder of close corporations by putting forward a proposal for a statutory approach in protecting minority shareholders that may be followed by countries with similar circumstances as Saudi Arabia’s. The prevalence of family businesses that are run by blinded trust among their members makes it difficult for these members, in reality, to bargain for themselves or at least expect conflicts and tensions in the future when it looks rosy at the outset. Furthermore, the developing corporate judiciary poses a threat that its rulings may not be anticipated ahead of time, and thus foreign investors appear to be reluctant to rely on such an approach in facilitating shareholders’ private ordering, or in construing their agreed-on provisions. Because of these

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circumstances, a corporate law with governance rules⎯that protect minority shareholders, balance the power, and ensure the exercise of rights472⎯is of necessity as explained hereunder in

reinforcing investor’s trust and offering a healthier business environment.

B. The Role of Law in the Region

The importance of corporate law’s role in the Saudi business environment stems from four overlapping factors. First of all, Saudi Arabia is an Islamic state that is mostly influenced by the civil law system.473 _{Hence, Laws and regulations are the primary sources for the legislation,}

especially for the business sector.474 _{Therefore, the necessity of the new law is unquestionable to}

chase the rapid changes the country has been pursuing.

Second, in developed countries (e.g., the U.S. and the U.K.), corporate laws are not only statutes that legislatures promulgate. Instead, they also include other players of social, judicial, and legal aspects.475 _{In fact, some scholars claim that corporate laws themselves perform a “trivial”}

role.476 _{On the other hand, corporate laws in emerging markets and economies are the linchpin of}

472 _{See infra Chapter 4. Part II.}

473 _{For an in-depth explanation about the legal system of Saudi Arabia and the role of Sharia in shaping it,}

see Faisal M. Al-Fadhel, Legislative Drafting and Law-Making Practices and Procedures under Saudi Arabian Law: A Brief Overview, 1I.J.L.D.L.R.95(2012); Abdullah F. Ansary, A Brief Overview of the Saudi Arabian Legal System, GLOBALEX (2008)

http://www.nyulawglobal.org/globalex/Saudi_Arabia.html; George N. Sfeir, The Saudi Approach to Law

Reform, 36AM.J.COMP.L.729 (1988); FRANKE.VOGEL,ISLAMICLAWANDLEGALSYSTEM:

STUDIESOFSAUDIARABIA,BRILL (2000); FAHADM.ALMAJID,ACONCEPTUALLEGAL

FRAMEWORKFORREFORMINGSAUDICORPORATEGOVERNANCE, ch.4 Lambert Academic

Publishing (2014). [hereinafter: AlMajid]

474 _{See FAHADM.ALMAJID,ACONCEPTUALLEGALFRAMEWORKFORREFORMINGSAUDI}

CORPORATEGOVERNANCE, pp.140 Lambert Academic Publishing (2014) (referring the special

recognition for regulating the business sector and incorporating modern legal concepts to the

establishment of the country in 1932. It “intensified…when large oil fields were discovered in the Eastern province.”)

475 _{See Bernard S. Black& Reinier Kraakman, A Self-Enforcing Model of Corporate Law,109HARV.L.}

REV.1914 (1996) (claiming that t corporate law in developed countries includes “other legal, market, and

cultural constraints on the actions of corporate managers and controlling shareholders to achieve a sensible balance among . . . competing needs.”)

476 _{See Bernard S. Black, Is Corporate Law Trivial: A Political and Economic Analysis, 84N}

W.U.L. REV.542 (1990).

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the business and the only wheel that rotates the market. Their contribution to the businesses in these countries outweighs the value added by corporate statutes in developed countries clearly because of the weak role played by other institutions477 _{that shape the corporate behaviors in the}

developed ones.478

Third, corporate laws in developed countries coexist with other supporting legal institutions. As stated above, the U.S. state courts represent the cornerstone in the protection for minority shareholders by for instance defining oppression and imposing a partner-like duty on dominant shareholders.479 _{However, this is not always the case in Saudi Arabia or other developing countries,}

where the judiciary works and develops sluggishly.480

Not only do rules and regulations aim at protecting the interests of minority shareholders⎯when they neglect or fail to bargain for their protection⎯, but also they serve an essential role in protecting the interests of outsiders.481 _{Outsiders include creditors of the}

corporation, its workforce, and its bondholders. An example of such an immutable rule is that corporations must maintain a statutory reserve of 30% of the advanced corporate capital.482

477 _{Id. at 1913, (defining “the term "institution" in a broad sense to include private organizational}

structures such as stock trading systems and securities registrars; public organizational structures such as securities regulators, courts with experience in commercial matters, an honest police force, and a reliable mail system; and mixed public private structures such as self-regulatory organizations, an accounting profession, and sophisticated financial accounting rules.”)

478 _Id. 479 _Id.

480 _{Classifying Saudi Arabia as a developing country is still debatable. AlMajid argues that Saudi Arabia}

should be considered as a developed country, particularly in terms of wealth. He believes that his

discussion can serve as supportive evidence for such a claim. See FAHADM.ALMAJID, A

CONCEPTUAL LEGAL FRAMEWORK FOR REFORMING SAUDI CORPORATE GOVERNANCE,

footnote 76 Lambert Academic Publishing (2014); but see RODNEYWILSON&OTHERS,

ECONOMIC DEVELOPMENT IN SAUDI ARABIA, pp.6 RoutlegdeCurzon (2004) (asserting that Saudi Arabia is a developing country).

481_{See generally F}

RANK H.EASTERBROOK &DANIEL R.FISCHEL,THEECONOMICSTRUCTUREOF

CORPORATELAW 237 (Harv. Univ. Press 1991) (ascribing the importance role played by rules and

regulation in protecting third parties to the fact that “. . . voluntary contracting is not feasible.”)

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

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Another example is the approval requirement of a special assembly consisting of bondholders concerning any change in their entitlements in addition to the approval of the shareholder general assembly.483 _{Such mandatory rules reinforce the third party’s confidence in dealing with}

corporations in the region, which accumulate for the public good of the market as a whole.484

These four points heighten the significance to put together, inter alia, a corporate act that fulfills the needs of the country, especially with the declaration of the Kingdom’s 2030 Vision. In short, the 2030 Vision reflects, inter alia, a steadfast commitment to end the era of oil dependency. Instead, it aims at rehabilitating the business ambiance to attract foreign investments, and empower small and medium-sized enterprises.485 _{Such a goal requires the existence of strong corporate}

governance embedded in an effective corporate law.486 _{All in all, knowing that Saudi Arabia is one}

of the emerging markets, it is of prominence to comprehend the role played by laws in such a country that lacks sophisticated institutions that would otherwise contribute to shaping the protective system of minority shareholders.