In recognition of the imperative need for the Royal Commission in Saudi Arabia to keep pace with all necessary developments to achieve the economic renaissance in the Kingdom, and to work towards realizing the vision of the Kingdom of Saudi Arabia for the year 2030, and in response to the desire of some companies to split into two or more companies even if they are in the liquidation stage, and for the emerging company to have the right to adopt one of the legal forms stipulated in the Saudi system, guidelines for the process of division for companies have been established under Royal Decree No. (M/132) dated 1-12-1443 AH, which we shall address as follows:
Responsibility for the debts and obligations of the company subject to division.
Guidelines for splitting-up companies in the Saudi system.
Proposing the splitting-up in the Saudi system. The Saudi Companies System has allowed for the division of a company into two or more, even if they are in the process of liquidation. The company or companies resulting from the division may adopt any legal form of companies listed in the Saudi system, such as (partnership company, simple partnership, joint-stock company, simplified joint-stock company, limited liability company). The decision to split-up the entity shall be issued in accordance with the established guidelines for amending the articles of association or the founding contract for each company. This decision must include a statement of the number of partners or shareholders, their shares in the company or companies resulting from the division, the company subject to division, the rights and obligations of these companies, and how assets, rights, and obligations are to be distributed among them.
The responsibility for the debts of the company subject to division and its obligations:
The company resulting from the split-up shall be the successor to the company subject to division. Creditors of the company subject to division are entitled to demand from the two companies or the companies resulting from the division the debts and obligations incurred by the company subject to division. The two companies or the companies resulting from the division shall be jointly liable for the payment of the debts and obligations of the company subject to division, except in cases where an agreement is reached with the creditors for the transfer of their rights to the company resulting from the division to which the debts and obligations have devolved.
Guidelines for splitting-up companies in the Saudi system:
The executive regulations of the Saudi system stipulate in Article 89 that it is permissible to divide a company into two or more, with the following considerations:
The decision to divide must be made by the partners, general assembly, or shareholders of the company subject to division in accordance with the quorum prescribed for amending the company's founding contract or articles of association.
The shares or stocks of the partners or shareholders of the company subject to division shall be allocated in the company resulting from the division based on their ownership in the capital of the company subject to division, unless they agree to redistribute the shares or stocks among themselves or with others.
Proposal for split-up in the Saudi system:
The director of the company subject to division or the board of directors shall prepare a proposal for the division, outlining the reasons for the division, specifying the assets and obligations of the company subject to split-up and how they will be separated. The proposal should include a report from an accredited appraiser detailing the fair value of the assets and obligations of the company subject to division, the division date, the number of shares and stocks that partners or shareholders will receive in the company resulting from the division.
It should also include any agreements with creditors of the company subject to division for their rights in the debt claims to be transferred to the company resulting from the division, to which the obligations and debts are assigned.
Asset evaluation or liabilities of the company subject to division shall not apply if the shares or stocks in the company resulting from the division will be distributed among partners or shareholders based on their ownership percentage in the capital of the company subject to division.
The director of the company subject to division or the board of directors must provide partners or shareholders with a copy of the division proposal through modern technology or any means specified in the company's founding contract or articles of association, before the scheduled meeting date for partners, general assembly, or shareholders to vote on the division decision, at least 21 days in advance.
The division decision shall take effect from the date of registration of the amendment to the company's founding contract or articles of association in the commercial register of the company resulting from the division.
In conclusion, the Saudi Companies System aligns with all economic developments in the Kingdom, allowing companies to divide shares and enabling individual proprietors to convert to another legal entity. This flexibility encourages investment and enhances the investment incentives for investors.
As a legal institution with expertise in the Saudi legal system and its provisions, we are dedicated to facilitating all matters related to company division within the Kingdom of Saudi Arabia for both Arab and foreign investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.