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Mohamad Chehab - Senior Associate - Corporate / Mergers and Acquisitions
On 14-08-1439H (30 April 2018), the Saudi Arabian Ministry of Commerce and Investment (‘MoCI’) issued Corporate Governance Regulations (‘CGRs’) for Non-Listed or Closed Joint Stock Companies (referred to below as ‘CJSCs’ or the ‘Company’ as appropriate) operating in the Kingdom of Saudi Arabia (‘KSA’).
This article summarises the key provisions of the CGRs.
The new CGRs provide CJSCs operating within KSA with a framework for enhanced accountability, fairness, transparency and efficiency. They are not however binding on CGRs. That is, there is no legal requirement for CGRs to adopt them.
CGRs are meant to be complementary to the Saudi Arabian Companies Law (Royal Decree no. M/3 dated 28-01-1437H corresponding to 11 November 2015) (the ‘Companies Law’) and provide a set of guiding principles for CJSCs to implement in conjunction with their existing regulatory obligations. The requirements of the Companies Law take precedence over the provisions of the CGRs where there is any conflict.
What are the Objectives of the CGRs?
The CGRs aim to:
The CGRs provide protections of shareholders’ rights. They include the following:
The CGRs specify the scope of authorities that may be exercised through Shareholders’ Assemblies.
The CGRs contain a number provisions relevant to boards of directors of CGRs:
The Company should develop training programmes for members of the board of directors and executive management to familiarise themselves with the following:
Additional training programmes and courses should be provided to members of the board of directors and executive management on an ongoing basis and as may be necessary.
With the recommendation of the nominations committee, the board of directors should establish procedures for evaluating the performance of the board of directors (including its members), committees and executive management on an annual basis. Key performance indicators may be instituted to achieve this.
Arrangements should be made for a third party to evaluate the performance of the board of directors every three years.
The chairman’s performance should be evaluated by independent members of the board of directors on a periodic basis.
The board of directors should establish a written policy for addressing any conflicts of interest that may occur. This would be applicable to all members of the board of directors, committees, executive management and employees of the Company.
The committees specifically prescribed by the CGRs are the audit, remuneration, nominations and risk management committees. The following are key requirements:
The audit committee’s functions include the following:
The chairman of the Board of Directors cannot be a member of the audit committee.
The remuneration committee’s functions include the following:
The nominations’ committee’s functions include the following:
Risk Management Committee
The risk management committee’s functions include the following:
The Company is required to assign its annual audit function to an independent, experienced and qualified auditor. The auditor will be responsible for preparing an objective and independent report to the board of directors and shareholders on the financial position of the Company.
Even though the CGRs are non-binding, CJSC’s can reasonably expect that these are standards by which their performance in relation to compliance issues will be judged by regulators and others. This may also have an effect on the overall reputation of a CJSC with the regulators. Non-compliance with the provisions of the CGRs may therefore carry with it legal and other risks.
The auditors of CJSC’s may take into consideration the extent of compliance with the CGRs as part of the auditing process.
Since CJSCs may be separately regulated by another authority (i.e. the Capital Markets Authority), it cannot be assumed that the CGRs satisfy all relevant compliance requirements in all cases since the relevant regulator may have more stringent compliance requirements in place.
Al Tamimi & Company’s Corporate Commercial team regularly advises on issues relating to Non-Listed Joint Stock Companies in Saudi Arabia. For further information, please contact Mohamad Chehab (firstname.lastname@example.org).