Provisions Governing Groups of Companies

A group of companies, comprised of a holding company and its subsidiaries, constitutes a principal organisational model for corporate governance and for ensuring centralised management of major economic groups. In this field, the Saudi legislator has distinguished itself by striking a balance between enabling the holding company to exercise oversight and strategic management over its subsidiaries, and protecting the interests of shareholders, minority shareholders in the subsidiaries, and creditors against potentially harmful acts.

 

The statutory framework for this type of corporate structure in the Kingdom is set out in the Companies Law promulgated by Royal Decree No. (M/132) dated 1/12/1443H, which devotes its Ninth Chapter to governing its provisions, in addition to the introduction of supplementary subsidiary regulations and implementing rules. Among the most prominent is the Corporate Governance Regulations issued by the Capital Market Authority dated 16/5/1438H, which govern standards of oversight, disclosure, and intra-corporate relationships. These provisions form the foundation for ensuring the efficiency of economic groups in the Kingdom, contributing to enhancing the attractiveness of the business environment and strengthening the stability of the national economy.

 

• Concept of the holding company:

It takes the form of a joint stock company, a simplified joint stock company, or a limited liability company, and it establishes companies or holds equity interests or shares in existing companies that thereby become its subsidiaries. (1)

 

• Concept of the subsidiary:

A company is deemed a subsidiary of a holding company if any of the following cases applies:

1. If the holding company is a partner or shareholder holding equity interests or shares in the share capital of the subsidiary that confer upon it a majority of the voting rights therein. In this case, the criterion of subsidiary status is the holding of a majority of the voting rights, given the impact of such voting rights on the subsidiary’s decisions.
2. If the holding company is a partner or shareholder that, on its own, controls the appointment of the manager or the majority of the board of directors’ members, or has the power to remove the manager or the majority of the board members. In this case, the criterion is the holding company’s control over the appointment of the manager or the majority of the board of directors of the subsidiary, given the significant influence this has on the direction and decisions of that company.
3. If the holding company is a partner or shareholder that, on its own, controls a majority of the voting rights pursuant to an agreement with the other partners or shareholders. This case signifies the holding company’s control over voting rights directly or indirectly.
4. If the subsidiary is itself a subsidiary of another subsidiary of the holding company. (2)

 

• Controls on the ownership of equity interests and shares in the holding company:

1. A subsidiary may not own equity interests or shares in the holding company. Any disposition that results in the transfer of ownership of equity interests or shares from the holding company to the subsidiary shall be void.
2. If the subsidiary held equity interests or shares in the holding company before it became a subsidiary thereof, the following must be observed:

1. The subsidiary shall have no right to make, or vote on, decisions in the holding company.
2. The subsidiary shall dispose of such equity interests or shares within (twelve) months from the date it became a subsidiary of the holding company. The competent authority may extend this period.

1. The two preceding provisions shall not apply to persons licensed pursuant to the Capital Market Law and its implementing regulations, where their ownership of equity interests or shares in the holding company falls within the ordinary course of their business activities. (3)

 

• Disclosure and transparency:

The legislator has set stringent disclosure requirements to ensure regular disclosure to shareholders and investors, without discrimination, in a non-misleading manner, so as to enable shareholders and stakeholders in subsidiary companies to exercise their rights to access financial and non-financial information relating to the company, its performance, and share ownership, and to ascertain the company’s position in a comprehensive manner. (4)

 

The legislator also required that the report issued by the board of directors of the holding company include the data and information relating to the subsidiaries, as set out below:

1. A description of the principal types of business activities of the holding company and its subsidiaries, provided that a separate statement is attached for each activity where two or more types of activity are described, together with its impact on the company’s business volume and its contribution to results. (5)
2. The above board report must include the name of each subsidiary, its share capital, the holding company’s ownership percentage therein, its principal activity, the country of its incorporation, and details of the shares and debt instruments issued by each subsidiary. (6)
3. A description of any interest, contractual securities, and subscription rights held by the company’s board members, senior executives, and their relatives in the shares or debt instruments of the holding company or any of its subsidiaries. (7)
4. A statement of the aggregate indebtedness of the holding company and its subsidiaries. (8)
5. A distinction between the listed securities purchased by the holding company and those purchased by its subsidiaries. (9)

 

• Liability of the holding company for the debts of subsidiaries:

The Saudi legislator has not established a detailed legislative framework defining the legal liability borne by the holding company, particularly in relation to the debts of subsidiary companies, and has instead confined the matter to the general provisions of civil law.

 

In light of that, we recommend that the Saudi legislator reconsider the Ninth Chapter of the Companies Law concerning the provisions governing holding companies and subsidiaries, and introduce an independent and specialised legal regime that lays down clear and comprehensive foundations for the holding company’s liability towards its subsidiaries. This would address certain legal and practical issues concerning the limits of liability between the holding company and its subsidiaries, given the distinctive legal nature of this institutional model, which differs from the nature of traditional corporate forms. (10)

 

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Sources:

(1) Article (216) of the Companies Law promulgated by Royal Decree No. (M/132) dated 1/12/1443H.

(2) Article (217) of the Companies Law.

(3) Article (218) of the Companies Law.

(4) Article (86) of the Corporate Governance Regulations issued by the Capital Market Authority pursuant to Decision No. 8-16-2017 dated 16/5/1438H, corresponding to 13/2/2017G, as amended by the Board of the Capital Market Authority Decision No. 8-5-2023 dated 25/6/1444H, corresponding to 18/1/2023G.

(5) Paragraph Fifteen of Article (87) of the Corporate Governance Regulations.

(6) Paragraphs Twenty-Two and Twenty-Three of Article (87) of the Corporate Governance Regulations.

(7) Paragraph Twenty-Six of Article (87) of the Corporate Governance Regulations.

(8) Paragraph Twenty-Seven of Article (87) of the Corporate Governance Regulations.

(9) Paragraph Thirty of Article (87) of the Corporate Governance Regulations.

(10) Salma bint Suleiman Saleh Al-Dhu’ayt, The Legal Liability of Holding Companies for the Debts of Subsidiaries: An Analytical Study in Light of the Saudi Companies Law, a paper published in the Arab Journal for Scientific Publishing, Issue 69, pp. 163-194.