Building a business in Saudi Arabia is not as hard as one thinks

Saudi Arabia is a country teeming with business and investment opportunities. But, for those unfamiliar with the Kingdom’s legal structures, finding the right specialist to guide them through challenges and pitfalls is one of the key differentiators between success and failure.

Before delving into the daily operation of the business, it is essential to understand the different corporate legal structures available and how these structures differ from other jurisdictions.

The Kingdom continues to improve its regulatory environment to encourage further economic development to position the region as a hub for investment and economic growth.

Its company and commercial law is regularly updated to provide flexibility and align rules and regulations with international equivalents.

New statutory procedures

The new Companies Law, recently enacted on June 28, 2022, provides an improved regulatory environment that incubates investments by facilitating new statutory procedures and corporate structures, specifically among small and medium enterprises. The new law will come into force 180 days from July 22, 2022, the date upon which it was published in the Official Gazette.

Below we consider the practical impact of the provisions of the new law on entrepreneurs embarking on their journey to success.

The new law aims to enhance the value of companies to develop their activities to assist and contribute to the national economy.

The new Companies Law, recently enacted on June 28, 2022, provides an improved regulatory environment that incubates investments

Faizal Bhana

It also introduced family corporate governance, acknowledging the importance of generational control. These changes create a conducive environment for investors in family businesses and startups.

Additionally, the new law has allowed flexibility that empowers investment in SMEs and diversifies the market with new forms of corporate entities.

To ensure the best global practices, the Kingdom has benchmarked the new law with several countries’ corporate statutes, including the United States and the United Kingdom.

However, with myriad choices and an ever-evolving regulatory and legal framework, investors will have to think carefully about the choice and options available to them for corporate structuring in the Kingdom.

This choice will vary and depend on several commercial factors, such as how the management is organized, the number of shareholders desired, and what business activities the company plans on partaking in.

The prudent suggestion is to seek advice and liaise with reputable professionals early and thoroughly.

Investors will typically select an incorporated entity to structure their business or an entity driven by, for example, the number and different types of investors.

For instance, we envisage seeing investors and entrepreneurs using a simplified joint stock company structure and a simple entity type for their venture.

In addition, the evolving simplified and streamlined incorporation process means that entities can be set up relatively easily and cost-effectively.

Improving scale and flexibility

Investors with plans to exit through, for example, an initial public offering will ensure their choice of entity will allow the flexibility to undertake the IPO once the business has reached sufficient scale and success.

An additional typical consideration for investors is raising finance to support their operations, capital investments or growth plans. Again, the type of entity and flexibility within the governing documents of the entity is critical for smooth finance raising in the future.

Shareholders or investors looking to protect their rights, predominantly minority shareholders, have available safeguards for these nuances, like other comparable company laws globally.

Additionally, Saudi Companies Law significantly streamlines the statutory requirements and procedures for establishing companies. It provides greater flexibility for entrepreneurs to include special terms and conditions in incorporation documents of companies, such as their articles of association, to attract other entrepreneurs, venture capital and private equity into their ventures.

Furthermore, the law offers greater flexibility at all stages of a venture, including its establishment, business operations and exits through a sale or IPO.

Like in other leading global jurisdictions, Saudi Companies Law also allows, for example, a limited liability company to issue debt instruments or negotiable financing instruments to help with the financing of the business.

Similarly, it permits the issuance of different types of shares with varying categories and rights, privileges or restrictions and the possibility of issuing shares allocated to employees. This provision allows entrepreneurs and businesses to attract more capital and talent, incentivizing and providing an adequate and commensurate return on the company’s growth.

Breathing life into the idea

The journey of the Saudi investor or entrepreneur starts with an idea, like other entrepreneurs across the globe. This idea then becomes a marketable concept able to generate value and profit. The evolution begins with incorporating the entity, securing finance or investors, and bringing the concept to life.

This stage is where the venture takes its path. Its success will depend on the value it creates as much as the protection and support of regulations, the regulatory environment and the professional clout of its venture.

We have seen in recent years, with the advancement of the company law and regulations, that the operational environment ticks all the boxes in terms of laws, regulations, adequate support and cost-effective professional services ecosystem — all rooting for the investor and entrepreneur to do well.

All of the successful IPOs similarly started their journeys as startups and as concepts. With a mix of effort and sound advice, these businesses grew to be very successful conglomerates, eventually listing successfully, realizing the true potential of the ventures on a path to becoming global players.

Given the numerous options available for regional investors, locally and abroad, it is prudent to seek expert advice when deciding upon the proper jurisdiction and structure for your needs. The adviser ought to have a long-standing history of providing bespoke guidance to Middle Eastern clients and be aware of the unique challenges clients face in the region.

(Lama Homaidan AlTurki, director at the Council of Corporate Health, also contributed to the article)

 

• Faizal Bhana is the director for Middle East, Africa and India at Jersey Finance.