Simplified Joint Stock Company in Saudi Arabia: Setup and Capital

Two founders: one is a programmer who built the app, and the other is an investor who will put in SAR 600,000. A third investor has promised to join the next funding round. They chose a simplified joint stock company because it is “flexible”, downloaded a bylaws template and filled in the blanks in an hour. A year later they disagreed on who signs the funding agreement, and found that the document has no answer. The flexibility of this company form is real, but it means you write the rules yourself, and whatever you do not write has no clear answer.

The short answer: a simplified joint stock company (SJSC) has no minimum capital, may be formed by a single person, and is managed by a president, a manager or a board of directors, as you choose. The bylaws (al-nizam al-asas) set the shares and their classes, the management's powers, and the voting thresholds for shareholders' resolutions.

What is a simplified joint stock company in Saudi Arabia?

It is one of the five company forms listed in Article 4 of the Companies Law. Article 138 lets the shareholders set the company's structure and how it operates in its bylaws. The shareholders replace the ordinary and extraordinary general assembly, and the company's president, manager or board replaces the board of directors of a joint stock company.

But it is not a company without rules. The joint stock company rules apply to it where there is no specific provision and as far as they fit its nature, except for certain articles listed in Article 138. So do not copy the bylaws of a traditional joint stock company, and do not assume that none of its rules apply to you either.

It may be formed by one person. Article 150 then limits his liability to what he allocated as the company's capital and gives him the shareholders' powers, but his decisions must be in writing and recorded in a special register.

What is the minimum capital of a simplified joint stock company?

There is none. Article 139 states that the minimum capital requirement for joint stock companies does not apply to the SJSC, and that the bylaws set the issued capital and the paid-up amount, and may provide for authorised capital.

No minimum does not mean a symbolic amount is enough. Some activities have a licensing authority that requires a certain level of financial capacity, and the company may start its activity only after registration and obtaining the necessary licences under Article 10. Calculate what you really need to operate, and write clearly what each founder committed and what he paid.

Watch out for a common mistake: a partner who contributes only effort and expertise cannot have a “work share” in this form. Article 13 excludes joint stock and simplified joint stock companies from work shares, and capital consists only of cash and in-kind contributions. However, paragraph 4 of the same article allows founders or shareholders to give shares to a person in return for work or services that benefit the company. So bringing in the programmer for his effort is possible, provided the wording is precise: how many shares, for what work, and when he earns them.

When must an in-kind contribution be valued by an accredited valuer?

If a founder contributes an asset instead of cash, such as equipment, software or a trademark, Article 141 distinguishes by size. If total in-kind contributions do not exceed half of the capital, valuation by an accredited valuer is not required unless the founders agree otherwise. If they exceed half, valuation is required, and the contributor does not vote on the decision about the valuation.

The point people miss: if the contributions are not valued by an accredited valuer, or are valued at a different amount than his valuation, the founders are personally liable with all their assets, towards third parties, for the fairness of the valuation and for paying the difference in cash to the company. This claim cannot be heard after five years from the company's registration or the capital increase. The Implementing Regulations (Article 3) require that no more than six months pass between the valuer's report and issuing the shares.

What should you write in the bylaws of an SJSC?

Article 140 lists the mandatory content: the name, head office and purpose; the capital; the number, types and classes of shares and the rights attached to each class; management; transfer of shares; shareholders' meetings and their quorum; shareholders' resolutions and the majority needed to pass them; and the financial year.

Separate the quorum for a meeting from the majority for a resolution. A majority attending does not mean every resolution passes by the same majority. Article 145 allows different majorities for certain matters, and requires the bylaws to identify matters that need unanimity. On the other hand, it requires the shareholders themselves to decide on: increasing or reducing capital, conversion, merger, division and dissolution, appointing the auditor, the financial statements, distributing profits, and amending the bylaws.

You can also add limits on selling shares: a ban on disposing of them for up to ten years from issue, or a requirement for the approval of the company or the shareholders (Article 151), an obligation on a shareholder to transfer his shares on set terms (Article 152), or referring disputes to arbitration (Article 153). Under Article 154, adding or amending these three types of clause needs the unanimous approval of the shareholders, so it is easier to write them from the start.

Who manages the company and signs for it?

Article 142 leaves the choice to you: a president, one or more managers, a board of directors, or another structure. The bylaws state how they are appointed and removed and the limits of their powers. If the bylaws say nothing, the shareholders manage the company.

Whoever manages the company has the widest powers except what is expressly excluded, and the company is bound by his acts in its name even if he exceeds his authority, unless the other party acted in bad faith or knew about it. In practice: a limit you place on the manager protects you internally, but it does not cancel a contract he signed with someone who did not know about the limit.

In the founders' story, it would have been enough for the bylaws to say that the manager handles operating expenses up to a set cap, and that borrowing, mortgaging an asset or selling intellectual property needs a shareholders' resolution with a set majority, with a rule on who appoints a replacement if the manager cannot continue.

Filing, registration and starting business

The founders file the formation request with the commercial register together with the bylaws. Under Article 140, they attach the founders' names, a statement of formation expenses, a declaration that all shares were subscribed, a certificate of deposit of the paid-up capital with a licensed bank, the decision appointing the management, and the valuer's report where in-kind contributions require one. If the request is rejected, you may file a grievance with the Ministry within sixty days of being notified, under Article 6.

The company becomes a legal person after registration (Article 9). Anyone who deals in its name before formation is complete, if the procedures are then not completed, is personally and jointly liable towards third parties for his acts during that period. So do not sign an office lease or an employment contract in the company's name before it is registered.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the founder who will manage the company:

• Write your powers with a clear financial cap, so you are not later questioned about a decision that was not yours to make.
• If your shares are in return for your work, write this expressly under paragraph 4 of Article 13, with the work required from you and when you earn the shares.
• Have any asset you contribute valued by an accredited valuer even when not required, to close the door on personal liability.
• Do not contract in the company's name before it is entered in the commercial register.

If you are the investor or shareholder:

• Ask that key decisions such as borrowing and selling assets need a majority that gives you a real vote.
• Read the rights of your share class as written in the bylaws; do not rely on a verbal pitch.
• Check the arbitration clause and the share transfer limits before signing, because changing them later needs unanimity.
• Keep in mind your right to ask for a shareholders' meeting, which belongs to anyone holding 10% of the voting shares (Article 146).

If you have draft bylaws or a written understanding between the founders, send it on WhatsApp and we will review with you the points that could open a dispute later.