Election and Powers of Board of Directors of Joint Stock Companies under the Saudi Companies Law

Compared to other legal entities, Joint stock companies (“JSCs”) have a unique legal structure, with a competent governing body responsible for the implementation of all legal strategies in an organized manner. To ensure the company's objectives and policies are met, JSCs must conduct their operations through a legal structure separate from its shareholders. This independence allows for strategic decision-making that benefits both the company and its shareholders. The JSC Board of Directors (Board), comprised of a minimum of three members, plays a crucial role in ensuring the continuous growth and development of the company, which will be addressed as follows:

• Overview of JSC Board.
• Election of JSC Board Members.
• Termination of the board of directors or retirement of Board Members.
• Where the Board Member shall not disclose an interest in business and contracts.
• Controls for authorization of the JSC Board in business and contracts.
• Cases where a JSC Board Member has an indirect interest in the company’s business and contracts.
• Cases where JSC may not provide loans to Members.
• Controls for payment, non-entitlement, or return of remuneration of Board Members.
• Board powers and competencies.
• Delegation and representation of JSC.

Overview of JSC Board under the Saudi Companies Law:

In compliance with the Saudi Companies Law (“Law”) promulgated by Royal Decree R/132 dated 1.12.1443 H and the Executive Regulations thereof, the JSC is overseen by a board of directors composed of a minimum of three members, but not exceeding eleven members. Each shareholder holds the privilege to propose themselves or other shareholders for board membership, provided they meet the nomination criteria outlined in the Company’s Articles of Association (“Articles “) and Law.

Election of JSC Board Members.

The JSC Board Members are elected by cumulative voting at the company’s Ordinary General Assembly (“OGM”) comprising at least 3 and not more than 11 members. Nevertheless, should the Articles specify otherwise, the election can be carried out via ordinary voting. The Board Members must be natural persons and legal persons. The Board membership term shall not exceed 4 years. However, it can be re-elected, unless otherwise stated in the Articles.

The Articles outline the procedures for the expiry or termination of Board Membership at the Board's request. However, the OGM has the authority to remove all or some Board members, even if the Articles state otherwise. In such cases, a new Board or replacement for the removed member is elected by the OGM, under the Law. The competent authority may establish controls for removing Board Members at the OGM.

Subject to the Law, the Articles may grant a shareholder, who holds a specified percentage of the Company's voting shares as stated in the Articles, the right to reserve seats on the Board and appoint a nominee. However, the shareholder with such right shall not participate in the election of other Board Members alongside other shareholders.

Requirements for Board Membership:

The Board Member shall:

•  be a natural person, not a legal person;
• be a Saudi national;
• be fully competent;
• have not been sentenced to a criminal penalty for money crimes, honor crimes, or drug offenses;
• have not been declared bankrupt;
• have not been convicted of crimes related to securities trading; or
• not be a member of the board of directors of more than 5 JSCs.

Expiration of the Board of Directors' term or retirement of Board Members in the Law:

Termination of Board Membership:

If the JSC Board membership expires, the Board shall call the OGM to convene before the expiration of the term within a sufficient period, to elect a new board for a new term. Where the Board cannot be elected for a new term, the term of the expiring Board shall not exceed 90 days from its expiration date. The Board shall take the necessary measures to elect a replacement board before the expiration of the specified period (90 days). 

Retirement of Board Members:

In the event of the retirement of the chairman and Board members, they must call the OGM to convene to elect a new board. Such a retirement shall not take effect until the election of the new board, provided that the term of the retiring Board shall not exceed 120 days from the date of retirement.

A Board Member may retire from his membership by written notification to the Board Chairman. If The Board Chairman retires, the notification shall be addressed to the other Board members and the Secretary. The retirement shall take effect from the date specified in the notification.

Unless the Articles stipulate otherwise, where a position of a Board Member becomes vacant due to his death or retirement, the Board may temporarily appoint an experienced and qualified person, subject to the conditions necessary for the validity of the Board where the number of members is below the minimum number as stipulated in the Articles. Such information shall be registered in the commercial, and the competent authority shall be informed where the company is listed on the financial market, within 15 days from the appointment date. The appointment proposal shall be presented to the OGM at its first meeting.

In the event that the requirements for the Board validity are not met, including as the number of members is below the minimum number stated in the Articles, the remaining members shall call the OGM to convene within 60 days to elect the required number of members.

If a board is not elected for a new term or the necessary number of Board Members is completed, any interested party may request the competent judicial authority to appoint an experienced and qualified person, in such number as it deems appropriate to supervise the management of the company, and call the General Assembly within 90 days to elect a new board or complete the required number of members, or to request the dissolution of the company.

The OGM may, as recommended by the Board, terminate the membership of any person who fails to attend three consecutive or five separate meetings during the term of his membership without an excuse acceptable to the Board.

Where Board Member shall not disclose an interest in business and contracts.

1. Where a Board Member becomes aware of any interest he may have, whether directly or indirectly, in the business and contracts for the company, he shall notify the Board of the same. The notification shall be recorded in the Board meeting minutes. The member may not participate in voting on the decision issued in this regard in such meetings and the General Assembly. The Board shall notify the General Assembly, upon convention, about the business and contracts in which the Board Member has a direct or indirect interest. The notification shall be accompanied by a special report issued by the company's auditor, under approved auditing standards in the KSA.
2. If a member of the Board fails to disclose his interest, the company or any interested party may claim before the competent judicial authority to annul the contract or instruct the member to pay any realized profit or benefit.
3. A Board Member with an interest in the business or contract shall be liable for any arising damage. The Board Members shall be liable for negligence or default in performing their obligations or if it is proven that such business and contract are unfair or involve a conflict of interest and cause harm to the shareholders.
4. The Board Members who oppose the decision shall be exempt from liability as long as they expressly state their objection in the meeting minutes (MoM). Absence from the meeting in which the decision is issued shall not be considered a reason for exemption from liability unless it is proven that the absent member did not know about the decision or could not object to it after learning about it.

Controls for authorization of the JSC Board in business and contracts:

The Executive Regulations of the Law stipulate that:

1. The General Assembly may delegate the Board to authorize the company's director or Board Member to have a direct or indirect interest in the business and contracts carried out for the benefit of the company if the following conditions are met:

• The total business and contracts during the fiscal year shall be less than 1% of the company's revenue, and less than SAR 10 million according to the latest financial statements, to be calculated by the Board Member with a direct or indirect interest.
• The scope of work or contract shall be part of the company's activities.
• The work or contract shall not include preferential conditions for the Board Member.
• The work or contract shall follow the same methods adopted with the other customers and contractors.

2. The term of Board authorization shall be one year, commencing from the date of approval by the General Assembly or until the expiry of the term of the authorized Board, whichever is earlier.
3. Board Members shall not vote on the terms of authorization and revocation of authorization in the General Assembly.
4. The General Assembly may add any such conditions as it deems appropriate.

Cases where a JSC Board Member has an indirect interest in business and contracts:

The interest of a Board Member is deemed indirect in either of the following events:

• Where financial or non-financial benefits are achieved for the relatives of the concerned Board Member.
• A joint liability company, limited partnership, or limited liability company in which a Board Member or a relative is a partner.
• A JSC or simplified joint stock company in which a board member or one of his relatives holds, jointly or severally, 5% or more of the total shares.
• Any establishment other than companies where a Board Member or a relative holds or manages it.
• A company in which a Board Member or a relative is a director, Board Member, or senior executive.

If a Board Member wishes to engage in a work that would compete with the company in one of its activities, the Member shall:

1. Notify the Board of such activities and record the same in the minutes of the Board meeting.
2. Not vote on the resolution issued in this regard in the meeting of the Board or the General Assembly.
3. Notify the Board to the General Assembly of such competing activities, unless the Board is authorized to authorize competition activities.
4. Obtain a license from the General Assembly or the Board to conduct such competing activities; to be renewed annually.

• Should the General Assembly refuse to grant the license, the member of the Board shall submit his resignation within a period specified by the General Assembly. Otherwise, his membership will be considered terminated, unless he decides to abandon such business, contract or competition before the expiration of the period specified by the General Assembly.
• If the authorized board of directors refuses to grant the license, the Board Member shall submit his resignation within a period specified by the board. Otherwise, his membership will be considered terminated, unless he decides to abandon such business, contract, or competition before the expiration of the term specified by the Board.

Cases where JSC may not provide loans to Members.

1. A JSC may not provide any kind of loan to the Board Members. It may not provide guarantees related to a loan made by any member with a third party or one of his relatives. Any contract contrary to this shall be invalid. The company may claim compensation against such member before the competent judicial authority for any damage arising therefrom
2. This does not apply to banks and other finance institutions, where they may, within the scope of their purposes, provide loans to a Board Member, open credit for him, or guarantee him in loans made with third parties.
3. This does not apply to loans and guarantees granted by the company in accordance with employee motivation programs approved in accordance with the provisions of the Articles or by a decision of the General Assembly.
4. The competent authority may determine the cases and controls in which a company may not provide a loan or guarantee related to a loan to a shareholder.

However, the Board may make loans for any period, sell the company's assets, mortgage, sell or mortgage the company's business place, or discharge the company's debtors from their obligations, unless the Articles or a decision is issued by the General Assembly restricting the powers of the Board to do so.

The board shall be supervised by shareholders, without interfering in the work of the Board or the executive management of the company unless he is a Board Member or works in the executive management, or his intervention is made through the General Assembly under its mandates.

Selling the company's assets: the Board shall obtain the approval of the company's General Assembly if the value of such assets exceeds 50% of the total assets, whether the sale is made through a single or several transactions.

Controls for payment, non-entitlement or return of remuneration of Board Members:

As stipulated in the Articles and the Executive Regulations, the following requirements shall be met when determining the remuneration of the Board Members:

1. The Articles determine the rules for remuneration of Board Members. A certain amount shall be fair and appropriate, an allowance for attending meetings or in-kind benefits. However, the remuneration shall be suitable for the company's activity and the required skills. The size of the company and the experience of the Board Members shall be taken into account.
2. The Board Member's remuneration may vary in terms of the Member's experience, mandates, duties, and tasks assigned to him and the number of meetings attended by him
3. The remuneration of independent Board Members shall not be a percentage of the profits generated by the company, or be based directly or indirectly on the company's profits.
4. In the annual report, the Board shall disclose to the General Assembly the details of the company's remuneration policy, mechanism of determination, and the amounts and in-kind benefits paid to each Board Member for any work or technical, executive or administrative positions.
5. A Board Member is not entitled to remuneration if the OGM decides to terminate his membership due to absence from attending three consecutive meetings or five separate meetings during his office, without an acceptable excuse for the Board. He is not entitled to any remuneration for the period following the last meeting he attended. He shall return all such remuneration received by him in relation to that period.
6. A Board Member is not entitled to remuneration if it is paid based on incorrect or misleading information. The Board shall return such remuneration to the company and it has the right to instruct him to return it.

Board powers and competencies:

Taking into account the Law and the Articles, the following shall be considered:

1. The Board has the broadest powers to manage the company to achieve its purposes, excluding such acts or actions that fall within the competency of the General Assembly by a special provision in the Articles or the Law. The Board may authorize one or more of Members or third parties to carry out a specific act or action.
2. The Company shall be bound by all acts and actions performed by the Board in its name, even if they are outside its competency unless the third party who dealt with him was in bad faith or aware that such acts were outside the Board's competency.
3. The Board shall appoint a chairman of the Board at its first meeting and may appoint from among Members a managing director or CEO. However, the Board shall determine their competencies and powers, unless otherwise specified in the Articles.
4. At its first meeting, the Board of a listed and non-listed JSC shall appoint a vice president from one of Members.
5. The Board shall appoint a CEO and a secretary from among Members or a third party. The board shall determine his powers and remuneration unless the Articles state otherwise.
6. The Board may exempt The Board Chairman, his deputy, the managing director, the CEO, the secretary, and any of them from such positions. This shall not result in their exemption from their membership in the Board.

Delegation and Representation of JSC

• The Board Chairman shall represent the JSC before the courts, arbitral tribunals, and third parties. The Articles may provide that the managing director or the CEO shall have the right to represent it. Any of them may authorize others to represent the company.
• The Board Chairman may authorize a Board Member or third party to engage in a specific business or word. However, the authorization shall be in writing, unless the Articles provide otherwise.
• In the absence of the Board Chairman, his vice chairman shall take his place, in cases where the Board has a vice chairman.

Finally, the existence of a competent body to manage the JSC, ensuring the achievement of the desired objectives and the implementation of plans, is the best legal regulation to ensure the management of JSC in the KSA.

Al-Saadani & Khalifa Advocates & Legal Consultants: Your trusted and reliable partner in establishing and managing your JSC in the KSA

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