How to Convert the Legal Form of Companies in Saudi Arabia

The societal development commences with the acknowledgment of the necessity to align with continual progress worldwide, and to endeavor towards creating opportunities to achieve stability and economic growth. One of  such endeavors is the attempt to adapt to this progression by enabling commercial entities to be transferred into alternative legal forms, through stringent legal regulations that work towards establishing new markets for the commercial and economic society.

This initiative impelled the Saudi Royal Commission to regulate this process by Royal Decree No. (M/132) dated 1-12-1443 H, which we shall further elaborate on as follows:

• Guidelines for the transformation of companies into other legal forms.
• Objections by shareholders or partners to the decision of conversion to another legal entity.
• Consequences of transformation of companies into another legal entity.

Guidelines for the Transformation of Companies into Other Legal Forms:

• Companies in Saudi Arabia are permitted to convert to alternative legal entities, subject to compliance with the regulations stipulated in the Saudi Companies Law, including the following provisions:
• The company may be converted to a different legal form by a decision issued by the partners or shareholders, in accordance with the conditions specified for amending the Articles of Association or Memorandum of Association for each company, and fulfilling the requirements for registration and endorsement for the type of company being converted into.
• A partnership company, a simple partnership, and limited liability companies can be transformed into a joint-stock company if requested by partners owning of more than half the capital, unless the Memorandum of Association specifies a lower percentage. All shares must be owned by individuals connected by kinship.
• Unanimous consent of partners or shareholders is required when transforming a company into a simplified joint-stock company.
• Individual establishments may transfer their assets to any form of established companies in accordance with the provisions of the law, without holding the owners of previous individual establishments liable for the establishment of the company unless creditors explicitly deny it accept this.
• Non-profit private companies can be converted into other forms of companies, unless otherwise specified in the Memorandum of Association or Articles of Association. Non-profit private companies intending to change their legal form must inform the Saudi Ministry of Commerce of their actions, particularly regarding any capital increase beyond the initial amount, as well as the fields and financial institutions mentioned in the establishment or Articles of Association of the company, any exemptions obtained, along with a special report from the company's auditors prepared according to the approved auditing standards in Saudi Arabia. The conversion process cannot proceed until the non-profit private company submits this report.
• Any company can be transformed into a non-profit public or private company with the unanimous consent of shareholders or partners.

Objection of Shareholders or Partners to the Decision of Conversion to Another Legal Entity:

Shareholders or partners dissenting from the decision to convert the company's legal entity have the right to withdraw from the company upon a written request submitted within 15 days from the date of the decision. Payment for their shares or stocks should be made according to the agreed value or based on a valuation report prepared by one or more accredited evaluators that indicates the fair value of the shares or stocks on the date of the conversion, unless otherwise specified in the company's Articles of Association or Memorandum of Association. Should a dispute arise, the dissenting party has the right to resort to the appropriate judicial authority.

Consequences of Companies Transforming into Another Legal Entity:

The transformation of a company's legal structure does not result in the creation of a new legal personality. The company retains its rights and remains liable for its obligations prior to the transformation.

If a partnership company or a simple partnership company transforms to another legal form, this does not absolve the collaborating partners from their responsibility for the company's debts predating the conversion, unless creditors explicitly accept this and none of them object to the decision of conversion to another legal entity within 30 days from the date of notification through registered letter with acknowledgment of receipt or through modern technological means.

In conclusion,

The transformation of companies into other legal forms is seen as an attempt to avoid the expiration and dissolution of the company, creating a new opportunity for the company to continue in the commercial market with new governance standards. This allows the company, as a legal entity, to thrive and contribute to economic growth in the Kingdom of Saudi Arabia.

Our legal institution, with expertise in Saudi law and its provisions, is dedicated to facilitating all aspects related to the conversion of legal entities into other legal forms within the Kingdom of Saudi Arabia for both Arab and foreign investors.

Therefore, Saadani & Khalifa Legal Consultancy is pleased to serve as your partners in success and continuous development.