The transformation of firms in Saudi Arabia is a crucial step to adapt to economic and legal changes that support the goals of Vision 2030. This process involves updating the legal framework for firms, allowing them to operate more effectively in a competitive market and boost economic growth. Changing a firm’s legal structure has become essential to meet evolving market needs and improve its ability to attract investments and compete. Saudi Arabia is empowering businesses to adopt flexible, sustainable legal structures, such as transitioning into joint-stock companies, simplified joint-stock companies, or limited liability companies. These changes not only bring stability to companies but also cultivate a dynamic business environment that fuels economic expansion and supports the private sector’s growth in line with the Kingdom’s sustainable development goals.

The updated Corporate Law in Saudi Arabia provides clear rules for companies looking to switch from one legal form to another, helping them stay relevant and competitive. This transformation can enhance companies' legal and financial strategies, making them more adaptable in the face of economic shifts. Below, this article outlines the essential aspects of corporate transformation in Saudi Arabia, with a focus on procedures, requirements, and legal steps to ensure a seamless transition.

What is Firm Transformation in Saudi Arabia?

In Saudi Arabia, corporate transformation occurs when partners or shareholders in a Firm agree to change its legal structure. The Firm can be converted to any form allowed under the Corporate Law, including:

• General Partnership
• Limited Partnership
• Joint-Stock Firm
• Simplified Joint-Stock Firm
• Limited Liability Firm

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What are the Reasons for Firm Transformation in Saudi Arabia?

Companies in Saudi Arabia may consider changing their legal structure for a variety of reasons, including:

Expansion and Growth

Companies may need a new legal form to support growth, such as transitioning from a limited liability Firm to a joint-stock Firm.

Attracting Investments

Transforming into a legal form that allows issuing shares in the stock market helps attract new investors, providing more options for increasing capital.

Reducing Risks and Liabilities

Some firms opt to switch structures to limit liabilities, like moving from a sole proprietorship to a limited liability firm

Tax Benefits

A new legal form may offer tax or financial advantages, making transformation appealing from a financial standpoint.

Improving Management Efficiency

A legal structure change can help companies improve management, particularly those experiencing rapid growth and needing a more organized governance model.

Engaging in strategic partnerships

Entering certain partnerships may require a legal structure that accommodates new partners’ needs with more flexibility.

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What are the Requirements for Firms to Transform into Other Legal Forms?

In Saudi Arabia, a firm may transform into another legal form through a decision made according to the procedures established for amending its founding contract or bylaws, after fulfilling the establishment, registration, and publication requirements for the new form.

It is important to note that for a firm to transform into a simplified joint-stock firm, unanimous agreement among the partners or shareholders is required. Additionally, owners of sole proprietorships may transfer their assets to any form of firm established under the Firms Law. However, this transfer does not absolve the owners of their responsibilities for the debts and obligations of the previous sole proprietorship unless the creditors explicitly agree to it.

Furthermore, a general partnership, limited partnership, or limited liability firm may transform into a joint-stock firm if requested by partners holding more than half of the capital, unless a lower percentage is specified in the founding contract. All shares of the firm must be owned by individuals who are related or connected by kinship, or by shares held as endowments or bequests from one of the partners. Any condition that contradicts this is considered void.

On the other hand, a private non-profit firm may transform into any form of firm unless its founding contract or bylaws state otherwise. Any surplus above the initial capital from profits, reserves, donations, or others must be allocated to non-profit purposes as specified in its founding contract or bylaws, and any exemptions received must be returned. A private non-profit firm wishing to transform must provide the ministry with proof of how it has utilized any surplus above its initial capital for non-profit purposes, along with a special report from an auditor prepared according to the approved auditing standards in the Kingdom. The transformation process cannot proceed until this report is submitted.

What are the Regulations for Objecting to the Decision of Firm Transformation?

Without prejudice to the provisions regarding the transfer of shares or stocks as per the firm's form, partners or shareholders who object to the transformation decision may withdraw from the firm by submitting a written request within fifteen days from the date of the decision. In this case, the value of their shares or stocks shall be paid according to the agreed value or based on a report prepared by one or more accredited appraisers, detailing the fair value of their shares or stocks at the time of transformation, unless the founding contract or bylaws state otherwise. In case of disagreement, the objector may resort to the competent judicial authority.

What are the Consequences of Firm Transformation in Saudi Arabia?

The transformation of a firm does not result in the creation of a new legal entity; the firm retains its existing rights and remains liable for obligations incurred prior to the transformation. Furthermore, converting a general partnership or limited partnership into any other form of entity does not relieve the general partners of their liability for the firm's debts incurred before the transformation, unless the creditors expressly consent to such relief or fail to object to the partners' decision to transform within thirty days of receiving notice via registered mail or other modern communication methods.

In Summary, Understanding the provisions for firm transformation in Saudi Arabia is essential for enabling businesses to adapt to economic changes and available investment opportunities. This understanding also helps companies make informed strategic decisions regarding changes to their legal structure, thereby enhancing their sustainability and growth. Moreover, compliance with the legal provisions related to transformation allows for greater flexibility in business operations and ensures adherence to Saudi regulations and laws, which fosters trust and stability in the business environment. Therefore, familiarizing oneself with these provisions is a vital step toward achieving sustainable success for companies in the Saudi market.

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Corporate Transformation Services in Saudi Arabia

Legal services related to corporate transformation in Saudi Arabia are essential for facilitating smooth transitions. Dr. Fahad Alrefaei & Partners Consulting & Law Firm offers a suite of services to assist companies in transitioning between legal forms while protecting partner and shareholder rights and meeting regulatory requirements. Our core services include:

Legal consultations on selecting the appropriate legal form.

• Drafting and preparing founding contracts and bylaws
• Registering the legal transformation with the Ministry of Commerce and relevant authorities.
• Capital restructuring services.
• Legal monitoring services to ensure ongoing compliance.
• Educating companies about the legal and administrative responsibilities associated with the new legal form.

For transformation services in Saudi Arabia, feel free to connect with us at Dr. Fahad Alrefaei & Partners Consulting & Law Firm. Contact us at 920012753 or by email at [email protected]. We’re eager to assist you with your needs.