The New Saudi Companies Law, Key Changes for Founders and Investors

Saudi Arabia’s New Companies Law (Nizam al-Sharikat, نظام الشركات) has reshaped the corporate landscape in ways that reach far beyond company formation. For founders building startups, investors structuring deals, and in-house counsel managing governance, the key changes in the new Saudi Companies Law affect everything from share-class flexibility and capital requirements to director liability and workforce decision-making. At Faisal A. Siddiqui Law Firm, I regularly advise founders and investors on the employment-litigation risks that sit at the intersection of these corporate-law reforms and Saudi labour regulation. This article provides a practical, risk-focused roadmap, covering the reforms themselves, their employment-litigation implications, a phased compliance checklist, investor-protection rules, and the regulatory timeline every founder needs to monitor.

Key Changes in the New Saudi Companies Law That Founders and Investors Must Know

The New Companies Law introduced several structural reforms designed to attract investment, modernise corporate governance in Saudi Arabia, and align the Kingdom’s commercial framework with Vision 2030 objectives. Below are the three areas that, in my experience, matter most to founders and their legal teams.

New Company Forms: The Simplified Joint Stock Company (SJSC)

The introduction of the Simplified Joint Stock Company (SJSC, الشركة المساهمة المبسطة) is arguably the single most consequential change for the startup and venture-capital ecosystem. The SJSC is designed as a flexible vehicle for company formation in Saudi Arabia: it can be established by one or more persons, carries no mandatory minimum capital requirement prescribed at the same level as a traditional JSC, and permits the founders to tailor governance arrangements through the company’s articles of association rather than being locked into the rigid board-and-committee structure required of listed joint stock companies.

For VC-backed founders, the SJSC offers the ability to issue multiple classes of shares (preference shares, shares with enhanced or restricted voting rights, and shares tied to specific performance conditions). This flexibility closely mirrors the share-class structures familiar in common-law jurisdictions and removes a long-standing barrier to structuring Saudi-incorporated funding rounds. I advise founders considering conversion from an LLC to an SJSC to undertake a thorough legal review of their existing articles, shareholder agreements, and, critically, all employment contracts and share-based compensation plans before proceeding.

Capital, Share Classes and Multiple Share Classes

Across entity types, the New Companies Law modernises capital rules. LLCs benefit from greater flexibility in partner contributions, while JSCs and SJSCs gain statutory authorisation for multiple share classes, including shares with differential voting rights and preferential dividend entitlements. The law also permits in-kind contributions with clearer valuation procedures, reducing disputes at the formation stage. For founders, this means that equity incentive plans, employee stock option programmes (ESOPs), and co-founder vesting arrangements can now be structured with far greater precision within Saudi corporate law, rather than relying on contractual workarounds that were historically difficult to enforce.

Directors’ Duties, Statutory Reserve and Liability, Employment-Litigation Touchpoints

The New Companies Law codifies and strengthens directors’ duties of care and loyalty, a development that has direct implications for founders who serve as directors. Directors are now subject to explicit statutory obligations regarding conflicts of interest, related-party transactions, and the duty to act in the company’s best interests. The law mandates the allocation of a percentage of annual net profits to a statutory reserve until that reserve reaches a prescribed threshold, ensuring companies maintain a financial cushion that can be relevant when workforce restructuring costs arise.

From an employment-litigation perspective, these duties matter because founders who also serve as managing directors are personally exposed if workforce decisions, mass redundancies, wrongful terminations, or failures to pay end-of-service benefits, are made without proper board authorisation or documented rationale. The Companies Law’s liability provisions mean that a director who breaches the duty of care in approving (or failing to prevent) unlawful dismissals may face civil claims from both shareholders and affected employees. In my practice, I have seen a marked increase in cases where employment disputes are pursued alongside derivative claims against directors, making it essential for founders to treat HR governance as a board-level responsibility.

Employment-Litigation Implications of the New Saudi Companies Law

While the Companies Law is not, strictly speaking, employment legislation, its governance and liability provisions create new risk pathways that can trigger or amplify employment litigation in Saudi Arabia. Founders who fail to recognise these intersections expose themselves, and their companies, to claims that are more complex, more expensive, and harder to defend.

Director and Officer Liability in Workforce Decisions

Under the enhanced duty-of-care framework, directors who authorise or acquiesce in workforce decisions that breach the Saudi Labour Law, such as terminations without valid cause, failure to observe notice periods, or non-payment of wages and end-of-service benefits, may be held jointly liable. This is particularly relevant in the startup context, where a founder-CEO often makes hiring and firing decisions unilaterally, without formal board minutes or documented justification.

My advice to founders is straightforward: every material workforce decision should be supported by a written board resolution (or a delegation-of-authority matrix that has been formally approved by the board), a documented business rationale, and evidence that the company has complied with the procedural requirements of the Labour Law and its implementing regulations as published by the Ministry of Human Resources and Social Development (MHRSD). Without this paper trail, a wrongful-termination claim can escalate into a director-liability claim under the Companies Law.

Audit, Financial Reporting and How Errors Trigger Claims

The New Companies Law imposes stricter financial-reporting obligations, including requirements for audited annual financial statements and enhanced disclosure to shareholders. When financial statements misstate or omit employment-related liabilities, accrued end-of-service benefits, pending labour-court awards, or contingent severance obligations, the consequences extend beyond an audit qualification. Shareholders who suffer loss as a result of misleading financial information may bring claims against directors, and employees whose benefits have been underfunded may pursue parallel claims through the labour courts. Founders should ensure that their finance teams and external auditors are aligned on the proper classification and disclosure of all employment-related liabilities in every reporting period.

Shareholder Disputes Leading to Employment Disputes

Shareholder deadlocks and disputes are a well-known feature of closely held companies. Under the new law, the resolution mechanisms available, including judicial dissolution, compulsory share transfers, and the appointment of interim managers, can all have downstream employment consequences. A court-appointed interim manager may restructure the workforce; a forced sale may trigger change-of-control provisions in employment contracts; a dissolution order will require the company to meet all end-of-service obligations before winding up.

In our experience, the most effective risk mitigation is proactive: founders should include employment-specific provisions in their shareholders’ agreements (such as restrictions on mass layoffs without supermajority approval) and ensure that change-of-control clauses in senior employment contracts are drafted to align with the Companies Law’s transfer and dissolution provisions.

Compliance Checklist for Founders and Investors, Practical Steps and Timeline

What founders need to do now to reduce employment-litigation risk under the new Saudi Companies Law can be broken into three phases. The following checklist reflects the steps I recommend to clients at Faisal A. Siddiqui Law Firm based on the regulatory expectations set by the Ministry of Commerce and the CMA.

Immediate Actions (0–30 Days)

• Board governance audit. Confirm that all workforce decisions (hiring, termination, restructuring) are covered by a formal delegation-of-authority matrix approved by the board. If no such matrix exists, draft and approve one immediately.
• Director liability review. Brief all directors, especially founder-directors, on the enhanced duty-of-care and conflict-of-interest obligations under the Companies Law. Document the briefing in board minutes.
• Employment contract inventory. Compile a register of all employment contracts, noting any clauses that reference company governance, change of control, or share-based compensation. Flag contracts that are inconsistent with the new corporate structure.

Medium-Term Actions (30–180 Days)

• Amend articles of association. Update the company’s articles to comply with the Companies Law’s mandatory provisions. For companies converting to an SJSC, this includes specifying share classes, governance arrangements, and any restrictions on share transfers.
• Revise HR policies. Align termination procedures, disciplinary policies, and end-of-service benefit calculations with both the Labour Law implementing regulations (as published by MHRSD) and the new corporate governance requirements. Ensure that payroll systems reflect the statutory reserve obligations.
• Beneficial ownership (BO) filings. Confirm that the company’s beneficial ownership register is current and filed with the Ministry of Commerce. BO compliance failures can trigger regulatory sanctions and complicate any future M&A or investment transaction.

Long-Term Actions (6–24 Months)

• Annual reporting alignment. Establish a reporting calendar that ensures employment-related liabilities are properly disclosed in audited financial statements, and that the statutory reserve is funded on schedule.
• Shareholders’ agreement review. Negotiate and execute updated shareholders’ agreements that address employment-litigation risk, including provisions on workforce restructuring approvals, mass-layoff thresholds, and director indemnification for employment-related claims.
• Ongoing regulatory monitoring. Track implementing regulations issued by the Ministry of Commerce, the CMA, and MHRSD. Each new implementing regulation may create additional compliance obligations or modify existing ones.

Investor Protections, M&A and Mandatory-Offer Rules

The New Companies Law and the CMA’s implementing regulations significantly strengthen investor protections, changes that founders must understand because they directly affect deal structuring, exit planning, and the employment consequences of corporate transactions.

Mandatory Offer Thresholds and What Triggers Them

For listed joint stock companies, the CMA’s Rules on the Offer of Securities and Continuing Obligations establish mandatory-offer obligations that are triggered when an acquirer’s shareholding crosses prescribed thresholds. A mandatory offer in Saudi Arabia requires the acquirer to extend the offer to all remaining shareholders on equivalent terms. Founders planning an IPO or a secondary sale must factor these thresholds into their transaction timeline, because a mandatory offer can accelerate change-of-control provisions in employment contracts and trigger collective-consultation obligations if the acquirer intends to restructure the workforce post-acquisition.

Minority Protections, Tag/Drag Provisions and Exit Planning

The Companies Law enhances minority-shareholder rights, including the right to request the appointment of an auditor, the right to challenge related-party transactions, and, for LLC members, strengthened exit and withdrawal rights. For founders, this means that tag-along and drag-along provisions in shareholders’ agreements must be carefully drafted to comply with the law’s mandatory protections. A poorly drafted drag-along clause that forces a minority shareholder out without meeting the statutory safeguards may be challenged and set aside, potentially unwinding a transaction and leaving the company in a governance vacuum that disrupts employment relationships.

In my view, the best practice is to have both the shareholders’ agreement and the company’s articles reviewed by counsel who understands both the Companies Law and the Labour Law, so that exit mechanisms account for the employment-litigation risks that inevitably accompany ownership transitions.

Comparison Table: Reporting and Compliance by Entity Type

Timeline of Key Legislative Dates and Regulators to Watch

Founders and investors need to track several regulatory milestones. The following timeline captures the key dates and the regulators responsible for issuing guidance and implementing regulations under the Companies Law.

I strongly recommend that founders set up a regulatory-alert system, whether through counsel, a compliance officer, or a government-notification service, to capture new implementing regulations as they are published. Missing a compliance deadline can create both regulatory exposure and, where employment-related obligations are affected, litigation risk.

How I Advise Founders and Investors

The intersection of the new Saudi Companies Law and employment litigation is an area where I see founders consistently underestimating their exposure. In practice, the most costly disputes are those that combine a shareholder claim with a wrongful-termination suit, cases where the founder-director is personally liable on both fronts. My approach is to help clients build a governance and HR compliance framework that prevents these disputes from arising, rather than reacting to them after the fact.

This means conducting a gap analysis against both the Companies Law and the Labour Law, drafting board resolutions and delegation matrices that withstand judicial scrutiny, revising employment contracts and ESOP documents to align with the new corporate structure, and preparing disclosure frameworks that satisfy audit and regulatory requirements. Whether you are incorporating a new SJSC, converting an existing LLC, or preparing for an investment round, the time to address these risks is before they crystallise into claims.

Conclusion and Next Steps

The key changes in the new Saudi Companies Law create both opportunities and risks for founders and investors. The SJSC offers genuine structural flexibility; enhanced share-class provisions enable sophisticated funding arrangements; and stronger corporate governance standards align Saudi Arabia with international best practice. But these same reforms also expand the personal liability of founder-directors and create new pathways for employment litigation, from wrongful-termination claims backed by director duty-of-care arguments to shareholder disputes that cascade into workforce disruptions. Founders who act now to align their governance, HR policies, and corporate documents with both the Companies Law and the Labour Law will be in a far stronger position, whether they are defending a claim, closing a funding round, or planning an exit.

Sources

1. Bureau of Experts, Official Companies Law (Official Gazette)
2. Ministry of Commerce, Implementation Guidance and Notices
3. Capital Market Authority, Rules on the Offer of Securities and Continuing Obligations
4. Ministry of Human Resources and Social Development (MHRSD)
5. Ministry of Investment (MISA), Companies Law Official PDF
6. OECD Corporate Governance Factbook, Saudi Arabia Country Note