Regulations for dismissing board members and distributing profits in companies
Introduction to the new regulatory amendments
In a strategic move aimed at enhancing the investment environment, the Capital Market Authority (CMA) Board approved amendments to the Implementing Regulations of the Companies Law pertaining to joint-stock companies listed on the Saudi Stock Exchange (Tadawul). This decision is part of the ongoing development of the regulatory framework concerning the procedures for removing board members, as well as regulating and updating the mechanism for determining and distributing cash dividends to shareholders in listed companies, reflecting the CMA's commitment to implementing global best practices.
General context and historical background
These amendments are part of the Kingdom of Saudi Arabia's ongoing efforts to develop its commercial and financial legislation system, in line with the objectives of Saudi Vision 2030. Since the launch of the new Companies Law, the Capital Market Authority has sought to close regulatory gaps and provide greater flexibility for companies while safeguarding shareholder rights. Historically, procedures for removing board members and distributing dividends were subject to restrictions that could slow companies' responsiveness to economic changes, thus necessitating regulatory intervention that keeps pace with the demands of the modern market.
Regulations for removing board members and protecting shareholders
According to the official statement issued by the Authority, the updated regulatory framework aims to establish precise and specific controls for the removal of board members by the general assembly. This measure will directly contribute to strengthening the governance of listed companies by enabling shareholders to exercise their statutory rights and monitor the performance of boards of directors with high transparency. Under the amendments, one or more shareholders holding at least 10% of the voting shares have the right to request the removal of all board members after at least six months from the start of the board's term. They also have the right to request the removal of one or more members if it is proven that they are unable to perform their duties.
Furthermore, the amendments require board members to immediately disclose to the board any final court ruling convicting them of a crime involving breach of trust, or any decision by a competent authority that affects their eligibility. In such cases, the board must recommend to the general assembly the member's removal immediately upon becoming aware of the decision.
Mechanism for electing new boards of directors to ensure business continuity
To ensure company stability, the amendments stipulate that if the dismissal of members results in a quorum that would prevent the board from meeting, the dismissal decision will not be effective until the general assembly approves the election of a new board or the appointment of a replacement. The board of directors is obligated to take the necessary steps to elect a replacement within a maximum period of 75 days from the date the general assembly approves the dismissal request, thus ensuring that no administrative vacuum occurs that could harm the company's interests.
Greater flexibility in dividend distributions
Regarding distributable profits, the amendments have granted listed companies greater financial flexibility. The requirement to base the profit allocation solely on audited annual financial statements has been eliminated. Instead, the mechanism now relies on the most recent audited financial statements preceding the distribution decision. This update allows companies to quickly make distribution decisions based on interim financial statements, thereby enhancing investor liquidity.
Importance and expected impact locally and internationally
These decisions will have a wide-ranging positive impact. Domestically, they will boost confidence in the Saudi Stock Exchange (Tadawul), protect small investors, and support market stability. Regionally and internationally, this move will align the Saudi market with global governance standards (such as the OECD Principles), making Saudi companies more attractive to foreign investors and international financial institutions, and reinforcing the Saudi market's position as the largest financial market in the Middle East and North Africa region.
