Joint Venture Board Governance: A New Standard for Joint Venture Board Directors in Saudi Arabia
By Jason Kolsevich
BEING A JOINT VENTURE (JV) Board Director is always challenging — and doubly so when laws and regulations shift in new and unforeseen ways. The Kingdom of Saudi Arabia (KSA) is the latest example, as it rolls out a New Companies Law (NCL) — effective May 2016 — that is intended to modernize the country’s legal and regulatory framework by streamlining legal provisions for structuring new businesses and codifying corporate governance requirements in line with international best practice.
The changes introduced by the NCL will have a major impact on JV Directors, JV Boards, and the partnerships they govern. Some parts of the law require structural revisions to JV legal agreements and associated implementation documents (like Articles of Association), with a 12-month grace period to achieve compliance. These changes will vary depending on the corporate form (e.g., whether the Saudi JV is a Limited Liability Company (LLC) or a Joint Stock Company (JSC)). But the NCL also contains provisions that affect all JV Directors in KSA, regardless of corporate form, via the introduction of new categories of Director liability and enhanced penalties on existing types of liability, including fines and imprisonment. These requirements are effective immediately, with application at the discretion of regulators.
This insight aims to introduce some of those changes and explore implications for JV Directors and Boards of existing joint ventures subject to the NCL.
WHAT DO INDIVIDUAL JV DIRECTORS NEED TO KNOW?
One of the most striking changes for JV Directors is the Director liability provision, which introduces serious financial penalties and criminal sanctions against individual Directors for a wide range of managerial offenses, such as publishing false or misleading financial statements. Under the NCL, JV Directors now face a quantum increase in fines and harsh jail sentences for negligent or malicious behavior (Exhibit 1).
Exhibit 1: JV Director Criminal Liability
Comparison of 1965 Companies Law vs. the New Companies Law
Most challenging is that the Director liability provision places the onus of compliance on Directors. Consider the example of a JV Director who becomes aware that the company’s losses have reached limits established in the NCL, and fails to convene the general assembly or shareholders meeting (or publish the occurrence thereof). This inaction is now considered a high-level offense, punishable by fines of up to SAR 5M (approximately USD 1.3M) and/or imprisonment of up to 5 years. And, in order to be fined, the JV Director need only be aware of the losses and fail to act as described above, regardless of whether they are specifically aware of the NCL rules or not.