Dr. Raed Al-saadoun,Airbus Defence and Space

Assessing the IPO challenges in KSA

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Case Study

The Challenges and impact of the new Regulations in KSA.

The Duties and liability of Directors in KSA laws.

Contents

June, 2014 – 3

Employees: ~ 40,000 Revenues: ~ €14 bn

Employees: ~ 22,400 Revenues: ~ €6.0 bn

Employees: ~ 73,500 Revenues: ~ €39bn

Employees: ~ 144,000 Revenues: ~ €59 bn

Tom Enders

Who we are?

www.airbus.com

November, 2016 – 4

Our portfolio.

Military Aircraft

• Eurofighter • A400M• A330 Multi-Role Tanker Transport• Special Mission Aircraft• Combat Aircraft• Unmanned Aerial Systems • Full In-Service Support

• Telecommunication Satellites • Earth Observation Satellites• Navigation Satellites • Orbital and Space Exploration

Infrastructure • Science Missions • Launchers, deterrence

• Earth Observation Satellite-based Geo-Intelligence Services

• Government Satellite Communication

• Command & Control (C5ISR) Systems

• Cybersecurity Solutions and Services

• Security Solutions

Space SystemsCommunications, Intelligence & Security

June, 2014 – 5

Production Locations in Europe (40/18)

BelgiumBrusselsOostkamp

Czech RepublicPrague FinlandHelsinkiJyväskylä

FranceAquitaineBiscarrosseBrestElancourtLes MureauxSuresnesToulouse

GermanyBremenFriedrichshafenLampoldshausenManchingOttobrunnTrauenUlmUnterschleißheim

GreeceAthens

HungaryBudapest

ItalyRomeTorino

The NetherlandsLeiden TurkeyAnkara UKNewportPortsmouthStevenage

LuxembourgLuxembourg

NorwayEik

PolandMielecWarsaw

Slovak RepublicBratislava

SpainBarajasCadizGetafeSevilleTres Cantos SwedenStockholm

June, 2014 – 6

Global Presence : 400 Legal Entitys

Why going Public?

Better Corporate Governance

Raise additional Capital; use for to grow and increase market share

Use shares as part of a financing package for Acquisitions

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Ability to tap the financial markets by selling stock or bonds

Include stocks as a part of employee and management incentive plans

Advantages

Disadvantages

Restrictive regulations

Lose of Control

Expenses

Disclosure Obligations

Company information available to the public

Reporting

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It's common for an IPO to take anywhere from six to nine months or longer. During this time, the company's management team is likely to be focused on that IPO, which could cause other areas of the business to suffer

How it Works?

Case Study

New Regulations in KSA?

New Judicial laws

New Systems for gov. applications

New commercial Laws and Regulations

New Labour Regulations

VAT

GCC conventions

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With numerous new and impeding regulatory and procedural changes affecting Saudi companies, it is vital that both existing companies and new investors make themselves fully aware of the changes made, review how they are conducting their procedures and affairs to bring them into line with the new laws and make any changes required to their existing constitutional documents to be consists with the new laws.

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New Companies law

The New Companies Law (NCL) was published in the Saudi Gazette (Um Al-Qura) on 4th December 2015, and came into effect on 2nd May 2016.

Article 224 of the new law gives existing companies 12 months from the Effective Date to bring their affairs into compliance with the new law.

MoCI and the Capital Markets Authority (“CMA”) can also determine certain provisions of the new law which are effective during this interim period for PLCs.

The new Companies Law completely replaces the old Companies Law. Implementing Regulations will be issued by the Ministry of Commerce.

August, 2014 – 14

New Companies law The NCL removes the two shareholders minimum requirement for LLCs, and it is now possible

to establish an LLC with a single shareholder.

There continues to be no minimum capital requirement for LLCs, although in practice if the LLC is foreign invested, SAGIA may impose a minimum capital requirement.

An LLC will be required to undertake a conversion to a JSC if the number of its shareholders increases beyond 50 (article 151).

Special section for holding company and branch of foreign company.

Requirement to publish documents in Official Gazette replaced by electronic publication on MoCI website

No Piercing of the corporate vail in case the company loses reaches 50% of it capital. Instead, a new provision provides for termination of the company by operation of law.

Transfer of shares will be in its fair value.

The partners share in the profits or losses shall be on pro rata basis to his share in the capital. However, it may be agreed in the company articles of association on different percentages for the partner according to the Sharia’a regulations.

A duty of confidentiality is imposed on shareholders in relation to information they receive in their capacity as shareholders of an LLC (Article 173).

Reserve of profit end at 30% of the company capital instead of 50%.

Article Topic New Old

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The capital of a JSC shall be sufficient to achieve its purpose and not less than SAR 500,000. The paid-in capital upon incorporation shall not be less than a quarter of the capital

Used to be SAR 2m for closed JSC or SAR 10m for Public and paid in capital was minimum of one half

- Guarantee  shares Guarantee shares no longer required from directors.Shares to value of SAR 10,000 must be deposited with Saudi bank as a guarantee of director’s liability.

86-2 Shareholder attendance

Every shareholder can now attend shareholder meetings.

Shareholders with less than 20 shares did not have right to attend shareholder meetings.

108 Founder Lock-upFounder lock-up period remains at publication of 2 sets of financial statements but can be reduced by the CMA for listed or prospective listed companies

2 sets of financial statements. 

112 Purchase/pledge of own shares JSC may purchase or pledge its own shares 

Only limited and restricted rights to purchase own shares and pledge of own shares by JSC generally prohibited. 

114 Preference sharesAdditional provisions around issue of preference shares.

Limited clarity resulted in no use of preference shares.

New Companies law

Article Topic New Old

129 Statutory reserveThe general assembly may suspend the assignment of 10% of net profits to statutory reserves once the reserve reaches 30% of paid capital. 

Statutory reserves used to be 50% of paid capital.

133-1 External AuditorThe external auditors may not be appointed for more than 5 continuous years with minimum 2 years before re-appointment.

No restriction on length of appointment or on re-appointment. 

150 Dissolution by operation of law.

if a JSC’s losses are 50% or more of capital and prescribed requirements (as specified) not followed deemed dissolution occurs by operation of law if EGM is not held within 45 days or EGM fails to pass resolution or re-capitalisation not implemented within 90 days of resolution.

75% of capital. No automatic dissolution by operation of law. Less procedural requirements. No provisions on failure to complete a re-capitalisation. 

New Companies law

New Companies lawOn May 2016 MoCI and the CMA specified certain provisions of the new law that must be implemented immediately and others which fall within the 12 month grace period. 

Provisions to be complied with are:• Article 90 regulating shareholders meetings;• Article 95 cumulative voting for board

elections. 

Provisions where an extension can be granted: Article 68.1, the number of directors; Article 76, directors’ remuneration; Article 81.1, the functions of the

Chairman, Deputy Chairman and Managing Director;

Articles 101-104, relating to Audit Committees;

Article 150, dealing with losses of JSCs . Articles 182 -186, dealing with holding

companies.

MOCCMA

Corporate Governance Regulations

On April 2016 MoCI and the CMA issued a draft of proposed new Corporate Governance Regulations (“the CG Regulations”) through a consultation phase.

The CG Regulations will apply to both Saudi listed companies and on a best practice voluntary basis to closed JSCs. Once approved the CG Regulations will replace the existing CMA Corporate Governance regulations.

The majority of the provisions of the CG Regulations are binding to PLCs.*

The MoCI shall be responsible for the implementation of the CG Regulations by closed joint stock companies, while the CMA shall be responsible for the implementation of the Draft CG Regulations by public joint stock companies.

* Except articles 3,20,34.2,40-41,43,59,65,69.2,73-75,77-79,80-81,90-91 and 98

Corporate Governance Regulations

In preparing the Draft CG Regulations, the MoCI/CMA took into account, amongst other things:

the corporate governance recommendations articulated by the Organisation for Economic Cooperation and Development,

the Basel Committee on Banking Supervision, the International Corporate Governance Network, the Institute of International Finance, the Financial Reporting Council, other Gulf Cooperation Council member states,

and the CG rules of the Saudi Arabian Monetary

Agency in respect of banking institutions and insurance companies.

The Draft CG Regulations reflect an obvious effort to integrate best practices in the field of corporate governance.

MOCCMA

Executive ManagementDay to day operation to the best interest of the Company, propose and recommend to BoD, ensure compliance with laws and regulations … etc.

General AssemblyHas the original and basic authority, meet one time per year; amend the bylaws, appoint and remove board members, approve financial statements, hire and replace the External Auditors, appoint the internal auditing committee.

Board of DirectorsSteer the company to the best interest of the shareholders, perform the authorities granted in the bylaws, guide and monitor the executive management.

Board Committeessupport the board in his mission, propose and recommend ideas and decision to the Board. (Special consideration to the Internal Auditing Committee.

StakeholdersCustomers, key suppliers, investors, employees, Environment and competitors.

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CG Regulations - Structure

CG Regulation related to BoD

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Board Composition: Number of Directors on the Board (3-11). However, number of Directors has to be appropriate with the nature of the activities of the Company.

Directors shall not have the right to hold directorship roles in more than 5 listed companies

Profile of Directors. (Leadership capabilities, independence, qualifications, ability to guide, understanding of financial information and physical fitness).

The majority of Director shall be independent or non-Executives (independent Directors be no lesser than 2, or a third of all Directors whichever is greater).

Independent Directors must attend at least 75% of all meetings of the Board of Directors each year and must attend all meetings in which critical decisions affecting the status of the Company are taken.

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Board of Directors

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The Draft CG Regulations specify circumstances in which a Director shall not be considered to be independent. These include, amongst other situations, if the director:

owns 5% or more of the shares in the Company or of the shares of an affiliated Company;

has worked as a Senior Executive or employee of the Company or any affiliated Company in the previous two years;

is a relative (up to the fourth degree) of any other Director or any Senior Executive or any consultant of the Company or any affiliated Company;

is a Director in any other affiliated Company;

is a Shareholder or Director in an entity which has substantial dealings with the Company;

receives remuneration from the Company in addition of what is paid for her/his directorship role; or

has acted as a Director of the Company for a period exceeding nine years.

Independent Director

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The Draft CG Regulations distinguish between 'Executive Management', the 'Executive Members' and 'Senior Executives'.

Executive Management means those individuals vested with the daily management of the Company.

Executive Members refer to any member of the Board of Directors that are members of the Executive Management and receive a salary for such role.

Senior Executives refer to any person with authority to propose and/or implement strategic decisions, such as for instance the Chief Executive Officer, her/his deputies and the financial director.

The Chairman and Vice-Chairman shall not have the right to hold executive roles.

The Secretary of the Board: does not need to be a Director and must have a university degree in law or finance or accounting or management and must have at least three years of experience.

Executives?

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Delegation: The Board of Directors is not entitled to issue broad delegations or delegations which are not restricted in time.

Meetings: The Board of Directors must hold at least 6 meetings each year and must meet at least once every 2 months. Meetings of the Board of Directors must be attended by at least half of its members.

Training: The Company must offer Directors the training needed for them to extend their understanding of the Company’s business.

Evaluation of Performance: The Board of Directors must, based on the recommendations of the nomination committee, put in place mechanisms to measure the performance of the Board of Directors and its individual members and Executive Management.

• Performance must be assessed each year. An external performance assessment must be obtained from a professional consultant every three years.

• Non-executive Directors must assess the performance of the Chairman each year.

Board of Directors

Directors‘ Duties and Liabilities

As a general rule, directors owe fiduciary duties to the company, the shareholders and third parties and hence the director must:

act within the scope of his/her powers;act honestly;exercise due care and skills;act in the company’s best interest.

A duty of care as imposed by Sharia’h include additional duties:

act with a duty of loyalty and to treat all shareholders fairly; act in a trustworthy manner; avoid any sort of conflict of interest; act in a reasonable manner as a responsible director would act.

Directors’ Duties

Directors’ Duties in the CG Regulation

Act in good faith, with due diligence and care, in the best interest of the company and shareholders.

Fair treatment of each class of shareholders.

Compliance with Law and regulations.

Selection, Monitoring, Replacement of Key Management.

Monitoring of conflict of interest of management, Board Members, and shareholders

Ensuring Integrity of accounting and financial reporting systems.

Monitoring Governance practices and making changes.

Overseeing Disclosure and communication.

Assure shareholders access to accurate, relevant and timely information.

Directors‘ Liabilities

Joint Liability

JSC directors' liability is governed by Article 165(2) of the Companies Law. The responsibilities of LLC managers is regulated by Article 78(1) of the Companies Law. Both provisions stipulate that persons engaged in the management of a company will be individually and jointly liable towards the company, its shareholders and third parties for:

violations of their duties under the Companies Law; breaches of the company's articles; and errors of management.

Where misconduct that would prompt liability of JSC directors is based on a unanimous decision of the board of directors, all board members will be held liable.

As for majority decisions, those directors who opposes a majority decision cannot be held accountable, provided that their objection was recorded in the minutes of the relevant board meeting.

Status of Limitation

A director that was absent from the board meeting during which a decision prompting management liability was made will not be released from liability unless he or she can establish that he or she was unaware of the decision or unable to object to the decision after becoming aware of it.

Liability claims against a director or manager are time barred 3 years after the harmful act being discovered.

Where the harmful act was conducted fraudulently, the statute of limitations is 5 years.

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How breaches discovered?

The competent authority shall have the right to control the companies including the power to audit the company and its accounts and to request information from the board of directors or the company directors through one or more of its representatives or experts appointed for such purpose. (Article 220)

All the company officers must give access to the representatives of the Ministry - or the Capital Market Authority to the company books, records and documents and to provide them with all the relevant explanations and information they request. (Article 221)

The officers nominated upon a resolution by the competent authority shall have the capacity of judicial seizure. For this purpose, they may seize whatever documents and records they deem relevant to the offense. (Article 222)

The competent judicial authority shall hear all the civil and penal actions and disputes arising from the implementation of the provisions of the Law and application of the penalties set for the breach of its provisions. (Article 223)

Real Cases

Al- MMG Case The case was raised on November 2014 by the Capital Market Authority against MMG in

relation to the breach of the provisions of Article 49 of the CML. In particular, because of the misleading activities related to the shares value of the group during the subscription phase on 2008 (70/18) in addition to the violation conducted by the founder and board member during (2008-2011).

The Preliminary Committee for the Resolution of Securities Disputes issued it decision as follows:

Fined the founder of MMG with an amount of 1.6 billion riyals. Five years prison on each of the group's founder and the CEO.. Fines of 300,000 riyals on each of board members, the senior executives and the

external auditor (Deloitte). 3-5 years prison on three of the convicts and prevent them from working in PLCs for a

term between 5-10 years. prevent Deloitte and one of its partners to provide legal accounting for 2 years.

The resolution is not final and subject to appeal before the Appeal Committee. Therefore, the committee did not disclose the names of the violators.

The breaches conducted by the BoD during 2008- 2011 shall be investigated by the Public Prosecution Authority.

Other cases

The Public Prosecution and Investigation Commission conducted an investigation

with directors and managers of (23) companies.

Main charges are:

o Failure to record the company’s articles of association or its amendment.

o Failure to disclose conflict of interest.

o Delay in finalizing financial statements.

o No invitation for shareholders meeting in general and when the company

losses reached 50%.

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Conclusion

The old role of board member is gone. It is not a merit anymore, it comes with duties, responsibilities and liabilities.

The new regulations in KSA especially the CG Regulations, in their current form, are expected to increase the burden on PLCs, BoD and executives yet it will promote greater managerial discipline.

Thank you.