Explanatory Memorandum for the Draft Companies Law
The modern renaissance that the Kingdom has undertaken, encompassing all aspects of life since the reign of His Majesty King Abdulaziz, may God have mercy on him, has had a significant impact on the flourishing of trade and the increase of large construction projects such as road construction, airport establishment, dam construction, and the establishment of governmental and private facilities. With the abundance of these works and their substantial repercussions, the need for individuals to combine their efforts and consolidate their energies in pursuit of production by establishing companies that possess financial, technical, and administrative competencies to face those repercussions, which are not available to each individual separately, became urgent. As a result, the number of companies jumped in a few years from a few dozens to a few hundreds, and it continues to increase (....) in work, yielding numerous benefits that serve the public interest and the interests of individuals collectively and separately.
Although the companies established during that short period encompassed all aspects of financial, commercial, and industrial activities, with their capital reaching several hundreds of millions of riyals, and the interest of governmental bodies and individuals in dealing with them increased, the texts of the laws governing them still consist of only a few articles found in the Commercial Court Law, which were insufficient to address all matters related to companies, whether at their establishment, during their operation, or upon their dissolution and liquidation.
In light of this deficiency, individuals resorted to adopting the rules applied in other countries when establishing their companies and managing their affairs, leading to varied approaches and a mixture of matters in many cases, making the Ministry's task of monitoring and supervising them difficult.
Hence, there arose an urgent need to establish a comprehensive law for companies, clarifying the provisions that must be followed in their establishment and operation (.....) and upon their dissolution and liquidation, indicating the extent of the Ministry's powers in monitoring and supervising them to preserve the public interest and safeguard the funds held by those companies on behalf of individuals, and imposing penalties for violating those provisions.
The known law generally addresses the organization of companies established by contract, where two or more agree to work for profit, sharing both gains and losses according to their agreement. This type of company is permissible by the Sunnah and consensus; as for the Sunnah, it is based on the sacred hadith which states (God Almighty says) "I am the third of the two partners as long as neither betrays the other - if one betrays, I withdraw from between them." It was narrated that Usama bin Sharik came to the Messenger of God (peace be upon him) and said, "Do you know me?" He replied, "How could I not know you, you were my partner, and what a good partner you are, neither concealed nor disputed." The Prophet (peace be upon him) sent people to engage in this partnership, affirming it as he neither prohibited nor disapproved of it, and the report is one of the aspects of the Sunnah. As for the consensus, it is what has been known of Muslims participating in trade since the early days of Islam until now without (.....).
When drafting the law, it was essential to rely fundamentally on the established practices of rules that have proven their validity through experience and have become customary among individuals, while also adopting the beneficial provisions from the laws of other countries - achieving the convergence necessitated by the international nature of trade, which has called and continues to call for the unification of commercial laws as a means to achieve prosperity for all, while excluding any provisions that may conflict with the noble Sharia, and without affecting the various forms of companies that Muslims have historically established (....) from the law in Article (2) after clarifying the forms of companies to which it applies, as follows: (Without affecting the companies recognized in Islamic law, any company that does not adopt one of the mentioned forms shall be void... etc." as stated in Articles 229 and 230) concerning penalties, emphasizing the necessity of adhering to the provisions of Sharia, thus affirming the right of individuals to establish companies that (.....) people have historically engaged in, and confirming that no penalties may be applied to them in such cases, acknowledging that the provisions of the noble Sharia are a fundamental principle that cannot be (.....).
In reality, all types of companies included in the project, despite their varying forms and provisions, do not differ from the companies known in the past except in some minor details that do not affect the general principles of lawful transactions - without rendering unlawful what is lawful or prohibiting what is lawful, or contradicting a text, Sunnah, or consensus.
The reason for the differences fundamentally stems from the expansion of the scope of transactions compared to the past, with a diversity of forms and shapes that were not known or anticipated, in addition to the fact that the interest of the nation now necessitates government oversight and monitoring of companies, ensuring that individuals do not deviate from the provisions of the noble Sharia, whether at the establishment of companies or during their operational activities.