Doing Business in Saudi Arabia: Options and Overview for Foreign Investors and Companies

Wassem Amin SAUDI

(Note: This Article was originally published the American Bar Association, Section of International Law Quarterly Newsletter in March 2014.  For a downloadable copy of the newsletter, click here.)

By: Wassem M. Amin, Esq. MBA*

The Kingdom of Saudi Arabia is one of the fastest growing economies in the Middle East. In 2013, the government increased its budget by more than 20% than the previous year, to approximately 820 Billion Saudi Riyals ($219 Billion). Additionally, Saudi’s King Abdullah pledged more than $500 billion on social welfare and infrastructure projects over the next few years. Saudi Arabia’s increased spending is part of its policy to create economic diversification and reform, in turn decreasing their dependence on oil revenue and creating new jobs for the local population.

A large proportion of the Government’s spending, approximately 300 billion Riyals, has been allocated to capital expenditures on investment projects and social infrastructure. Ambitious plans include building 539 new schools and universities, as well as the development of several new cities in the sprawling desert kingdom.
The biggest beneficiary of this expansionary policy is the construction industry. Demand in the construction and associated sectors, such as residential and commercial real estate development, will increase exponentially, representing an excellent market opportunity for foreign investors and international corporations seeking to enter the Saudi market.

Applicability of Islamic Finance

Construction projects in Saudi Arabia are typically either public or private. The governing law which applies to all contracts, including construction, is Shari’a, or Islamic, law. General principles of Islamic Finance are applicable, such as the duty to act reasonably, in good faith, and to mitigate losses.

In the private sector, within the construction sector specifically, the Islamic Finance principle that applies is the “istisna’a” contract, which is a contract for the sale of an asset that is yet to be constructed or manufactured. Using this structure, the party providing capital, the financier, enters into a contract with the purchaser of the building to be constructed. Usually the financier, whether a bank or investor, will then enter into a back-to-back construction contract with a general contractor for the project. The financier realizes a profit from the spread between the cost of the construction contract and the price of the purchase contract.

Public Works Contracts

However, in the public sector, specific regulations and a complex legal framework govern bidding for public works, as well the interpretation and enforcement of underlying contracts. While still generally subject to Islamic Law principles, public works contracts are considered administrative contracts and are subject to the Government Bids and Procurement Law, implemented with associated regulations.

Establishing a Foreign Presence in Saudi Arabia

Recent amendments in the law and a shift in policy by the government to attract foreign direct investment have made it easier than ever for a foreign company or investor to establish business operations in Saudi Arabia. Although there are a variety of business organizations in Saudi Arabia, the most commonly used by foreign companies in undertaking construction projects are Limited Liability Companies (LLCs). That is due to the relative ease of incorporating an LLC (as opposed to, for example, a Joint Stock Company), minimal capitalization requirements, and the requirement of less corporate governance formalities.

The actual procedure of establishing an LLC in Saudi Arabia is typically a two-step process: (1) First, the foreign partner applies to the Saudi Arabian General Investment Authority (SAGIA) for a foreign investment license; (2) Second, once SAGIA issues the license, the partners in the proposed LLC apply to the Ministry of Commerce and Industry in order to incorporate the company. Once approved, the Ministry will certify the formation documents of the LLC and issue a commercial registration certificate–which permits the LLC to begin operating in the Kingdom legally.

Saudi Arabia’s Foreign Investment Regulations give foreign investors a variety of options in determining how to conduct business operations in the Kingdom. However, regardless of the option chosen, if a physical commercial presence is established, foreign investors must first obtain a foreign capital investment license from the Saudi Arabian General Investment Authority (SAGIA). The following section gives an overview of the other options that may be feasible

Overview of Saudi Arabian Business Entities and Markets

Investments in Saudi Arabia may be through the formation of a new business entity or through the acquisition of assets or equity in an existing company. Commercial enterprises by foreign companies may be structured as any of the following: (1) joint ventures, (2) wholly owned subsidiaries, (3) local branches of a foreign company; or (4) representative or agent offices.

The principal body of law governing commercial enterprises in Saudi Arabia is the Companies Regulation, which is enforced and regulated by the Ministry of Commerce and Industry. In some circumstances, an enterprise may be subject to the rules and regulations of additional regulatory bodies such as the Saudi Arabian Stock Exchange (Tadawul), the Saudi Arabian Monetary Agency (SAMA), or the Capital Market Authority (CMA).

In terms of the legal type of entity established, foreign investors have several options to consider–depending largely on the scope and type of the proposed enterprise as well as the investor’s exit strategy. The types of entities are: (1) Joint Stock Company; (2) Limited Liability Company; (3) Joint Venture; (4) Branches of foreign companies; and (5) Technical and Scientific offices of foreign companies.

Joint Stock Company (JSC): JSCs are the most analogous entity to a C-Corporation in the United States. They may be wholly foreign owned and are typically established with the intent towards a future public offering and listing on the Saudi Stock Exchange (Tadawul). A minimum of 5 shareholders and 3 directors on the board of directors is required. The minimum initial capitalization required is 2 Million Saudi Riyals (SR), which rises up to SR10 Million if the JSC will issue publicly traded shares.

Limited Liability Company (LLC): As with JSCs, Saudi law permits an LLC to be wholly foreign owned and managed. LLCs must have at least 2, but not more than 50, member-investors. Each member owns a pro-rata equity share equal to the uniform nominal value. Liability of individual members, under most circumstances, is limited to the member’s paid-in capital. Minimum initial capitalization for an LLC with any foreign members is typically SR500,000. However, for certain industries, such as agricultural or industrial projects, the minimum capital may be much higher. Unlike JSCs, LLCs do not issue shares and cannot be publicly traded on the Saudi Arabian Stock Exchange.

Joint Ventures – LLCs and JSCs may both be wholly owned or established with a Saudi business partner. The decision to establish a Saudi partner may be mandatory in some fields, such as establishing a branch of international law firm. However, in other cases, a foreign investor may benefit from a Saudi partner’s expertise and familiarity of the local market, customs, and traditions. The risks and benefits of doing so must be carefully analyzed after thorough due diligence is conducted.

Branches of Foreign Companies – Branch offices are set up to represent foreign companies in Saudi Arabia. Similarly to JSCs or LLCs, branch offices are allowed to engage in direct business activities. However, their scope of business is limited to that of the parent company.

Technical and Scientific Offices (TSOs) – TSOs are easily set up in Saudi Arabia and are usually established when a foreign company enters into long-term distribution or agency arrangements with local companies. However, their scope of allowed commercial activity is limited to providing technical support and assistance to local distributors, agents, and consumers. TSOs are prohibited from engaging in any direct business activities.

Other Commercial Arrangements – Distribution arrangements may be done through a joint venture with a Saudi partner or by appointing a local distributor or agent on your behalf. Other options, such as franchising or a direct international sale, may also be available, depending on the type of service or product the foreign company offers.

Saudi Arabia is a lucrative market for foreign companies and investors. At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.
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Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years. Wassem currently focuses his practice on Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions. For more information, please visit the About Us page or http://www.dharlawllp.com.

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EB-5 Chinese Quota Retrogression: Analysis of Potential Impact and Recommended Solutions

Amin-Wassem-China-US-EB-5By Wassem M. Amin, Esq., MBA

(Visit our Publications Page for a FREE PDF Download of this Article)

Over the past few years, the skyrocketing popularity of the EB-5 Immigrant Investor Visa program has fueled record demand from foreign investors.  The EB-5 Immigrant Visa allows foreign investors and their immediate family members to obtain permanent residency, providing an eventual path for citizenship, in exchange for a $500,000 to $1,000,000 investment in a job-creating enterprise.  The overwhelming majority of EB-5 foreign investors, over 80%, have come from China.  Allotted a maximum quota of 10,000 visas per year, the EB-5 Immigrant Visa is further subject to a numerical per country limit in the event that quota is met.   Known as “retrogression,” this limitation essentially works by creating a backlog in visa availability for immigrant investors from oversubscribed countries.

The U.S. Department of State cautioned in a December 2012 bulletin that projected demand of EB-5 Visas in that fiscal year may subject Chinese immigrant investors to retrogression.  Although that never came to fruition (not due to demand, but primarily caused by slow processing times), the Department of State renewed its caution alert again in December 2013.  Although the 10,000 visa-quota has never been met since the inception of the EB-5 Program, based on new statistics recently released by the United States Citizenship and Immigration Service (“USCIS”), it is now evident that the demand will surpass the available quota inevitably, perhaps as soon as this Fiscal Year 2015.  This no longer makes the likelihood of Chinese quota retrogression a question of “if,” but rather “when.”

The implications of Chinese quota retrogression are far-reaching and affect not only potential Chinese investors but the entire EB-5 industry, including Regional Centers, project developers, agents, and professional service providers such as attorneys.  This article will begin with a brief overview of the EB-5 program and how visa retrogression works.  It will then assess the potential ramifications of Chinese EB-5 visa retrogression for investors and the EB-5 industry.  Finally, it will propose solutions to alleviate the potential impact of Chinese quota retrogression on project developers and Regional Centers.

Background

In 1990, the U.S. Congress created the employment-based fifth preference (“EB-5”) immigrant visa category for immigrants who invest in and manage U.S. commercial enterprises that benefit the U.S. economy and create jobs. Allotted 10,000 immigrant visas annually, the EB-5 immigrant visa was designed to attract foreign direct investment into projects that would directly impact the economy, i.e., not merely passive investments.

Immigrant investors can apply for an EB-5 visa through two primary routes. The first route is through a direct investment into a qualifying “new commercial enterprise.” The second is through the Regional Center Pilot Program. The Regional Center Pilot Program allows USCIS to designate private or public entities as so-called Regional Centers to function as conduits or administrators of large or medium-scale projects funded, at least in part, by EB-5 investors. Regardless of which route is selected, the EB-5 Investor Visa allows foreign investors to obtain permanent residency in the United States conditioned upon an investment of a minimum of $1,000,000 (or $500,000 in a high unemployment or rural area) in a project which creates and sustains at least 10 full-time jobs for U.S. workers.

How Does Visa Retrogression Work?

Congress sets limits on the number of immigrant visas that can be issued each year. In order to adjust status to that of legal permanent resident, an immigrant visa must be available to the applicant both at the time of filing and at the time of adjudication. Visa retrogression occurs when more people apply for a visa in a particular category or country than there are visas available for that month. Retrogression typically occurs toward the end of the fiscal year as visa issuance approaches the annual category, or per-country limitations.  When an applicant files an immigrant petition, he or she is given a “priority date.”  The priority date is the date when the immigrant petition is properly filed with USCIS.  If, at the time of adjudication, an applicant’s priority date no longer meets the cut-off date published by the Department of State, due to retrogression, his or her case must be held in abeyance until a visa once again becomes available.

The EB-5 Program is allotted 10,000 annual immigrant visas.  However, that number is misleading because the quota counts an investor as well as  his beneficiaries, i.e.,if an average investor is married and has two children, the total number of visas counted towards the quota will be four.  In reality, the average number of actual EB-5 principal investors is around 3,000, substantially lower than the available quota.

Once that annual quota is met, the per country limitations on EB-5 visas will be imposed, creating a waitlist for applicants from oversubscribed countries.  Since Chinese applicants account for the substantial majority of EB-5 visas, they will be the ones directly impacted.  This backlog would essentially delay an investor’s ability to obtain an immigrant visa by a year or more, in addition to normal USCIS processing times for an I-526 (the Immigrant Investor Petition).  Therefore, if, for example, an I-526 petition normally takes 6-9 months, a backlog due to visa retrogression would extend processing times to an average of two years, if not more.

 What is the Likelihood of a Chinese Visa Retrogression?

In FY2013, 8,567 EB-5 visas were issued.  In the first two months of FY2014, over 6,700 EB-5 petitions are already pending with USCIS.  Absent Congressional action, the prospect of EB-5 petitions exceeding the annual 10,000 allotment is inevitable.  Once that quota is met, the per country limits will result in visa retrogression for Chinese investors, delaying their ability to obtain an immigrant visa by at least a year or more, in addition to the time it takes to process the I-526.

Potential Implications

In the long-term, the delay and complications of EB-5 processing will result in Chinese investors looking to other countries that actively compete for foreign investors, including Australia, Canada, and the United Kingdom.  Retrogression adds further strains on the EB-5 program which has already been plagued by extraordinarily slow processing times and delays by USCIS.  Faced with the prospect of waiting two or more years before being able to immigrate to the United States, a Chinese investor may decide to immigrate elsewhere.  Other countries will surely capitalize on visa retrogression to draw away potential investors.

In addition, the Chinese retrogression creates a significant conflict of interest between project developers, Chinese investors and immigration agents.  It also raises new ethical issues for an attorney representing the project developer or the Chinese investor.

From an investor’s perspective, an investor with children who are reaching the age of 21 may have incentives to delay the approval of the I-526 as long as possible.  Under the Child Status Protection Act (“CSPA”), commonly known as the “age-out provisions,” a child can immigrate as a beneficiary of a parent’s immigration application until he or she turns 21.  The CSPA freezes the age of children who are derivative beneficiaries of an I-526 petition while the petition is pending, but not once the petition is approved and awaiting the quota to become available for an immigrant visa.  This benefits a Chinese investor whose children are close to aging out.  Thus, it will be their benefit to delay the I-526 approval as long as possible.

From a Regional Center or project developer’s perspective, job creation projections and capital redemption timelines will be directly impacted by retrogression.  Capital redemption, or the investor’s exit strategy, is, essentially, the time period before which the investor can have his capital returned.  A protracted visa immigrant visa availability will tie up the investment money for a longer period of time.  Although that may seem like a benefit to the project developer, most current EB-5 investments provide for an exit strategy in which the developer sells or refinances the business, using the proceeds to repay investors.  A delay in visa availability will delay the developer’s ability to do so–since an investor cannot redeem capital before the approval of an I-829, which is the petition to remove conditions on investor’s permanent resident card.

Another potential implication is whether such a delay would impact the developer’s ability to access investor funds.  In a typical investment through a Regional Center, the investor’s capital is held in an escrow account until the approval of the I-526, at which point the funds are released to the developer.  Previously, an I-526 approval typically meant that the investor would be able to immigrate to the United States (or adjust their status) shortly thereafter because an immigrant visa was always available.  However, visa retrogression will delay that process by a significant period of time.  An investor, therefore, may dictate that the funds be held in escrow until a visa becomes available, not simply until the I-526 is approved.  Without alternate financing, this delay could essentially result in an inability to proceed with a project’s development and, ultimate failure.

From an attorney’s perspective, counsel for a Regional Center must recognize the additional securities disclosures that may result from visa retrogression.  Specifically, new risk factors for offering documents or Private Placement Memoranda would need to be disclosed.  Similarly, counsel for an investor would need to highlight the possible implications to their client.

Solutions and Proposals

Bridge Financing

However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue.  There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.

Bridge or interim financing provides the opportunity for EB-5 project developers to take out short term financing to help construct and develop the project, then the EB-5 capital, as it is received, may replace that short term financing yet still receive credit for job creation by USCIS.

Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context.  In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated, in pertinent part:

It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

Tapping Alternative Markets

Prudent project developers and Regional Centers should hedge the risk of any impact a shortage in Chinese investors may cause.  Since over 80% of EB-5 investors are from China, even a small decrease in the number of investors may have an significant impact.  Creating an alternative pipeline of EB-5 investors from different regions is the key to ensuring continued and sustained growth in the EB-5 Program.


[1] Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division of the American Bar Association.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently concentrates his practice on Corporate Law, Business Immigration and International Business Transactions.  He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers as well as sourcing investors throughout the Middle East.  For more information, please visit the About Us page or request more information on our Contact Us page.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Commercial Fraud is a Two Way Street – Middle East Companies Increasingly Fall Victim To Sophisticated U.S. Scams

online-fraud-scammer419By: Wassem M. Amin, Esq.

A recent disturbing trend that I have witnessed in my practice is the rising occurrences of fraud perpetuated upon Middle East businesses via sophisticated schemes in the United States.  Most, if not all, cases take place within the context of a sales agreement where a fictitious American supplier targets Middle Eastern import/export firm.  Sophisticated scams often involve official-looking documents, such as bills of lading, fake certificates of origins, and even letters of credit.  Most correspondence between the parties is done via email and the parties rarely meet in person.  In particularly sophisticated cases, the scam artist in the U.S. even invites a representative to meet at the American Company’s “headquarters,”–which turns out to be an office suite rented for the day.

After the purported agreement is reached, the purported supplier urges the Middle Eastern company to wire funds prior to shipment of the agreed-upon goods.  This is usually accompanied by fictitious emails from a fake freight or shipping agent to reassure the buyer of shipment.  Of course, once the buyer wires the money, they never hear from any of the parties again.  I have seen losses that range from a few thousand dollars to millions of dollars.

Middle Eastern companies are particularly susceptible to fraud by US scam artists due to several misconceived notions.  First and foremost, they believe that a US company cannot be fraudulent due to erroneous misconceptions about the U.S. laws and regulations.  Second, most commercial business transactions in the Middle East are very informal and do not involve extensive legal documentation.  They rarely ever involve legal counsel.  Therefore, most Middle Eastern buyers are unfamiliar with the requirements of any agreements and how to conduct due diligence to properly vet a potential supplier.

A Middle Eastern company can reduce the risk of such fraudulent transactions in several different ways.  First, it is always advisable to seek the professional counsel of an International Transactions Attorney or Business Consultant, particularly one who is familiar with the Middle East.  The expense incurred may protect against exponentially larger losses.  Second, international buyers should insist on using a Letter of Credit as the method of payment–especially if the parties do not have any prior transactional history.  A Letter of Credit will work as a safeguard to ensure that goods are shipped prior to the release of funds.  Third, international buyers should conduct their own extensive due diligence to ensure that the supplier or seller is a reputable company.  That may include steps such as retrieving the company’s corporate/business registration records, asking the company for prior buyers’ contact information as references, and search with local and national Better Business Bureaus to uncover customer complaints.

The extent of protective measures, of course, depends on the size and complexity of the transaction involved.  The bottom line is that once a buyer is defrauded, it is very difficult to recover the losses.  Consulting an international transactions attorney or consultant is an important investment for any party – whether a US supplier OR a international buyer.  As always, caveat emptor.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin is an Associate Attorney at Dhar Law LLP in Boston, MA.  Wassem has extensive experience in the Middle Eastern region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or http://www.dharlawllp.com. 

Supreme Court Continues Trend of Protecting Individual Fourth Amendment Rights

imagesOn February 19, 2013, in Bailey v. United States, the Supreme Court issued an opinion limiting police officer’s authority to detain an individual incident to the execution of a search warrant.  The decision is another example in recent history of the Supreme Court’s refusal to limit the Fourth Amendment.

Facts

While police were preparing to execute a warrant to search a basement apartment, detectives conducting surveillance in an undercover police vehicle located outside the apartment observed two individuals leave the gated area above the apartment, get in a car and drive away.  The detectives waited for the men to leave and then followed the car approximately a mile before stopping it.  Keys to the apartment were found on the petitioner who initially informed police that he resided in the apartment before denying it when informed of the search.  The District Court denied the defendant’s motion to the apartment key and statements he made to the detectives under Michigan v. Summers (1).  The Second Circuit affirmed the decision and the Supreme Court granted certiorari.

History

The Fourth Amendment provides the right of every citizen to be secure in their persons against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause.  A general rule on the Fourth Amendment is that Fourth Amendment seizures are “reasonable” only if based upon probable cause “to believe that the individual has committed a crime.  In Michigan v. Summers, the Supreme Court established an exception to this general principle and defined an important category of cases in which detention is allowed without probable cause to arrest for a crime.  The rule established in Summers, is that the law permits officers executing a search warrant “to detain the occupants of the premises while a proper search is conducted.”  This rule is unique as it extends farther than other exceptions to the Fourth Amendment in that it does not require law enforcement to have particular suspicion that an individual is involved in criminal activity or poses a specific danger to the officers.

In Summers and the cases that followed, the occupants detained were found within or immediately outside a residence at the moment the police officers executed the search warrant.  However, in the present case petitioner left the apartment before the search began and the police officers waited to detain him until he was almost a mile away.  Thus, the Court must decide whether the reasoning the Court used in Summers can justify detentions beyond the immediate vicinity of the premises being searched.

When Summers was decided, the Court reasoned that there were three important law enforcement interests that justify detaining an occupant who is on the premises during the search warrant’s execution.  (1) The safety of the officers and the need to detain the current occupants so they can search without fear that the occupants will become dangerous or frustrate the search.  (2) The facilitation of the completion of the search, if an occupant is free to move around during the search they may potentially obstruct the search or destroy evidence.  (3) The interest in preventing the flight of the occupants.

Analysis

The Court addressed all three interests established in Summers and applied the facts of the present case to those interests.  The first interest, officer safety, was not at risk because petitioner was away from location of the search and further, he was not even aware that a search was being conducted.  Additionally, if he had returned to the scene and did pose a threat, he would have been able to be lawfully detained because he was on the premises.  Addressing the second interest regarding the facilitation of the search, an individual who is not on the premises when the search is being conducted cannot obstruct a search or destroy evidence.  Finally, in addressing the concern of potential flight, the court said that if law enforcement is able to use flight as an excuse to apprehend occupants without any limitations, a suspect may be able to be seized 10 miles or further away from their house.  The Court then quoted a former Supreme Court case saying “the mere fact that law enforcement may be made more efficient can never by itself justify disregard of the Fourth Amendment.” (2)

The Court also emphasized the fact that the intrusion on personal liberty of a detention away from the premises of one’s home is significantly greater than the intrusion on an individual’s liberty while they are on their premises or inside their home.  When someone is apprehended in their yard or even inside their home, it does not raise the level of the public stigma or indignity associated with the search of the home itself.  However, when one is detained away from their home there is an additional level of intrusiveness.  Even if it is not an arrest it will appear to the public as a full-fledged arrest.  This is another important reason why the decision the Court established in Summers, must be limited and not used by law enforcement as a vehicle to apprehend occupants of a home even if they are not at their home during the search.

(1)    Michigan v. Summers, 452 U.S. 692 (1981)

(2)    Mincey v. Arizona, 437 U.S. 385, 393 (1978)

Demystifying the Saudi Arabian Market: Key Features of Various Business Entities (Part 3)

By: Wassem M. Amin, Esq.

In Part 2, the various business entities that may be used in Saudi Arabia were discussed.  This post outlines, in greater detail, the key features of the most popular entities used by foreign investors.

Limited Liability Companies (LLCs)

100% Foreign Management and Ownership – Unlike many other business entities, Saudi law does not require a minimum level of Saudi participation nor does it require that any manager be a Saudi national or a member of the LLC. Foreign management is only allowed if the LLC has a foreign capital investment license from SAGIA.

Board Members; Number of LLC Members – Under Saudi law, LLCs must have at least 2, but not more than 50, members.  The law provides for automatic dissolution if the number of members falls below 2.  The LLC may have either a manager or a board of managers.  However, if the LLC has more than 20 members, it must have a separate advisory board to oversee and advise management.

Limited Liability – The personal liability is generally limited to the individual member’s contribution to the company’s capital.  However, liability may extend to the shareholders, individually, in the event that the company’s losses exceed 50% of capital and no action has been taken to rectify losses.

Preemptive Rights – There are no shares issues in an LLC.  Investors hold a proportion of the uniform nominal value.  Further, equity transfers of a member’s ownership are permitted, but subject to the preemptive rights of other LLC members.  That means, a member wishing to dispose of his ownership must offer it to the other members first.

Minimum Capital Requirement – Minimum capital for an LLC with only foreign investors is 500,000 Saudi Riyals (SR).  There is no minimum capital requirement for LLCs wholly owned by members from the Gulf Cooperative Council countries.  Further, the Saudi Arabian General Investment Authority has the discretion to increase or decrease the capital requirement for an LLC.

Joint Stock Company (JSC)

A JSC is most analogous in structure to that of a C Corporation in the United States.  A JSC is often used when the company anticipates a public offering of shares on the Saudi Stock Exchange (Tadawul).

100% Foreign Ownership – As with an LLC, foreign ownership of all issued shares are allowed.

Board Members and Shareholders – The minimum number of shareholders allowed is 5.  The minimum number of directors required is three, including a chairman and a managing director.  Directors of the corporation are required to own shares in the corporation with a nominal value of at least SR10,000.

Preemptive Rights – Unlike LLCs, shares in a JSC are freely transferable.  Preemptive rights must be expressly added in the JSC’s organizational documents to be enforceable.

Minimum Capital – JSCs must have a minimum capital of SR2 Million.  In the event the JSC decides to issue public shares, the minimum capital requirement is SR10 Million.  Regulation of public offerings is under the auspices of the Capital Market Authority.