The Saudi Companies Law has undergone a significant legislative development with the issuance of the new Companies Law, which entered into force in January 2023. This reform forms part of a broader regulatory approach aimed at modernizing the corporate legal framework, strengthening corporate governance principles, and regulating complex economic structures that have become a practical reality in the Saudi market. Among the most prominent of these structures are holding companies and their subsidiaries, given their direct impact on the organization of control and management within corporate groups.
In this context, the Saudi legislator has dedicated Chapter Nine of the Companies Law to the regulation of holding companies, establishing for the first time a clear and comprehensive statutory framework defining the concept of a holding company, the criteria for affiliation, and the regulatory restrictions governing cross-ownership between holding companies and their subsidiaries. This framework seeks to strike an appropriate balance between investment flexibility and the protection of statutory interests.
First: Legislative Background to the Regulation of Holding Companies
The previous Companies Law did not contain a standalone or detailed regime governing holding companies. Instead, such structures were addressed indirectly through general rules relating to ownership and control under the provisions applicable to joint stock companies or limited liability companies. However, the Companies Law issued pursuant to Royal Decree No. (M/132) dated 1/12/1443H introduced a specific regulatory framework for holding companies under Chapter Nine, reflecting a clear legislative intent to recognize economic structures based on unified control and management, regulate the legal relationship between companies within the same group, and prevent the misuse of affiliation structures in a manner that may prejudice shareholders, creditors, or the market as a whole.
Second: Concept of the Holding Company and the Subsidiary
The Saudi Companies Law regulates the concepts of the holding company and the subsidiary within a unified framework based on the criterion of legal or actual control, while preserving the principle of the independent legal personality of each company. Article (226) of the Companies Law defines a holding company as a joint stock company, a simplified joint stock company, or a limited liability company that establishes other companies or owns shares or equity interests in existing companies that thereby become its subsidiaries.
This provision confirms that a holding company does not constitute an independent legal form in itself; rather, it is a legal status acquired once the elements of dependency are satisfied. Accordingly, the decisive factor is the nature of the actual relationship between the companies, rather than their designation or outward form. Moreover, limiting the status of a holding company to specific corporate forms reflects a legislative policy linking the exercise of control and the management of corporate groups to legal forms that satisfy governance, disclosure, and institutional oversight requirements.
A subsidiary, in turn, is a company that is subject to the control of another company, which is thereby considered its holding company. Such dependency arises where one of the legally recognized forms of control exists, whether through the ownership of a majority of voting rights, the power to appoint or remove management, an agreement conferring dominance over decision-making, or indirect dependency through intermediary companies within the corporate group. Accordingly, the criterion of dependency under Saudi law is based on effective and substantive control over the company’s will and management, rather than mere formal ownership.
Notwithstanding the existence of a holding–subsidiary relationship, each company retains its own separate legal personality and independent financial liability. The establishment of such a relationship does not result in the merger of the two entities or the loss of their legal independence; rather, it serves to regulate their relationship within a corporate group subject to unified management or direction, within the limits prescribed by law and in a manner that balances investment freedom with market protection.
Third: Criteria for Dependency under the Saudi Companies Law
The Saudi legislator has adopted the concept of actual control, rather than mere formal ownership, as the primary criterion for determining dependency between companies, in line with modern corporate governance standards. Dependency is established where the holding company has the ability to control the subsidiary’s decisions, whether through ownership of a majority of voting rights, control over the composition of the board of directors, or the existence of effective influence enabling it to direct the subsidiary’s policies and management.
The existence of a dependency relationship gives rise to several statutory consequences, most notably those relating to disclosure obligations, the preparation of consolidated financial statements, and the allocation of responsibilities within the corporate group. These measures enhance transparency and mitigate the risks associated with the abuse of control.
Fourth: Prohibition of Reverse Ownership between Holding Companies and Subsidiaries
Article (118) of the Companies Law establishes a fundamental principle prohibiting a subsidiary from owning shares or equity interests in its holding company. A violation of this prohibition results in the nullity of the ownership transfer, the suspension of voting rights or decision-making where ownership predates the dependency relationship, and an obligation on the subsidiary to dispose of such shares within a period not exceeding twelve (12) months, subject to extension by the competent authority.
This prohibition aims to prevent circular or artificial ownership structures within corporate groups, preserve the clarity of control hierarchies, and protect the interests of shareholders and creditors.
Fifth: Establishment of Holding Companies in the Kingdom of Saudi Arabia
The establishment of holding companies in the Kingdom of Saudi Arabia is governed by the general provisions of the Companies Law applicable to commercial companies, subject to the specific nature of holding companies as instruments for organizing control and management within corporate groups. A holding company does not established as a distinct legal form; rather, it must be incorporated in one of the forms prescribed by law — namely, a joint stock company, a simplified joint stock company, or a limited liability company — and subsequently acquires holding company status once its purpose of owning or establishing subsidiaries is realized.
Accordingly, a holding company is incorporated in accordance with the general rules governing articles of association or bylaws, capital requirements, management structure, and corporate objectives. The status of a holding company is determined by its actual activities and objectives, rather than by its formal designation.
Sixth: Limits of the Holding Company’s Liability for Its Subsidiary
As a general principle under the Saudi Companies Law, a holding company’s liability for the debts and obligations of its subsidiary is limited to the extent of its participation in the subsidiary’s capital, in application of the principle of separate legal personality and independent financial liability for each company. Nevertheless, this principle does not preclude holding company liability in cases where misuse of control or unlawful interference in the management of the subsidiary is established, resulting in harm to third parties.
This balance between the independence of legal personality and the prevention of abuse of control constitutes one of the defining features of the modern regulatory framework governing holding companies under Saudi law, ensuring effective protection for stakeholders without undermining the flexibility of investment structures.