Splitting up your company into multiple entities can be a strategic move to enhance efficiency, foster growth, and increase operational flexibility. In Saudi Arabia, this process is governed by specific regulations designed to facilitate the procedure and ensure legal compliance. This article will guide you through the steps of dividing your company into multiple entities according to Saudi regulations. We will outline the key steps and legal requirements to successfully accomplish this goal. Additionally, we will discuss the potential benefits of this process and how to leverage it to strengthen your business in the growing Saudi market.

what is splitting up companies 

Article 231 of the New Companies Law and Article 89 of its Executive Regulations stipulate that any company in the Kingdom of Saudi Arabia has the right to divide it into two or more companies, even if it is in the process of liquidation, and the company or companies resulting from the division may take any of the corporate forms mentioned in Article Four of the Law: Companies, such as a joint liability company, a simple partnership, a joint stock company, a simplified joint stock company, or a limited liability company.

Proposing a Company Split in Saudi Arabia

Proposing a Company Split in Saudi Arabia whereas In Saudi Arabia, companies can be divided into two or more separate entities, even if they are in the process of liquidation. The newly formed companies can as welltake on any legal form recognized in the Saudi system, such as a partnership, joint-stock company, simplified joint-stock company, or limited liability company.

To initiate a split, a formal decision It must also made according to the established guidelines for updating the company’s articles of association or founding contract, This decision should detail the number of partners or shareholders, their shares in the new entities, the company being split, and the rights and responsibilities of each new company, also It should also explain how assets, rights, and obligations will be allocated among the new entities.

Responsibility for Company Debts After a Split

When a company splits into two or more new entities, these new companies take over the responsibilities of the original company, This means that creditors of the original company can seek repayment from either or both of the new companies. 

Generally, the new companies are jointly responsible for settling any debts and obligations of the original company. However, if there’s an agreement with the creditors, they may transfer their claims to the specific new company that has assumed the relevant debts.

Guidelines for Splitting a Company in Saudi Arabia

According to Saudi regulations, a company can be split into two or more separate entities. Here are the key guidelines:

1. Decision to Split: The split must be approved by the company’s partners, general assembly, or shareholders, following the required quorum for changing the company’s founding documents or articles of association.
2. Share Allocation: The shares or stocks held by the partners or shareholders in the original company will be distributed among the new entities based on their original ownership. Alternatively, they can agree to rearrange the shares or stocks among themselves or with others.

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What are the effects of the decision to divide the company in Saudi Arabia?

The entry into force of the decision to divide the company in Saudi Arabia in accordance with Article 233 of the Companies Law results in the company resulting from the division being a successor to the company subject to the division within the limits of what devolved upon it according to the division decision issued.

The creditors of the company subject to the division shall have the right to demand that the two companies or companies resulting from the division pay the debts and obligations incurred by the company subject to the division.

The two companies or companies shall also be jointly responsible for the performance of those debts and obligations, except in cases where it is agreed with the creditors that their rights to claim will be transferred to the company resulting from the division to which the debts and obligations resulted.

Proposal for split-up in the Saudi system:

The director of the company subject to division or the board of directors shall prepare a proposal for the division, outlining the reasons for the division, specifying the assets and obligations of the company subject to split-up and how they will be separated. 

The proposal should include a report from an accredited appraiser detailing the fair value of the assets and obligations of the company subject to division, the division date, the number of shares and stocks that partners or shareholders will receive in the company resulting from the division.

It should also include any agreements with creditors of the company subject to division for their rights in the debt claims to be transferred to the company resulting from the division, to which the obligations and debts are assigned.

Asset evaluation or liabilities of the company subject to division shall not apply if the shares or stocks in the company resulting from the division will be distributed among partners or shareholders based on their ownership percentage in the capital of the company subject to division.

The director of the company subject to division or the board of directors must provide partners or shareholders with a copy of the division proposal through modern technology or any means specified in the company’s founding contract or articles of association, before the scheduled meeting date for partners with general assembly, or shareholders to vote on the division decision, at least 21 days in advance.

The division decision shall take effect from the date of registration of the amendment to the company’s founding contract or articles of association in the commercial register of the company resulting from the division.

Navigating the process of splitting your company into multiple entities under Saudi regulations involves careful planning and adherence to specific guidelines, From ensuring that the split aligns with Saudi legal requirements to managing the allocation of shares and addressing the responsibilities for existing debts, each step must be executed thoughtfully. 

By understanding and following the regulations set out by Saudi law, you can effectively restructure your business to achieve strategic goals, enhance operational efficiency, and possibly unlock new growth opportunities. Consulting with legal and financial experts can further help ensure a smooth transition and compliance with all regulatory requirements.

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How to Split a Company into Two Entities

One popular method for dividing a company is through a “spinoff.” In this approach, the parent company establishes a new company and transfers an equity stake to itself in the new entity, reflecting the proportion of its original equity that is being reallocated. Once the spinoff is completed, the shares of both the parent and the new company are traded independently on the stock market. This setup allows investors to choose shares based on their expectations of which entity will offer the best returns.

What Happens When a Company Splits into Multiple Entities?

When a company decides to split into several independent entities, it’s known as a split-up. This financial maneuver involves dividing the original company into two or more distinct companies, each operating separately. After the split, shareholders have the option to exchange their shares in the original company for shares in one or more of the newly formed entities. This process allows investors to choose the new company they believe will best meet their financial goals.

Can I Split My Business into Two?

Yes, it’s possible to split your business into two separate entities, each with different ownership and management structures. This can be done for various reasons, such as improving operational efficiency or restructuring for strategic purposes. While the process can be complex, careful planning and execution can help you navigate it without incurring tax liabilities for either the business or its shareholders.

What Are Some Examples of Company Split-Ups?

Here are three notable examples of companies that have undergone split-offs:

1. Fortive’s Split-Off: Fortive separated its Automation & Specialty Business into a distinct entity.
2. CBS Corporation’s Divestiture: CBS Corporation spun off CBS Radio as a standalone company.
3. Viacom-Blockbuster Split-Off: Viacom and Blockbuster separated into independent companies.