Article 118 of the Saudi Companies Law
المادة 118 من نظام الشركات · الفرع الثاني: أدوات الدين والصكوك التمويلية
The article allows a company to convert debt instruments or financing sukuk into shares under the Capital Market Law, provided the holder approves, whether in advance in the issue terms or by a later agreement.
Official text (Arabic)
This article has not been amended since the law was issued.
يجوز للشركة تحويل أدوات الدين أو الصكوك التمويلية إلى أسهم وفقًا لنظام السوق المالية، وذلك بموافقة حاملها سواء أكانت موافقة سابقة كأن تكون ضمن شروط الإصدار أم باتفاق لاحق.
This is the official Arabic wording, the only legally binding version. We do not translate the law itself; the explanation below is ours. Official source: Bureau of Experts at the Council of Ministers
Article 118 explained in plain English
This article regulates the conversion of debt instruments or financing sukuk into shares in the company, meaning that the holder changes from a creditor of the company into a shareholder in it.
Conditions for conversion:
- It must be done in accordance with the Capital Market Law.
- It must be with the approval of the holder of the instrument or sukuk.
Forms of approval: the holder's approval is valid in either of two forms:
- Prior approval, for example where it is part of the issue terms they accepted when subscribing or buying.
- A later agreement between the company and the holder after issue.
Why this condition? The holder of a debt instrument or sukuk has entered into a financing relationship with the company, and converting them into a shareholder changes the nature of their rights, so it may not be imposed on them without their consent, whether that consent is given beforehand or afterwards.
This article complements Article 117, which requires, for issuing debt instruments or sukuk convertible into shares, a resolution of the extraordinary general assembly setting the maximum number of shares, and which empowers the board of directors to issue the new shares on conversion and to register the completion of the capital increase procedures with the commercial register. Article 119 also allows any interested party to ask the competent judicial authority to annul an act that breaches Articles 117 and 118, in addition to compensating holders of debt instruments or sukuk for the harm. Sukuk holders who face a conversion they have not approved may consult a lawyer who specializes in companies and securities.
Practical example
Mona bought financing sukuk issued by a joint stock company in Riyadh, and the issue terms did not include conversion into shares. The company later offered to convert her sukuk into shares, which can only happen if Mona agrees in a later agreement. Had the issue terms provided for conversion, her acceptance of them would have counted as prior approval.
Translated from our Arabic explanation with machine assistance. For guidance only; it does not replace advice from a lawyer on your situation.
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Frequently asked questions about Article 118 of the Saudi Companies Law
Can the company convert my sukuk into shares without my approval?
No. The approval of the holder of the instrument or sukuk is required, whether given beforehand in the issue terms or by a later agreement.
Under which law is debt converted into shares?
Conversion is done in accordance with the Capital Market Law.
What if the company converts sukuk in breach of these provisions?
Article 119 allows any interested party to ask the competent judicial authority to annul the act, with compensation for holders of the instruments or sukuk for the harm.
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The texts are reproduced from the official website of the Bureau of Experts at the Council of Ministers for reference; where they differ, the officially published Arabic text prevails. This content is not legal advice.