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Article 123 of the Saudi Companies Law

المادة 123 من نظام الشركات · الفصل الخامس: مالية شركة المساهمة

The article allows the articles of association to set aside a percentage of net profits as a reserve, and allows the ordinary general assembly to create other reserves and to deduct amounts for social purposes for the company's employees.

Official text (Arabic)

This article has not been amended since the law was issued.

1- يجوز النص في نظام الشركة الأساس على تجنيب نسبة معينة من صافي الأرباح لتكوين احتياطي يخصص للأغراض التي يحددها النظام الأساس. وللجهة المختصة وضع ضوابط تكوين الاحتياطيات.

2- للجمعية العامة العادية -عند تحديد نصيب الأسهم في صافي الأرباح- أن تقرر تكوين احتياطيات أخرى، وذلك بالقدر الذي يحقق مصلحة الشركة أو يكفل توزيع أرباح ثابتة -قدر الإمكان- على المساهمين. وللجمعية المذكورة كذلك أن تقتطع من صافي الأرباح مبالغ لتحقيق أغراض اجتماعية لعاملي الشركة.

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 123 explained in plain English

A reserve is a part of the profits that is not distributed to shareholders but kept in the company for a particular purpose. This article describes two ways of creating one in a joint-stock company:

First: a reserve provided for in the articles of association

  • The company's articles of association may provide for setting aside a certain percentage of net profits to form a reserve.
  • This reserve is allocated to the purposes that the articles of association themselves specify.
  • The competent authority may set rules for forming reserves; the article does not state what these rules contain.

Second: reserves decided by the ordinary general assembly

  • When determining the shares' portion of net profits, the assembly may decide to form other reserves.
  • This is permitted to the extent that it serves the company's interest or ensures, as far as possible, steady profit distributions to shareholders.
  • The assembly may also deduct amounts from net profits for social purposes for the company's employees.

In both cases the wording is permissive; the article does not require the company to form a reserve at a set percentage. Article 124 then explains how these reserves are used and who decides: a reserve allocated to a purpose in the articles of association can only be used by a decision of the extraordinary general assembly. Anyone drafting reserve provisions in the articles of association should consult a lawyer specializing in companies.

Practical example

An industrial joint-stock company in Riyadh has profits that fluctuate from year to year. When the ordinary general assembly met to determine the shares' portion of net profits, it decided to form an additional reserve so the company could pay shareholders similar profits in weaker years, and it also deducted an amount to fund a social program for the company's employees.

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 123 of the Saudi Companies Law

Is the company required to form a reserve?

No. The article permits but does not require it: the articles of association may set aside a percentage of net profits, the ordinary general assembly may form other reserves, and the competent authority may set rules for forming reserves.

Why would the general assembly form additional reserves?

To serve the company's interest or to ensure, as far as possible, steady profit distributions to shareholders.

Can part of the profits be set aside for employees?

Yes. The ordinary general assembly may deduct amounts from net profits for social purposes for the company's employees.

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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.