Does the law hold corporate founders accountable?

The founders are persons who initiate the idea of establishing a company through a series of legal acts and material acts required by law to form the company.
These behaviors and actions of these founders entail civil and criminal liabilities and responsibilities if they violate them, as the consequences of these behaviors and actions, if they are negative, can jeopardize the entity of the company and the confidence of investors and creditors in it.
The consequences of these behaviors and actions, if negative, could jeopardize the company’s entity and the confidence of investors and creditors in it. Therefore, the protection of companies from such acts and actions requires criminalizing them and enacting deterrent penalties.

In reviewing the Saudi Companies Law issued in 1437 AH, we find that it defines the founder according to the text of Article (56).
Whoever signs the company’s articles of incorporation
Or applies for a license to establish it.
Or provides an in-kind share at the time of its establishment.
or actively participates in its establishment.
with the intention of becoming a founder of the company.
The founder who provided an in-kind share shall be responsible for the correct valuation of his share.

We now come to review the criminalization provision, which comes in response to the fraudulent means that the founders of the company may resort to in order to achieve their personal interests, as well as to protect the company and its customers.
as well as to protect the company and those who deal with it from such frauds.
It is the text of Article (212) paragraph (f), which outlines the acts of those who deserve a prison sentence of up to one year and/or a fine of up to one million riyals.
The operative part of the text is whoever deliberately proves in the company’s memorandum of association or in its articles of association or in other company documents or in the application for a license to establish the company or in the documents accompanying the application for incorporation false data or contrary to the provisions of the law, or whoever signs those documents or publishes them in violation of the provisions of the law.
Anyone who knowingly signs or publishes such documents.

I will comment on this important article, which contains multiple criminal offenses.
By citing some examples of violations, including but not limited to the violations committed by the founders of the company in the articles of incorporation and by those who come after them (members of the board of directors) in the amendments they make to the company’s contract and articles of association.
These violations, whether of the law or of ministerial circulars and decisions, focus on introducing clauses in the company’s contract from which the board of directors or the executive management take decisions that harm the public interest and serve a limited group of partners and shareholders.
In doing so, they take advantage of the weakness of oversight in following up on the exact terms of the contract and recalling all the decisions and circulars that complement the Companies Law at the same time.
Therefore, the role and importance of the executive regulations comes, which the old Companies Law lacked, and we hope that the mistake will not be repeated in the new one, where ministerial decisions with complementary circulars have become its substitute.
and are not introduced into the body of the Companies Law.
This makes it difficult for the audit task, which requires absorbing all of this at the same time.

Therefore, the founders and their successors rely on the company’s memorandum of association, which was swiftly passed and approved by the Ministry of Commerce.
The founders and their successors rely on the company’s memorandum of association, which was approved by the Ministry of Commerce, to commit some violations of ministerial circulars that were prior to the date of the memorandum of association, which enabled them to commit these violations.

In general, it is a common practice to pass in the memorandum of association a clause concerning the members of the board of directors, which in commercial practice is considered non-executive, by stating:
(The Board of Directors has the right to such and such and such).
The Ministry of Commerce may approve this memorandum of association without looking professionally at its contents and the extent to which it complies with all ministerial decisions and circulars.
Therefore, you may be surprised to find that the board of directors authorizes a non-executive board member to conduct the company’s daily business, such as signing contracts or bank checks.

In particular, we come up with one example.
It is the introduction of the right to invest (20) percent of the capital outside the scope of the company’s purpose.
This means that a petrochemical company owns service real estate from this 20 percent, noting that they are long-term investments and their revenues are considered non-operational.
This is passed on to the Ministry of Commerce, which approves the memorandum of association containing this right without recalling the corrective circulars for this matter.

This is why I sent this note regarding the articles of incorporation and its amendments along with other notes on the entire old system to the former Minister of Commerce two years ago.
At the time, I enclosed two proposals to remedy this note:

First proposal:
There must be a handover of the entire system and all decisions and circulars amending it to the founders before receiving the contract from them.
A declaration prepared by the Ministry of Commerce
to be signed by the founders stating that they are fully aware of what has been delivered to them (the Law, decisions and circulars) and that there is no violation thereof in the articles of incorporation to be submitted for the Ministry’s approval.
The second suggestion is to have an independent legal entity, an accredited legal office similar to the legal accounting offices at the Ministry of Commerce, review the memorandum of association as well as the appendices.
to review and certify the Memorandum of Association and subsequent amendments.
It is considered criminally and civilly liable if it is found that the contract violates any of the relevant laws, decisions or circulars.
This is because the Ministry of Commerce did not issue the decision to approve this Memorandum of Association or its amendment except upon their validation of its validity.