Corporate profits and how to protect them

The company aims to make a financial profit and distribute it to the shareholders.
These profits realized by the company are the amounts that are added to its liabilities.
These profits are the positive outcome of the operations it undertakes, and since these profits are the ultimate goal of the investor and the company’s shareholder as well as its creditors.
Therefore, they must be protected
and criminalize acts that may affect them and diminish their reality and the reality of their receipt and entitlement, whether negatively or positively.

These profits are realized by comparing the expenses and costs incurred by the company.
and the total return from operations.
From the sum of these returns, the company’s gross profit for the fiscal year is formed.
However, these profits are not net profits and eligible for distribution until after deducting expenses and depreciation and deducting reserves.
The remainder is then considered a net profit that must be distributed to the shareholders and others in the manner specified in the prescribed regulations as well as in the company’s articles of association.
For clarity, depreciation refers to the gradual decrease in fixed assets such as buildings, machinery and vehicles due to time and use.
The company must deduct a portion of its annual profits to cover this gradual decrease.

The Saudi regulator has indicated in Article 10 of the new Companies Act that only distributable profits may be distributed to the partners.
and that if fictitious profits are distributed to the partners
the creditors of the company may demand that each partner – even if he is in good faith – return what he received from them.
As for the real profits received, the same article stipulates that the partner is not obliged to return them even if the company suffers losses in the following years.

However, the Saudi Companies Law, whether old or new, does not stipulate the exact definition of net profits.
This is important in characterizing cases related to manipulating the distribution of profits when they occur.
I have already included this observation with a number of observations that I sent two years ago to the then Minister of Commerce.
Note that the definition of net profits in the corporate laws of other countries is common.
The content of this definition is that the net or real profits are the profits resulting from the operations initiated by the company after deducting all the costs necessary to achieve these profits.
After calculating and setting aside all depreciation and provisions that accounting principles require to be calculated and set aside before making any distribution in any form.

It is well known that one of the provisions that are deducted before the distribution of profits is the annual statutory reserve provision unless it reaches the statutory limit.
It is also well established, whether by the Saudi regulator or others, that no dividend may be distributed if it would prevent the company from paying its cash obligations on time, in order to protect and strengthen the company’s credit.
This is to protect and strengthen the company’s credit.
It is also against the law and the law for some companies to revalue some or all of the company’s assets and distribute the difference as dividends.
This is because they are not real profits because they are not the result of a real sale, but rather a revaluation.
The distribution of fictitious profits also serves to show the company in a falsely prosperous position.
This may influence the financial markets to buy the company’s shares and encourage investors to buy the company’s shares, or tempt banks to lend to the company.
Or it may entice banks to lend to these companies even though the company may be in a state of default.
In addition to the damage to the financial markets as a result of the false prosperity of the shares of these companies and the effects they have on the national economy.
This is in addition to what we mentioned earlier that this distribution represents a risk to the company’s creditors in securing their rights.
The Saudi regulator, in order to protect the credit of the company, the strength of its financial position and the rights of its creditors, criminalized the distribution of unreal profits.
He did well when he bypassed the areas of criticism on his criminalization text in the old Companies Law, which was stipulated in Article (5/229) of which every director or board member obtains or distributes to partners or others fictitious profits.
This text contained a number of observations that I sent to the Minister of Commerce two years ago.
Namely, that this text limits the criminalization of this behavior to the company director or board member, which is a misplaced limitation.
It helps non-participants to escape punishment if this behavior occurs.
Also, the auditor is not mentioned among those mentioned in the text, despite the fact that this behavior is commonly associated with him because he approves the distribution of these profits.
The text is also criticized for narrowing the circle of criminalization to sham profits only.
The text should be expanded to include distribution contrary to the provisions of the law or the company’s own bylaws, even if the profits are real.

Therefore, the new Companies Law goes beyond these observations and stipulates in Article (1/213) that a fine not exceeding five hundred thousand riyals shall be imposed on anyone who decides, distributes or receives, in bad faith, profits or returns contrary to the provisions of the Law or the company’s articles of incorporation or bylaws.
Profits or returns contrary to the provisions of the law or the company’s memorandum or articles of association.
Any auditor who ratified such distribution knowing the violation.

It is interesting to note that some Arab and European laws do not limit net profits to shareholders only.
Rather, a portion of it included the workers in the company, without prejudice to their fixed wages, on the basis that the role of the labor component in a group is no less than that of the capital.
This is on the basis that the role of the labor element in a group is no less than the role of capital in the production of profit and that the participation of workers in the profit creates an incentive that binds them to the company’s activity and pushes them to double their efforts in serving it.
It is important to point out that profits are not considered as dividends.
if they are distributed by a decision of the General Assembly from the free or optional reserves.
provided that its decision is not contrary to the interest of the company.
This is because this reserve is not considered a supplement to the capital.
Therefore, there is no harm to the company’s creditors if it decides to distribute it to the shareholders.

Also, the amounts distributed to shareholders from the hidden reserve are not considered as fictitious profits because this reserve does not appear in the balance sheet because its distribution does not affect the principle of capital stability.
Since we have mentioned the reserves of companies, perhaps in the next article we will elaborate on the types of these reserves in some detail, God willing.