Saudi Arabia: What Should Be Done With Joint Stock Companies That Are Run At A Loss?
08 April 2018
By Dr. Ali Al-Ghamdi
Before establishing a company, feasibility studies should be carried to gather
information about the scope of the business activity that the company intends
to engage in. This information should then be thoroughly reviewed to pinpoint
the extent of the company's success as well as the risks involved in addition
to projecting the revenue and profits of the company. The competent
authorities should review all the studies and information pertaining to the
company, especially if the company plans to offer their shares to the public.
A number of companies have been established over the past years. There has
often been an overwhelming response from the public to buy shares when these
companies launched their initial public offering. However, the allocation of
the shares of many of these companies was limited.
One of these companies, established about a quarter of a century ago, has so
far failed to distribute any dividends to its shareholders. About ten years
after the establishment of the company, a number of shareholders who have a
large stake in the company took the initiative to drop the board of directors
after it failed to make any profit and selected a new board of directors
instead.
Most of the shareholders, especially small shareholders, welcomed this move
and expected that it would help improve the financial position of the company
significantly so that it could distribute dividends to shareholders,
especially those who bought shares at a time when the stock prices were at
their peak in the Saudi market. But what happened was that the performance of
the new board was no better than the previous one. The new board also failed
to fulfill any of the promises made at the time of replacing the previous
board. Moreover, the new board sold the headquarters of the company, which was
a seven-story building situated in a prime location in the city. The sale was
said to be made in order to clear the company's accumulated debts.
I attended the general assembly meeting of the company last year. After going
through the agenda of the meeting, I found no good news for shareholders. I
found the usual items, including the report of the board of directors,
financial statements, report of the auditor of the company, report to
exonerate members of the board for failures and other such routine items. The
meeting also witnessed the disclosure of details and explanations of these
items in addition to matters related to the remuneration of members of the
board.
When some members asked for an explanation about the company's position, the
chairman of the board boasted that they did not have to reduce the capital of
the company or increase it, which means that the company's losses were less
than half of the capital. If the losses reached that level, the Capital Market
Authority would force them to reduce the capital so that the number of shares
owned by each shareholder would decrease in accordance with the percentage of
the losses incurred or the CMA would increase the capital by increasing the
number of shares on the basis of the percentage of the losses. But in this
case, each shareholder would have to provide the value of the increased shares
so that trading in the company's shares would not be suspended and the company
would not be declared bankrupt or be liquidated.
What happened to this company and to other such companies that offered shares
to the public after studies had been carried out, the required data had been
gathered and the necessary permits had been taken from competent authorities?
People invested in these companies with the hope of making a profit. Many
people, who do not have enough money to invest in land, feel that investing in
stocks is an affordable and appropriate means of investment.
It is widely believed that many of those involved in the real estate business
are swindlers, and it seems that those in charge of some joint stock companies
that are run at loss are little different from those who run such real estate
businesses. These people present a rosy image about the scheme to shareholders
and promise huge profits for their investments. However, most often the
outcome is actually losses that may eat up half of what people have invested,
and in some cases those who manage the business may run away with the money
and in the end investors lose not only their money but also their time and
effort.
It is essential to review the laws governing companies and make necessary
adjustments from time to time. No board of directors of any company should be
allowed to remain in office for more than two three-year terms, especially if
they fail to provide profits to shareholders. There is no logic at all in a
board of directors remaining in office for 20 years, especially in the case of
companies that continually incur losses.
There should be regulations in place that force them to leave their office and
their dismal performance should be investigated. Those people who fail to
discharge their duties or who are perhaps corrupt should not be allowed to
play with the rights of people.
— Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast
Asian affairs. He can be reached at algham@hotmail.com
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