Legal Articles

ESOP, Employee Stock Ownership Program, Saudi Companies, Stock Incentive Plans, Employee Benefits, Corporate Governance, Capital Market Authority

1. Program Concept:

It is a regulatory and incentive mechanism adopted by companies to grant their employees, or specific groups of them, future rights to own company shares, whether through direct grants, stock options, or other arrangements often linked to performance metrics or vesting periods. This program serves as a strategic tool to enhance institutional loyalty, attract talents, and achieve long-term alignment between the interests of employees, the company, and shareholders by involving employees in company ownership and future market value.

2. Regulatory Framework:

1. Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443H. The most relevant provisions related to employee stock incentive programs:

• Article 72: Permits the company to provide loans or guarantees to employees within approved incentive programs.
• Article 127: Permits the Extraordinary General Assembly to allocate newly issued shares upon capital increase, or a part of them, to employees of the company or its subsidiaries, regardless of the pre-emptive rights of other shareholders.

2. Executive Regulations of the Companies Law for listed joint-stock companies issued by the Capital Market Authority. These regulations organize the details related to employee shares in listed companies, most importantly:

Article 29:
• A provision must exist in the company's Articles of Association authorizing allocation of shares to employees within a specific program.
• Approval of the Extraordinary General Assembly is required for this program.
• The Board of Directors may be delegated to determine the program conditions, including allocation price and implementation mechanism.
• Non-executive board members may not participate in this program, and executive members may not vote on related decisions.

3. Corporate Governance Regulations issued by the Capital Market Authority. These impose additional regulatory restrictions to protect shareholders and ensure transparency, most notably:

• Article 11: Requires the General Assembly to vote on the allocation of newly issued shares to employees.
• Article 21: Requires the Board of Directors to determine types of rewards, including stock-based rewards, in accordance with executive regulations.

3. Regulatory Procedures for Implementing the ESOP Program:

To implement the Employee Stock Ownership Program according to the regulatory framework, the following steps should be taken:

1- Amend the company’s Articles of Association if it does not include an explicit provision regarding granting shares to employees.
2- Prepare a detailed ESOP program document including:
• Eligibility Criteria
• Vesting Schedule
• Pricing Mechanism (Price per Share)
• Rights and Obligations of Employees
3- Submit the program to the Extraordinary General Assembly for approval.
4- Delegate the Board of Directors by the Extraordinary General Assembly to establish the program’s executive rules.
5- Implement share issuance or treasury share allocation as approved.
6- Disclose to the Capital Market Authority according to its requirements and related executive regulations.

Conclusion:

The Employee Stock Ownership Program serves as an effective strategic tool to enhance human resources stability and incentivize institutional performance, especially in startups and competitive sectors. Its effectiveness is not achieved merely by launching it; it requires a balanced design that combines regulatory compliance, contractual clarity, and financial discipline. The more fair, motivating, and well-structured the program’s conditions, the greater its contribution to achieving growth objectives, attracting talent, and establishing a genuine partnership between the company and its employees.