Bahrain’s Dual Corporate Reform: Eliminating Informal Business Structures While Strengthening Governance Standards

Founding Partner Saad Al Doseri and Legal Assistant Diana Ahmad Gharaibeh examine the amendments to Bahrain’s Commercial Companies Law, enacted through Decree Law No. 38 of 2025 (amending Decree-Law No. 21 of 2001), which represents a significant modernisation of the Kingdom’s corporate regulatory framework, enhancing transparency and streamlining corporate structures.

Key revisions include the expansion of accountability to individuals exercising actual management of a company, and the complete repeal of provisions related to Partnership by Participation companies, Sharikat Al-Muhassa (commonly referred to as Joint Ventures in practice). These revisions align legal responsibility with actual operational control and phase out company structures that no longer align with Bahrain’s evolving commercial landscape.

This article explores the key amendments in detail, their implications for existing companies, and compliance requirements moving forward.

Article (18 bis): Shifting the Scope of Liability

A significant reform introduced by Article 18 bis limits personal liability for company debts and obligations, exempting founders, shareholders, and capital owners from such liability. The liability now primarily rests with those exercising actual management control over the company, whether overtly or covertly, along with the board members.

Under this provision, directors, board members, and de facto managers are personally liable for damages resulting from negligent acts, gross negligence, or violations of applicable laws or the company’s constitutional documents. While the amendment narrows the scope of liability by exempting passive investors, it simultaneously expands liability to include any person exercising actual management, even if not officially registered in the company’s records.

This amendment embodies the fundamental corporate governance principle that decision-making authority must be accompanied by commensurate liability. While it restricts creditors’ recourse against beneficial owners, it promotes investment by enhancing protections for shareholders and founders while establishing more rigorous oversight of executive management.

Article 23 bis: Electronic Meetings as a General Rule

The Article 23 bis amendment demonstrates the legislature’s recognition of technological advancements in corporate governance. Prior to this amendment, electronic meetings were permissible only if expressly authorised in a company’s Memorandum of Association. The amended law now permits electronic or telecommunication meetings for all companies, regardless of whether such provisions exist in their incorporation documents, provided certain safeguards are observed.

This change facilitates broader participation by shareholders and board members and provides companies with the flexibility needed in today’s rapidly evolving business environment. It is also a strategic step toward integrating Bahraini companies into the global digital economy, reflecting an adaptive response to contemporary and dynamic needs.

Article (204): Electronic Voting

Article 204 has also been amended to allow companies to adopt electronic voting systems for general assembly meetings, subject to rules and conditions to be issued by the Minister of Commerce. This addition enhances transparency, facilitates participation, and reflects the shift toward digital corporate practices.

Article 226: Closed Joint-Stock Companies

Another key development is the amendment to Article 226, which enables the establishment of a closed joint-stock company with a single shareholder, who will exercise the full powers of both the founding and general assemblies. The amendment introduces more flexibility for investors.

This amendment, departing from the former two-shareholder requirement, aligns with modern business practices and provides enhanced flexibility for entrepreneurs and family businesses to establish and manage closed joint-stock companies independently, subject to regulatory safeguards prescribed by the Minister of Commerce.

Article (322) (c): Prolonged Decision Period

Extending the decision period to 90 days enhances legal and operational flexibility for partners during critical transitions. This allows more time to navigate the complexities of reaching unanimous agreement, particularly in emotionally or legally challenging circumstances such as a partner’s death or insolvency. This change reduces the risk of unintentional company dissolution due to procedural deadlines and supports business continuity. However, the requirement for registration in the Commercial Registry to bind third parties remains unchanged, ensuring transparency and legal certainty.

Article (357):

The amendment significantly expands the scope of accountability by explicitly including “any person exercising actual management of the company” among those required to cooperate with inspections and provide documents upon request, thereby aligning with international corporate governance standards and OECD principles of transparency and disclosure. This change reflects practical recognition that not all managerial authority rests with formally appointed directors or managers. By targeting individuals who exercise effective control over the company’s operations, the law ensures that regulatory oversight cannot be circumvented through unofficial or informal leadership structures. It reinforces the principle that responsibility follows function, not just title, thereby promoting greater transparency and compliance.

Abolition of “Partnership by Participation” Companies (Sharikat Al-Muhassa): Phasing Out the Joint Venture Structure

What Were Associations in Participation (Sharikat Al-Muhassa)?

These entities were companies that concealed themselves from third parties, had no legal personality, and were not subject to publication procedures. Key characteristics included:

• The Memorandum of Association specified the rights and obligations of partners and the allocation of profits and losses; however, the company was prohibited from issuing shares or negotiable instruments.
• Third parties established legal relationships exclusively with the specific partner(s) with whom they dealt, rather than with the entity itself.
• These entities constituted unincorporated and unregistered arrangements that relied on transactions conducted in the name of one or more partners.

The Cancellation and Legal Framework

The amendment abolishes this company form, and partners in such companies must regularise their status within three months from the date of the law’s enactment. All statutory references to Muhassa have been removed, and the entire chapter governing them has been repealed. Existing Muhassa structures must regularise their status within three months from the law’s effective date.

Implications of the Cancellation

1. Immediate Transitional Requirements

Existing Muhassa (associations/partnerships by participation) must regularise their status within three months from the Law’s effective date, creating an urgent compliance deadline for all such entities.

2. Enhanced Transparency and Regulatory Oversight

The reform phases out informal arrangements in favour of registered and regulated entities, thereby enhancing transparency. This aligns with Bahrain’s objectives to strengthen corporate accountability, conform to international standards, and simplify the corporate landscape by removing outdated entities.

3. Restructuring Options

Existing entities must restructure, with options to convert into limited partnerships, WLLs, Closed Joint Stock Companies, or other recognised corporate vehicles, preferably well in advance of the three-month deadline.

4. Compliance and Documentation Challenges

Companies are advised to update their governance documents and remove all references to joint venture structures. Additionally, companies must prepare for inspection requests and centralise and digitise their corporate records to facilitate immediate production upon request by inspectors and the Ministry of Industry & Commerce.

5. Modernisation of Business Environment

The reforms modernise Bahrain’s corporate framework by enabling digital governance, permitting single-shareholder joint stock companies, and aligning the jurisdiction’s legal infrastructure with international standards.

Practical Steps for Affected Entities

Existing associations in participation should take the following immediate steps:

1. Evaluate and select appropriate conversion options to legally compliant business forms
2. Engage qualified legal counsel to navigate and complete the restructuring process
3. Review and update all contractual documentation and corporate agreements to reflect the new business structure
4. Provide timely written notice to all stakeholders and counterparties of the impending structural changes
5. Ensure full compliance with the three-month statutory deadline to avoid penalties and potential enforcement actions

Broader Strategic Impact

This cancellation represents part of Bahrain’s broader strategy to modernise corporate governance, expand personal liability frameworks, and align its corporate framework with international practice. The elimination of these informal structures removes potential regulatory arbitrage opportunities while ensuring that all business entities operate under clear, transparent legal frameworks with robust oversight mechanisms.

The reform ultimately strengthens Bahrain’s position as a business-friendly jurisdiction by eliminating outdated, opaque structures in favour of modern, internationally recognised corporate forms that provide enhanced protection for all stakeholders and more effective regulatory oversight.

Conclusion

The amendments represent a fundamental shift toward digitalisation of corporate governance, establishing electronic meetings and voting systems as standard practice rather than exceptional provisions. This positions Bahrain at the forefront of regional corporate law modernisation, recognising that contemporary business operations demand technological flexibility and adaptability. The most significant reform lies in the expansion of personal liability to encompass any person exercising actual management control, regardless of formal title or registration status. This “substance over form” approach ensures that regulatory oversight cannot be circumvented through informal leadership structures, while simultaneously protecting passive investors and founders from operational liability.

The complete abolition of Partnership by Participation companies (Sharikat Al-Muhassa) eliminates an outdated, opaque corporate structure that lacked juristic personality and proper regulatory oversight. The three-month transition deadline for existing entities creates urgency for compliance while providing sufficient time for restructuring. The authorisation of single-shareholder closed joint-stock companies and extended decision-making timeframes demonstrates legislative responsiveness to modern business needs, particularly benefiting entrepreneurs, family businesses, and companies navigating complex transitions.

These reforms collectively demonstrate Bahrain’s strategic vision to balance investor protection with business flexibility. The amendments align with Bahrain Economic Vision 2030 and establish the Kingdom as a pioneer in regional legal reform, creating a regulatory framework that meets international standards while addressing the dynamic requirements of global commerce.

This legislation decisively strengthens Bahrain’s position as a leading financial and commercial hub by systematically eliminating regulatory arbitrage opportunities, materially enhancing corporate transparency and governance standards, and providing businesses with the technological infrastructure and structural flexibility essential for sustained competitive advantage in the modern global economy.

Authors:

Saad Al Doseri

Diana Ahmad Gharaibeh