Shareholder Disputes In Saudi Arabia

Shareholder Disputes in Saudi Arabia: Rights, Claims and Routes to Resolution

Disputes between shareholders or partners usually concern profits, control, information or exit, and the Saudi legal framework addresses each of them through specific rights and specific claims rather than through a general notion of unfairness. The main source is the Companies Law, issued by Royal Decree No. (M/132) dated 1/12/1443H and in force according to the Bureau of Experts platform, which also shows no amendment to it. Jurisdiction and procedure are governed by the Commercial Courts Law, issued by Royal Decree No. (M/93) dated 15/8/1441H, and its Implementing Regulations, and arbitration by the Arbitration Law, issued by Royal Decree No. (M/34) dated 24/5/1433H, which is in force and was last amended by Royal Decree No. (M/21) dated 26/1/1447H. (The Arabic texts are the authoritative versions; the quotations below are translated from them.)

The rights at the centre of shareholder disputes

The rights attached to shares in a joint stock company

Article 107 of the Companies Law sets out the rights attached to a share in a joint stock company. They include “the right to dispose of it, the right to attend shareholders’ assemblies, to participate in their deliberations and to vote on their resolutions, the right to receive a share of the net profits that are resolved to be distributed, the right to elect members of the board of directors, the right to review the company’s records and documents without prejudice to the confidentiality of information, to monitor the work of the board of directors, to file a liability claim against the members of the board, to challenge the resolutions of shareholders’ assemblies for nullity, and the right to receive a share of the company’s assets on liquidation”, all “subject to the conditions and restrictions set out in the Law or in the company’s bylaws.” The right to profits is therefore a right to a share of profits that the assembly has resolved to distribute, and not a right to compel distribution in every year.

The rights of partners in a limited liability company

For the limited liability company, Article 171 gives each partner the right to participate in deliberations and to vote, with “a number of votes equal to the number of shares he owns”, and provides that “no agreement to the contrary is permitted.” The same Article gives a partner who is not a manager the right to submit opinions to the manager and the right, personally or through his delegate, to review the company’s business at its head office and examine its records and documents “(twice) during the company’s financial year”, requires the company to meet the request “within (fifteen) days from the date of his request”, and provides that “every condition to the contrary is void”. It also obliges anyone who obtains information under that right to keep it confidential and not to use it for any purpose that may harm the company or any partner, on pain of compensation.

Protection against dilution and forced sale

When the capital of a limited liability company is increased by issuing new shares, Article 172 gives each partner “priority in owning the shares issued against cash contributions in proportion to what he owns in the company’s capital”, in accordance with the regulations. The Law also allows drag-along and tag-along arrangements, but only by a qualified decision. Under Article 181, the memorandum of association may provide, after the approval of partners representing at least “(ninety per cent)” of the capital, that the majority may compel the minority to accept a good-faith offer to buy all the company’s shares at the same price and terms, and that the minority may compel the majority to ensure the sale of the minority’s shares on the same terms when the majority sells.

Shareholder agreements and family charters

Their binding force

Article 11 of the Companies Law allows founders, partners or shareholders, during or after incorporation, to conclude one or more agreements regulating their relationship with each other or with the company, including how their heirs will enter the company, and to conclude a family charter covering family ownership, governance, management, employment of family members, profit distribution, disposal of shares and “the mechanism for settling disputes or disagreements”. The same Article provides that the agreement or charter “is binding” and may form part of the memorandum of association or bylaws, “provided that it does not contradict the Law or the company’s memorandum of association or bylaws.” A shareholder agreement can therefore set the dispute route and exit terms in advance, but it cannot override the Law or the company’s constitutional documents.

Claims available to shareholders and partners

Challenging the resolutions of a joint stock company’s assembly

Article 99(1) of the Companies Law allows any shareholder, “without prejudice to the rights of third parties in good faith”, to apply to the competent judicial authority to annul a resolution of the shareholders’ assembly issued in violation of the Law or the bylaws, “if he objected to it during the meeting, or was absent from it with an acceptable excuse.” The same paragraph provides that “the nullity claim shall not be heard after the lapse of (ninety) days from the date of issuance of the resolution”, and Article 99(2) requires the claimant to be a shareholder “at the time the claim is filed and throughout all its proceedings.”

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Challenging the resolutions of a limited liability company’s partners

Article 170(1) gives every partner the right to apply to annul a resolution of the general assembly of partners issued in violation of the Law or the memorandum of association, but only partners “who objected to it in writing or who were unable to object to it after learning of it” may do so, and it provides that a judgment of nullity makes the resolution “as though it had never been, with respect to all the partners.” Article 170(2) bars the claim after ninety days from the date of the resolution, and Article 170(3) requires the claimant to remain a partner throughout the proceedings. The conditions differ between the two company forms, since the joint stock company rule refers to objection during the meeting or absence with an acceptable excuse, while the limited liability company rule requires a written objection or an inability to object after learning of the resolution.

The liability claim against managers and directors

Article 29(1) gives the company the right to bring a liability claim against the manager or members of the board for violating the Law or the company’s constitutional documents, or for errors, negligence or default that cause harm to the company, and it is the partners, the general assembly or the shareholders who decide to bring the claim. Where the company does not act, Article 29(2) allows one or more partners or shareholders representing “(five per cent) of the company’s capital”, unless the memorandum or bylaws set a lower percentage, to bring the company’s claim, provided that its main purpose is to serve the company’s interests, that it rests on a sound basis, that the claimant is in good faith, and that he is a partner or shareholder when the claim is filed. Article 29(3) requires the claimant to notify the manager or board members of the intention to sue “at least (fourteen) days” before filing, and Article 29(4) preserves the partner’s or shareholder’s personal claim where the error causes him a specific harm of his own.

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Several rules surround this claim. Article 30 provides that the approval of the partners, the assembly or the shareholders to discharge the manager or board members does not prevent the claims under Article 29. The same Article provides that, except in cases of forgery and fraud, the liability claim is not heard after “(five) years from the end of the financial year in which the harmful act occurred or (three) years from the end of the work of the manager or the membership of the board member concerned, whichever is later.” Article 31 sets a standard for judging decisions, under which a manager or board member is deemed to have performed his duty in good faith where he had no interest in the subject of the decision, informed himself of it to the appropriate extent according to his reasonable belief, and firmly and rationally believed that it served the company’s interests, with “the burden of proving otherwise” on the claimant. Article 32 allows the competent judicial authority, at the request of the partner or shareholder, to charge the company with the costs of bringing the liability claim “whatever its outcome”, if he brought it in good faith and it was in the company’s interest to bring it.

Dissolution by judgment

Article 243 of the Companies Law lists among the general causes for the dissolution of a company “the issuance of a final judicial judgment dissolving it or declaring it void.” For the limited liability company, Article 184 provides that the company is not dissolved by the death, interdiction, bankruptcy liquidation proceedings, insolvency or withdrawal of a partner, “unless the memorandum of association so provides.”

Exit of a partner from a limited liability company

Article 184 does not make the exit of a partner conditional on a provision in the memorandum of association. It addresses the effect of a partner’s withdrawal on the company, and its effect is that the company continues to exist after a partner withdraws unless the memorandum provides otherwise. The memorandum of association and any shareholder agreement concluded under Article 11 can then play a complementary role, since the parties may use them to set in advance the terms on which a partner leaves, including the drag-along and tag-along mechanisms permitted by Article 181, which reduces the scope for dispute when a partner decides to exit.

Routes to resolution

Agreement, conciliation and mediation

The parties may settle at any stage, and the Commercial Courts Law supports this. Article 19(2) allows the parties to a commercial dealing, before registering the claim and under the court’s supervision, to take conciliation and mediation measures, to exchange documents and memoranda, and to hold a meeting to define requests, defences and evidence. Article 58 of the Implementing Regulations makes prior resort to conciliation and mediation mandatory before registering certain claims, including “claims whose parties are spouses or are related up to the fourth degree” and “claims relating to contracts that include an agreement, in writing, to resort to conciliation, mediation and amicable settlement before resorting to the courts.” Disputes within family companies, and disputes under a shareholder agreement that contains such a clause, may therefore have to pass through conciliation before they can be registered.

Arbitration

Arbitration requires an agreement, and Article 9(2) of the Arbitration Law provides that “the arbitration agreement must be in writing, otherwise it is void”, while Article 9(1) allows it to be concluded before or after the dispute arises. Where a claim is brought before a court despite an arbitration agreement, Article 11(1) requires the court to rule that the claim may not be heard “if the defendant raises this before any request or defence in the claim”, so the defendant must raise the agreement at the outset or risk losing it. Under Article 49, arbitral awards are not subject to any means of challenge “except a claim for annulment of the arbitral award” on the grounds in Article 50, and Article 51(1) requires that claim to be filed “within the sixty days following the date of notification” of the award. Article 52 gives the award the force of res judicata and makes it enforceable, but under Article 55(1) a request to enforce it is not accepted until the period for filing the annulment claim has expired, and under Article 55(2) the enforcement order requires verification that the award does not conflict with a judgment or decision issued in the Kingdom, does not contain what violates the provisions of Islamic Sharia and public order, and was duly notified to the party against whom it was issued.

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The Commercial Courts

Where there is no arbitration agreement, or where it is not invoked in time, the dispute goes to the Commercial Courts. Article 16(4) of the Commercial Courts Law gives them jurisdiction over “claims and violations arising from the application of the provisions of the Companies Law”, which covers nullity claims, liability claims and other claims under that Law. The procedural rules discussed in the other articles of this series then apply, including the prior written notice, the contents of the statement of claim, filing by a lawyer and the periods for appeal.

Conclusion

Shareholder disputes in Saudi Arabia are resolved through rights and claims that the Companies Law defines with some precision. The rights attached to shares and to partnership interests are listed in Articles 107 and 171, the protection against dilution and the drag-along and tag-along mechanisms are set in Articles 172 and 181, and shareholder agreements and family charters are binding under Article 11 provided they respect the Law and the constitutional documents. A resolution adopted in breach of the Law or the company’s documents may be challenged within ninety days under Article 99 for joint stock companies and Article 170 for limited liability companies, each with its own conditions, and mismanagement may be pursued through the liability claim in Article 29, with the limitation periods in Article 30, the decision standard in Article 31 and the cost rule in Article 32. Conciliation is mandatory in some cases under Article 58 of the Commercial Courts Regulations, arbitration depends on a written agreement that must be invoked before any defence, and the Commercial Courts hear Companies Law claims under Article 16(4). A shareholder who knows these texts can act within the short periods they set and can draft the company’s documents so that the route to resolution, and the terms of exit, are settled before any dispute begins.

Frequently asked questions

How long does a shareholder have to challenge an assembly resolution?

Ninety days from the date of the resolution, under Article 99(1) of the Companies Law for joint stock companies and Article 170(2) for limited liability companies, provided the conditions on objection or absence in each Article are met.

Can a minority shareholder sue the directors on behalf of the company?

Yes, where the company does not bring the claim itself. Article 29(2) of the Companies Law allows partners or shareholders representing five per cent of the capital, or a lower percentage set in the company’s documents, to bring the company’s liability claim, after notifying the managers or directors at least fourteen days in advance under Article 29(3).

Does the assembly’s discharge of the directors prevent a liability claim?

No. Article 30 of the Companies Law provides that the discharge does not prevent the claims under Article 29.

Can a partner in a limited liability company inspect the company’s records?

Yes. Article 171 of the Companies Law allows a partner who is not a manager to review the company’s business and examine its records and documents twice during the financial year, and requires the company to respond within fifteen days.

Is a shareholder agreement binding in Saudi Arabia?

Yes. Article 11 of the Companies Law makes it binding, provided it does not contradict the Law or the company’s memorandum of association or bylaws.

If there is an arbitration clause, can a shareholder still go to court?

The court must rule that the claim may not be heard if the defendant invokes the arbitration agreement before any request or defence, under Article 11(1) of the Arbitration Law. If the defendant does not raise it in time, the court may proceed.

Which court hears shareholder disputes?

The Commercial Courts, which under Article 16(4) of the Commercial Courts Law have jurisdiction over claims and violations arising from the application of the Companies Law.