With the enactment of Saudi Arabia’s New Companies Law (2022) and the modernization of its corporate framework, Shareholders’ Agreements (“SHAs”) have become an essential management tool for both local and foreign investors. SHAs provide a clear structure for shareholder rights, governance arrangements, investment protections, and exit mechanisms in joint ventures and privately held companies. Whether incorporated as a Closed Joint Stock Company (“CJSC”), Simplified Closed Joint Stock Company (“SCJSC”), or Limited Liability Company (“LLC”), a well-drafted SHA enhances certainty, supports regulatory compliance, and safeguards long-term shareholder relationships. This article highlights key terms investors and founders should consider when drafting or negotiating SHAs under Saudi law.
Legal Status and Priority
Under the New Companies Law, any SHA must clearly state that it is binding on all shareholders and must align with, or be incorporated into, the company’s Articles of Association (“AoA”). To strengthen enforceability, the SHA should also address how inconsistencies between the SHA and the AoA will be resolved, either by requiring amendments to the AoA to reflect SHA provisions or by specifying that the SHA prevails to the extent permitted by Saudi law.
Governance and Decision Making
Strong and clear governance rights are crucial for investor confidence. SHAs should define board nomination and representation rights based on shareholding proportions, allocate casting vote rights, and identify matters requiring special approval such as share issuances, capital restructurings, related-party transactions, and major asset transactions. They should establish information and inspection rights, including access to financial statements, budgets, auditor appointment, KPIs and management reports. They should define shareholder representation on committees such as audit, remuneration, or risk committees to further enhance control and transparency.
Share Transfer Controls and Dilution Protection
To protect ownership structure and prevent dilution, SHAs should address pre-emption rights on share transfers and new share issuances, approval thresholds for transfers to control shareholder entry, and anti-dilution protections for future capital increases. They should also define processes for change of control events, default or breach scenarios and possible buyouts or compulsory transfers.
Deadlock Resolution
To avoid decision-making paralysis, SHAs should contain structured deadlock procedures, including escalation to senior management or shareholders’ meetings, mediation or arbitration whether under the Saudi Center for Commercial Arbitration (“SCCA”) or any other lawfully agreed seat and buy or sell mechanisms if agreement cannot be reached.
Exit Strategies
The SHAs can essentially include exit mechanisms which are clearly defined, commercially reasonable and free from excessive uncertainty, consistent with Sharia principles such as good faith and unjust enrichment. Clear valuation rules with fair market valuation formulas, independent valuations, or fair market value standards support equitable outcomes and support enforceability under the New Companies Law. Exit tools like Tag-along rights for minorities, Drag-along rights for majority-led sales can be included in the SHAs when in compliance with the New Companies Law.
Directors’ Duties and Liability
Directors nominated by shareholders remain subject to statutory duties of care and loyalty under the Companies Law. SHAs may provide further protection through indemnification for actions taken in good faith within authority, liability limitations where enforceable, and consequences for wilful misconduct, fraud, or breach of fiduciary duties.
Financial Oversight
Financial oversight may be enhanced through rights to appoint external auditors, access company records, and require quarterly and annual financial reporting. Investors may also secure rights to request special audits or independent reviews when needed.
Investment Milestones
For joint ventures or project-based entities, investment may be linked to performance milestones. If targets are missed, step-in rights, or other lawful adjustments may be triggered to protect investor contributions.
Regulatory and Compliance Requirements
SHAs should address compliance with regulatory matters including foreign investment licensing from Ministry of Investment, Saudization and labour compliance, competition and data protection regulations, Zakat and tax obligations, and founder warranties confirming compliance with applicable laws.
Governing Law and Dispute Resolution
For enforceability, SHAs should specify governing law, normally Saudi law and the dispute resolution forum, either SCCA arbitration in Riyadh or another lawfully agreed seat. The Shareholder Agreement should specify the official language and identify which version prevails in case of conflict, noting that Arabic is generally required for enforcement before Saudi courts.
Conclusion
A robust and well-structured SHA is essential to protecting investor rights, establishing sound governance, and providing clear mechanisms for dispute resolution and exit. Given the evolving legal and regulatory landscape in the Kingdom, professional legal guidance is very important when drafting or negotiating SHAs.
Disclaimer
This article is not legal advice. For advice and assistance with Saudi law compliant SHAs, please contact our corporate team. Our firm advises local and international investors in structuring, negotiating, and implementing shareholder arrangements across all forms of Saudi companies.
