Shareholders’ Agreement and Articles of Association in Saudi Arabia: What Is the Difference and How Can They Protect Shareholders’ Rights?
When establishing a company with more than one shareholder or partner, attention is often focused on incorporation procedures, ownership percentages, capital, and management. However, the long-term relationship between the shareholders requires consideration of other equally important matters, such as how decisions will be made, how new investors may enter the company, how a shareholder may exit, how shares or ownership interests may pass to heirs, and how disputes between shareholders will be handled.
The Saudi Companies Law allows founders, partners, or shareholders to enter into an agreement regulating their relationship with each other or with the company, whether during the incorporation process or after the company has been established. Such an agreement is binding, provided that it does not conflict with the Companies Law or the company’s Articles of Association or Bylaws.
It is therefore important to understand the difference between a company’s constitutional documents and a Shareholders’ Agreement, as well as the role each document plays in governing the company and the relationship between its owners.
What Are the Articles of Association?
The Articles of Association are the principal constitutional document for company forms that are established through Articles of Association, while certain other forms of companies are governed by Bylaws in accordance with the Saudi Companies Law.
The Articles of Association contain the fundamental provisions and information required by law according to the legal form of the company. These may include provisions relating to the company’s capital, ownership interests, management, shareholders’ resolutions, and other matters required by the Companies Law.
The Articles of Association or Bylaws, together with any amendments made to them, must also be registered in accordance with the applicable legal procedures.
Accordingly, the Articles of Association are not merely a private agreement between the shareholders. They form part of the legal foundation upon which the company is established and through which its basic structure is governed.
What Is a Shareholders’ Agreement?
A Shareholders’ Agreement is an agreement entered into by founders, partners, or shareholders to regulate their relationship with one another or with the company in greater detail.
The Saudi Companies Law permits such an agreement to be entered into either during the incorporation of the company or after its establishment. It may also form part of the company’s Articles of Association or Bylaws.
The importance of a Shareholders’ Agreement lies in its ability to address practical matters that may not be sufficiently dealt with by merely specifying ownership percentages and management arrangements.
It can establish clear rules governing situations that may arise throughout the life of the company and provide the shareholders with a framework for dealing with those situations before a disagreement occurs.
What Is the Difference Between a Shareholders’ Agreement and the Articles of Association?
The main difference is that the Articles of Association constitute the company’s principal constitutional document for the relevant company forms and contain the information and provisions required by law.
A Shareholders’ Agreement, on the other hand, is used to regulate the relationship between the shareholders or partners, or their relationship with the company, in greater detail.
The two documents do not necessarily have to remain entirely separate. The Companies Law allows a Shareholders’ Agreement to form part of the Articles of Association or Bylaws.
When establishing a company, shareholders should therefore consider which matters must be included in the company’s constitutional documents, which matters are better addressed in a separate Shareholders’ Agreement, and whether certain provisions of the Shareholders’ Agreement should be incorporated into the company’s Articles of Association or Bylaws.
Is a Shareholders’ Agreement Binding in Saudi Arabia?
Yes. The Saudi Companies Law recognizes a Shareholders’ Agreement as binding, subject to an important limitation: it must not conflict with the Companies Law or the company’s Articles of Association or Bylaws.
For this reason, a Shareholders’ Agreement should not be drafted or reviewed in isolation from the company’s constitutional documents.
Both documents should be reviewed together to reduce the risk of inconsistent provisions.
This is also important whenever the Articles of Association or Bylaws are subsequently amended, as the effect of any amendment on the Shareholders’ Agreement should be considered.
Can a Shareholders’ Agreement Be Signed After the Company Has Been Established?
Yes. A Shareholders’ Agreement is not limited to the incorporation stage. The Saudi Companies Law permits such agreements to be entered into during the incorporation period or after the company has been established.
Accordingly, shareholders of an existing company that does not already have a Shareholders’ Agreement may enter into one at a later stage, subject to the applicable law and the company’s Articles of Association or Bylaws.
However, addressing these matters at an early stage may be more practical, as reaching an agreement before a dispute arises is generally easier than attempting to establish new rules after the shareholders’ interests have diverged.
What Are the Key Provisions of a Shareholders’ Agreement?
The appropriate provisions will vary depending on the company’s business, number of shareholders, ownership percentages, management structure, and commercial objectives. There is therefore no single form of Shareholders’ Agreement that is suitable for every company.
Depending on the circumstances, a Shareholders’ Agreement may address matters such as:
- The management structure of the company and allocation of authority between shareholders and managers.
- Reserved matters requiring specific approvals or voting thresholds.
- The admission of new investors or shareholders.
- The sale and transfer of shares or ownership interests.
- Pre-emption rights or other agreed mechanisms where a shareholder wishes to transfer their interest.
- Exit arrangements and mechanisms for valuing shares or ownership interests where appropriate.
- Procedures for addressing deadlocks in relation to material decisions.
- Conflicts of interest.
- Confidentiality and non-compete obligations within the limits permitted by applicable law.
- The consequences of a shareholder failing to comply with agreed obligations.
- Mechanisms for resolving disputes between shareholders.
- Business continuity and the future transfer of ownership.
The inclusion of any particular provision does not mean that the shareholders are free to agree on it without limitation. Each provision should be drafted in accordance with applicable law, the legal form of the company, and its Articles of Association or Bylaws.
How Can a Shareholders’ Agreement Protect Shareholders’ Rights?
Protecting a shareholder’s rights is not limited to recording their percentage of ownership in the company. An important part of shareholder protection concerns how the rights associated with that ownership can be exercised.
For example, a shareholder may hold a significant ownership interest, but disputes may still arise over which decisions require their approval, the powers of management, the admission of a new investor, the transfer of another shareholder’s interest, or the method used to value an ownership interest upon exit.
A properly structured Shareholders’ Agreement can establish rules for these matters in advance rather than leaving material issues unresolved until a dispute arises.
The purpose of the agreement is not simply to anticipate disputes. It is also to reduce the areas in which disputes may arise and to establish agreed mechanisms for addressing them if they do.
Can a Shareholders’ Agreement Regulate the Entry of Heirs into the Company?
Yes. The Saudi Companies Law allows arrangements concerning how a shareholder’s heirs may enter the company, whether in their individual capacities or through a company established by them for that purpose.
This can be particularly important for businesses whose owners wish to establish a clear framework for the continuity and future transfer of ownership rather than leaving the matter unregulated until succession occurs.
Any provisions relating to heirs should be drafted in accordance with the applicable legal requirements, the legal form of the company, and its constitutional documents.
Should a Shareholders’ Agreement Be Separate or Form Part of the Articles of Association?
The Saudi Companies Law allows a Shareholders’ Agreement to remain a separate agreement or to form part of the company’s Articles of Association or Bylaws.
This choice can have important practical consequences.
Where the agreement forms part of the Articles of Association or Bylaws, the Implementing Regulations of the Companies Law provide that the requirements for amending it are governed by the requirements applicable to amendments of the Articles of Association or Bylaws, depending on the legal form of the company.
Accordingly, before incorporating provisions of a Shareholders’ Agreement into the company’s constitutional documents, shareholders should consider how this may affect their ability to amend those provisions in the future.
The decision should therefore not be treated as merely a matter of form.
What Happens If a Shareholders’ Agreement Conflicts with the Articles of Association?
A Shareholders’ Agreement must not conflict with the Saudi Companies Law or the company’s Articles of Association or Bylaws.
Accordingly, having a Shareholders’ Agreement does not permit shareholders to disregard provisions contained in the company’s constitutional documents.
One issue that should be avoided is preparing a Shareholders’ Agreement and subsequently amending the Articles of Association without considering how the amendment affects the agreement. Similarly, inconsistent provisions between the two documents may create legal and practical difficulties.
It is therefore preferable to treat the Articles of Association and Shareholders’ Agreement as interconnected parts of the overall framework governing the company and the relationship between its owners.
Are the Articles of Association Alone Sufficient to Regulate the Relationship Between Shareholders?
This depends on the nature of the company, the number of shareholders, its management structure, and the complexity of the relationship between its owners.
For some companies with relatively straightforward ownership and management arrangements, the Articles of Association may provide sufficient regulation.
Companies involving several shareholders or investors, complex decision-making arrangements, specific exit mechanisms, or detailed ownership-transfer requirements may benefit from a more comprehensive framework governing the relationship between shareholders.
A Shareholders’ Agreement should therefore not be prepared simply because a company has more than one shareholder. The relevant risks and matters requiring regulation should first be identified, and the agreement should then be structured according to the circumstances of the company and its owners.
Shareholders’ Agreements and Family Businesses in Saudi Arabia
The Saudi Companies Law also provides family businesses with an additional governance tool: the Family Charter.
A Family Charter may address matters such as family ownership of the company, governance and management, employment policies for family members, distribution of profits, transfers of shares or ownership interests, and mechanisms for resolving disputes or disagreements.
Where a Family Charter forms part of the company’s Articles of Association or Bylaws, amendments to it are subject to the requirements applicable to amendments of those constitutional documents according to the legal form of the company.
A Family Charter can therefore help a family business address not only its current ownership structure, but also its long-term governance, succession, continuity, and the relationship between family members and the business.
When Should a Shareholders’ Agreement Be Considered?
The need for a Shareholders’ Agreement becomes particularly relevant when a business is being established by several investors, when a new investor is entering an existing company, where there is a significant difference in ownership percentages, where some shareholders are actively involved in management while others are not, or where the shareholders need to establish clear exit and ownership-transfer mechanisms.
It can also be particularly useful where the shareholders expect a long-term relationship or where there are material matters on which they wish to agree from the outset rather than leaving them unresolved until a disagreement occurs.
In practice, many of these matters are easier to address before the shareholders’ interests begin to diverge.
Conclusion
Protecting shareholders’ rights is not limited to determining their ownership percentages in the Articles of Association. It also involves regulating how those rights are exercised and how the relationship between shareholders will operate throughout the life of the company.
The Articles of Association govern the company’s fundamental legal structure, while a Shareholders’ Agreement allows the relationship between shareholders, and between the shareholders and the company, to be regulated in greater detail according to their particular needs.
Preparing an effective Shareholders’ Agreement therefore requires an understanding of the nature of the business, ownership structure, management arrangements, material decisions, exit mechanisms, and potential risks. Based on these factors, the shareholders can determine which matters should be addressed in the company’s constitutional documents and which are better regulated through a separate Shareholders’ Agreement.
Do You Need a Shareholders’ Agreement Prepared or Reviewed?
Abdullah Mohammed Al-Shethri Law Firm & Legal Consultations provides legal services for the preparation and review of Shareholders’ Agreements, Articles of Association, and Family Charters.
Our services include structuring provisions relating to management, decision-making, shareholder exits, transfers of ownership, and dispute-resolution mechanisms according to the company’s legal form, ownership structure, and business requirements.
A legal consultation can be booked to assess the relationship between shareholders and determine the appropriate contractual structure, whether for a newly established company or for restructuring the relationship between shareholders of an existing company.