The Companies Law issued by Royal Decree No. M/132 dated 1/12/1443H has redrawn the map of disputes inside Saudi companies and between them and their creditors and shareholders. Alongside the governance rules, the law creates specific action mechanisms with deadlines and thresholds: liability actions against managers and board members, a creditor objection right against mergers, an exit right for objectors to conversions, mandatory sale and purchase rights at the ninety percent threshold, and jurisdictional rules that distribute the dispute between the competent court and the Committee for the Resolution of Securities Disputes. This article explains, from our office in Kuwait and in cooperation with our partners in Saudi Arabia, how these disputes move in practice, and where arbitration and the Commercial Courts Law issued in 1441H fit in the picture.
The liability action against managers and board members
Article 29 gives the company the right to bring a liability action against the manager or board members for breach of the law or of the company's memorandum or articles of association, or for errors, negligence or shortcomings in performing their work that cause the company damage. The partners, the general assembly or the shareholders decide to bring the action and appoint the company's representative in it; if the company is in liquidation, the liquidator brings it, and if any liquidation procedure under the Bankruptcy Law is opened, it is brought by whoever represents the company by law.
The practically important mechanism is the derivative action: one or more partners or shareholders representing five percent of the company's capital, unless the memorandum or articles set a lower percentage, may bring the company's liability action if the company itself does not, subject to three conditions: that the principal aim is the company's interests, that the action rests on a valid basis, and that the claimant is in good faith and was a partner or shareholder when the action was brought, with the manager or board members notified of the intention to sue at least fourteen days before filing. A partner or shareholder additionally has his own personal action where the wrong caused him special damage. And the partners' or the assembly's approval of discharging the manager or board members from liability does not prevent these actions being brought (Article 30).
Objection rights in merger and conversion transactions
The creditors of a merged company have a complete objection track: it opens with a registered letter within fifteen days of the merger announcement, obliges the company to pay the due debt or provide sufficient security for a deferred one, and, if the company falls short, the creditor applies to the competent judicial authority at least ten days before the date set for the merger decision. The court may order payment or security, suspend or postpone the merger, and award compensation after effectiveness if the claim proves well founded (Article 227).
A partner or shareholder who objects to converting the company into another form has an exit right by written request within fifteen days of the decision, with the value of his quotas or shares paid according to the agreed value or a report by an accredited valuer stating the fair value at the conversion date, and recourse to the competent judicial authority in case of dispute (Article 222). At the ninety percent threshold in joint stock companies, the law preserves the minority's right to request an offer for their shares within ninety days of disclosure, gives the controlling owner the right to seek approval of a mandatory offer within sixty days, and gives any shareholder the right to object to the purchase price before the judicial authority within sixty days (Article 230).
Dissolution and liquidation: liability for a hasty decision
Before the partners, the general assembly or the shareholders take a decision to dissolve the company, its managers or board members must prepare a statement recording that they have examined the company's affairs and confirming that its assets suffice to pay its debts by the end of the proposed liquidation period and that it is not distressed under the Bankruptcy Law, and the statement is presented within thirty days of its preparation for the decision to be taken (Article 242). If the statement shows the assets are insufficient or the company is distressed, the dissolution decision may not be taken; otherwise those who took it are jointly liable for any debt remaining in the company's charge. This statement is the direct point of intersection between the Companies Law and the Bankruptcy Law, and reviewing it is among the first things we examine in any liquidation dispute.
The Bankruptcy Law interface: distress changes the rules
The Companies Law intersects with the Bankruptcy Law at more than one point sensitive for disputes. The statement of ability to pay debts required before a dissolution decision (Article 242) presupposes that the company is not distressed within the meaning of the Bankruptcy Law, and if any liquidation procedure under the Bankruptcy Law is opened, the right to bring the liability action passes to whoever represents the company by law (Article 29). This means the parties to a dispute must ask early: is the debtor distressed in the sense of the Bankruptcy Law? The answer determines who brings the action, what statements must be prepared, and what risks attach to decisions taken before the distress. Ignoring this interface is among the costliest mistakes we see in liquidation disputes.
Building the evidence file before suing
Disputes arising from the Companies Law are documentary by nature: the memorandum and articles of association, assembly minutes, the deposited financial statements, registered objection letters and notification notices are the backbone of proof. In the derivative liability action, the notification letter sent fourteen days in advance is a formal condition the opponent and the court will both ask about. In the creditor objection, the registered letter inside the fifteen days is the entry ticket to a suspension application. In the price objection, the sixty days from the making of the offer define a short window that cannot be reopened once closed. We therefore begin every file with an inventory of documents and deadlines before drafting the first pleading.
Settling amicably without losing the deadlines
Pursuing settlement does not conflict with protecting statutory positions: negotiation can continue while objection and notification letters are sent within their deadlines to preserve rights, then withdrawn if the settlement matures. Deferring the formal steps pending the outcome of negotiation is the gamble that closes the fifteen-day and sixty-day windows for good. The rule we apply: preserve the right with its document and its deadline, and negotiate from the strength that a preserved right provides.
The competent forums: the commercial court, the securities committee and the violations committee
The competent court hears and decides all civil and criminal claims and disputes arising from applying the Companies Law and its regulations and imposes the prescribed sanctions, except for joint stock companies listed on the capital market, where the Committee for the Resolution of Securities Disputes hears appeals from the Authority's decisions and all related claims and disputes (Article 266). Alongside this sits the procedural framework of the Commercial Courts Law issued in 1441H, which governs the course of the action before the commercial courts from limitation and case management to enforcement. Add the Public Prosecution's investigation and prosecution of the grave and less grave offences (Article 265), and a committee in the Ministry to consider violations (Article 267), and choosing the correct procedural front from day one becomes a decision that shapes the outcome of the dispute.
Arbitration as an alternative to litigation
Arbitration remains an available option for partners, shareholders and creditors, and many memoranda, articles and shareholders' agreements contain an arbitration clause referring disputes to a Saudi or international centre. The clause's value is that it fixes in advance the applicable law, the language of the proceedings and the seat, and it mitigates the jurisdictional fragmentation produced by the distribution of disputes between the court and the committees. Our standing advice to clients: review the arbitration clause at incorporation and at every amendment, because it is far cheaper than renegotiating it after a dispute arises, and note that some statutory rights, such as the judicial objection to the mandatory offer price, remain with the judicial authority whatever the clause says.
How we run a commercial dispute for our clients
From our office in Kuwait and in cooperation with our partners in Saudi Arabia, we open every dispute file with a map of deadlines: are we inside the fifteen days for the creditor objection or the exit request? Has the fourteen-day notification before the liability action been completed? Is the sixty-day window for the price objection still open? Then we fix the correct front: commercial court, Committee for the Resolution of Securities Disputes, the Ministry's violations committee, or arbitration. If your company faces a dispute arising from the new Companies Law, whether you are minority shareholders, creditors, or board members facing a liability action, the team at Hind Bin Al Sheikh & Partners can help you assess the position and choose the right procedural track before the statutory windows close on your rights.
See also: dispute resolution in Saudi Arabia, our M&A advisory services in Saudi Arabia and our corporate and commercial law services in Saudi Arabia.
Frequently asked questions
How can a minority shareholder bring a liability action against the board?
If a partner or shareholder, or several together, hold five percent of the capital, unless the memorandum or articles set a lower percentage, and the company has not brought its own action, they may bring it provided the manager or board members are notified of the intention to sue at least fourteen days in advance, and the action serves the company's interest, rests on a valid basis and is brought in good faith.
Can a creditor stop a merger?
Yes. The creditor objects to the merger by registered letter within fifteen days of its announcement; if the company does not pay the due debt or provide sufficient security for the deferred debt, he may apply to the competent judicial authority at least ten days before the merger decision date, and it may order payment, security, suspension or postponement.
What is the right of a shareholder who objects to a conversion?
He may exit the company by written request within fifteen days of the conversion decision, with the value of his quotas or shares paid at the agreed value or under an accredited valuer's report of fair value, and he may resort to the competent judicial authority in case of dispute.
Who hears the disputes of joint stock companies listed on the capital market?
The Committee for the Resolution of Securities Disputes, under the jurisdiction prescribed in the Companies Law, hears appeals from the Authority's decisions and all claims and disputes relating to those companies.
Must the commercial courts be used before arbitration?
No. Arbitration is an agreed elective route that remains available to whoever stipulated it in the contract, the memorandum or the articles, while purely statutory rights, such as the judicial objection to the mandatory offer price or the proof of financial statements, remain subject to the jurisdiction of the judicial authorities fixed in the law.
What are the consequences of a hasty dissolution decision?
The managers or board members must prepare a statement confirming that the assets suffice to pay debts by the end of the proposed liquidation period and that the company is not distressed under the Bankruptcy Law, presented within thirty days for the decision; if the decision is taken without that, those who took it are jointly liable for any debt remaining in the company's charge.
Does the general assembly's discharge of the manager extinguish the liability action?
No. Approval by the partners, the general assembly or the shareholders of discharging the manager or board members from liability does not prevent liability actions being brought, whether by the company or by partners or shareholders.
What changes in the action if bankruptcy procedures are opened against the company?
The right to bring the liability action passes to whoever represents the company by law when any liquidation procedure under the Bankruptcy Law is opened, the liquidator brings it if the company is in liquidation, and the statement of ability to pay debts becomes a focus of accountability for earlier decisions.