The Family Charter under the Saudi Companies Law: A Practical Guide

For the first time, a Saudi statute names the “family charter”. Article 11 of the Companies Law issued by Royal Decree M/132 dated 1/12/1443H allows partners or shareholders to conclude a family charter regulating family ownership of the company, its governance and management, the policy on employing family members, profit distribution, disposal of shares, and the mechanism for settling disputes, and declares that the charter is binding and may form part of the articles of association or bylaws. Before this provision, family charters were moral documents honoured for as long as the founding generation was alive. After it, they are legal instruments with teeth, provided they are drafted so as not to conflict with the Law or the articles, and provided they are tied to the provisions of the Law that give them enforceability. This guide explains what a charter can contain, where each clause should be anchored, and the financial clauses most charters leave out.

1. What exactly did Article 11 change?

Recognition of shareholder agreements: paragraph (a) allows one or more agreements regulating the relationship among partners or with the company, including how their heirs enter the company, personally or through a company established for that purpose.
Recognition of the family charter: paragraph (b) allows a charter covering ownership, governance, management, business policy, employment of family members, profit distribution, disposal of shares, dispute settlement “and other matters”.
Binding effect: the agreement or charter is binding and may form part of the articles of association or bylaws, provided it does not conflict with the Law or with those documents.

The Ministry of Commerce’s Corporate Governance Regulations for Unlisted Joint Stock Companies add, in Article 2, that a company owned or controlled by a family should prepare a family charter to secure an orderly transition between generations and a fair balance between the interests of family members and the company, the Regulations themselves being guidance rather than mandatory.

2. The charter alone is not enough: where does each clause belong?

The most common mistake is to write an ambitious charter and leave the articles of association untouched. The Law makes the charter binding, but many of its clauses are not effective against third parties or the Commercial Register unless they are reflected in the articles of association or bylaws. The table shows the best place for each clause and its basis in the Law:

Clause	Best place	Basis in the Companies Law
Restricting transfers to outsiders and the right of redemption	Articles of association (LLC)	Art. 178: partners are notified through the manager, any partner may claim redemption within 30 days, a disagreement on value goes to an accredited valuer, and redemption does not apply to transfers by inheritance, will or court order
A lock-up on shares or a company-consent requirement	Bylaws (simplified JSC)	Art. 151: a transfer ban of up to 10 years, extendable by unanimous consent, or a consent requirement; any transfer in breach is void
Compelling a shareholder to transfer (exit) and pricing	Bylaws (simplified JSC)	Art. 152: price at fair value unless the bylaws provide otherwise, with the option of suspending non-financial rights
Drag-along and tag-along on a majority sale	Articles of association (LLC), with approval of 90% of the capital	Art. 181: the majority may compel the minority to accept a bona fide buyer’s offer, and the minority may compel the majority to procure the sale of its shares on the same price and terms
Entry of heirs through a family holding company	Shareholder agreement plus ownership structure	Art. 11(a); Chapter Nine on holding and subsidiary companies
Quorum for amending the articles	Articles of association	Art. 172: at least three quarters of the capital unless a higher percentage is stipulated; unanimity to raise the nominal value or suspend pre-emption rights
Non-managing partners’ right of inspection	Articles of association (cannot be reduced)	Art. 171: inspection and examination of records twice a year, response within 15 days, and any contrary provision is void
Dispute settlement by arbitration or alternative means	Articles of association	Art. 173: except for criminal acts, disputes among partners or between the company and its managers may be referred to arbitration or other alternative means
Limits on the manager’s authority	Articles of association plus registration	Art. 162: no resolution appointing a manager or restricting his powers is effective against third parties until registered with the Commercial Register
Dividend and reserve policy	Articles of association plus an approved policy	Art. 22: distributions only from distributable profits, annually or interim; Art. 177: a percentage of net profit may be set aside for a reserve with defined purposes

3. The financial clauses missing from most charters

Charters usually deal with the family council, values and employment, and leave out the clauses that actually ignite disputes. From our work on settling accounts between partners, these are the clauses the charter must decide and the articles must reflect:

How a share is valued on exit, death or expulsion: the Law refers to fair value determined by an accredited valuer in case of disagreement, but the charter can fix the method in advance (earnings multiple, adjusted net assets, discounted cash flow), the treatment of non-operating assets, minority discounts and the payment schedule, sparing heirs years of litigation.
Dividend policy: a minimum payout or a retention rule, linked to liquidity and financing covenants, and a bar on distributions outside Article 22, which obliges a partner to return what he received even in good faith.
Partners’ current accounts: limits on personal drawings, the settlement date, and their characterisation: a loan at a market rate or a provisional distribution? The absence of this clause is the leading reason a family disagreement turns into a misappropriation claim.
Employment and pay of family members: conditions of appointment and pay benchmarked to the market rather than to kinship, which also matters for zakat because inflated salaries to relatives are among the most frequent assessment adjustments.
Family dealings with the company: an explicit cross-reference to the conflict-of-interest policy and the disclosure and authorisation procedure detailed in our guide on conflicts of interest and related-party transactions.
Independent oversight: appointing an auditor even where the company is exempt under Article 19, and forming an audit committee of non-executives where some partners do not work in the business, as explained in our guide on audit committees and internal audit in unlisted companies.

4. Ownership structure: a family holding company or direct shareholdings?

Article 11(a) expressly allows heirs to enter through a company established for that purpose. In practice, the family’s shares are pooled in a holding company (often a simplified joint stock company, given the share classes and transfer restrictions available under Articles 108 and 151) that owns the operating companies, so operating ownership stays stable however many heirs there are, and family matters are handled at holding level only. The structure has accounting and zakat consequences that must be assessed before implementation: consolidation of financial statements, the treatment of investments in subsidiaries in the zakat base, and pricing of intra-group transactions. We provide that assessment within our financial consulting service.

5. Steps to a charter that gets implemented

Diagnosis before drafting: who actually approves what, where decisions are taken, what is documented and what passes verbally, and the size of partners’ current accounts and family dealings with the company.
Agreement on principles: separation of ownership from management, rules for the next generation’s entry, limits on employing relatives, and the payout ratio.
Translating principles into clauses: drafted to be operated rather than displayed, with dates, voting thresholds and an owner for each clause.
Alignment with the articles of association: amending the articles or bylaws by the required majority (three quarters of the capital in an LLC) to anchor what needs anchoring, and registering the amendment with the Commercial Register so that it is effective against third parties (Art. 8).
Linking the charter to control tools: an independent auditor, an audit committee where warranted, a delegation-of-authority matrix and a conflict-of-interest policy.
Periodic review: every three years or on a material event (a death, a new generation, an incoming investor).

6. How we help

We work alongside the family’s legal counsel on the financial and accounting side of the charter: the share valuation method, the dividend and reserve policy, the treatment of partners’ current accounts, the related-party policy, and the effect of the ownership structure on the financial statements and zakat. Within our governance service we build the governance framework that makes the charter operable, and where needed we perform the statutory audit that gives every branch of the family financial statements they can trust.

Is a family charter legally binding in Saudi Arabia?

Yes. Article 11 of the Companies Law (M/132) provides that a shareholder agreement or family charter is binding and may form part of the articles of association or bylaws, provided it does not conflict with the Law or with those documents.

What can a family charter contain?

Under Article 11(b): the regulation of family ownership in the company, its governance and management, business policy, the policy on employing family members, profit distribution, disposal of shares, the mechanism for settling disputes, and other matters.

Is signing the charter enough, or must the articles of association be amended?

The charter binds its parties, but clauses intended to be effective against third parties and the Commercial Register, such as transfer restrictions, limits on the manager’s authority and an arbitration clause, should be anchored in the articles of association or bylaws and registered with the Commercial Register.

How is the share of a deceased or departing partner valued?

Unless the value is agreed or the articles specify a valuation method, an accredited valuer determines fair value in a report. We therefore recommend that the charter and the articles fix the valuation method and the payment schedule in advance.

Can sales of shares to non-family members be prevented?

In an LLC the Law gives partners a right to redeem a share offered to an outsider within 30 days (Art. 178). In a simplified joint stock company the bylaws may impose a transfer ban of up to ten years or require the company’s consent (Art. 151).

Does the Ministry of Commerce require a family charter?

It does not mandate one, but the Corporate Governance Regulations for Unlisted Joint Stock Companies (Art. 2) state that a family-owned or family-controlled company should prepare a family charter to secure an orderly generational transition; the Regulations are guidance.