Conflicts of Interest and Related-Party Transactions under the New Saudi Companies Law: Disclosure, Authorisation and Consequences

In family-owned and closely held companies, related-party dealings are routine: the manager buys from an establishment he owns, the company rents a building from a partner, a board member’s brother is a supplier. The Companies Law issued by Royal Decree M/132 dated 1/12/1443H does not prohibit these dealings. It requires prior disclosure and an authorisation from the partners or the general assembly, and it attaches explicit consequences to skipping either step, up to annulment of the contract and disgorgement of the profit. This guide sets out exactly what is required, who authorises, and how to document the file so that it holds up before the auditor, the assembly and the court.

1. Duties of care and loyalty (Article 26)

Article 26 imposes specific duties on a company manager or board member, among them: acting within delegated authority, working for the company’s interest, deciding and voting independently, exercising reasonable care and skill, avoiding conflicts of interest and disclosing any direct or indirect interest in business and contracts made for the company’s account, and not accepting benefits from third parties in connection with the role. Article 11 of the Implementing Regulations elaborates: powers must be used for the purposes for which they were granted, in good faith, to maximise the company’s value and sustainability, while avoiding situations that impair neutrality when voting.

2. The three prohibitions in Article 27

Article 27 places three restrictions on managers and board members, each lifted only by an authorisation from the partners, the general assembly, the shareholders, or whoever they delegate:

1. Interest in business and contracts: no direct or indirect interest in business or contracts made for the company’s account.
2. Competition: no participation in any business that competes with the company, in any branch of its activity.
3. Exploiting assets, information and opportunities: no use of the company’s assets, information or investment opportunities offered to him in that capacity, or offered to the company, for his own direct or indirect benefit.

Three exceptions apply to the first restriction: contracts awarded through public competition; contracts meeting personal needs on the same terms the company offers the general public within its ordinary activity; and other cases set by the Regulations that do not conflict with the company’s interest.

What happens on breach?

For a breach of the first restriction the company may ask the competent court to annul the contract and order the offender to hand over any profit or benefit obtained. For the competition restriction it may claim appropriate compensation. Joint liability for damage follows under Article 28. The action may be brought within five years from the end of the financial year in which the act occurred or three years from the end of the person’s term, whichever is later, and no time bar applies in cases of forgery or fraud (Article 30). Partners or shareholders holding 5% of the capital may bring the company’s action if the company fails to do so (Article 29).

3. What applies specifically to joint stock companies (Articles 71 and 95)

Article 71 adds a complete procedure for board members of a joint stock company:

• Immediate notification: as soon as the member becomes aware of any direct or indirect interest, he informs the board, and the notification is recorded in the minutes.
• No vote: the member may not vote on the matter at the board or at the general assemblies (confirmed by Article 95).
• A special report from the auditor: the board informs the general assembly of these dealings when it convenes, attaching a special report from the company’s auditor prepared in accordance with the auditing standards adopted in the Kingdom.
• Consequence of non-disclosure: the company or any interested party may ask the court to annul the contract or order the member to hand over any profit or benefit; liability rests with the interested member and with the other board members where they were negligent or the contract proves unfair, and a member who recorded an express objection in the minutes is exempt.

Delegation to the board: clear limits

Article 16 of the Implementing Regulations allows the general assembly to delegate the authorisation power to the board only when all of the following are met: the total value of the contract, or of all such contracts in the financial year, is below 1% of the company’s revenue per the latest financial statements and below SAR 10 million; the contract falls within the ordinary activity; and it carries no preferential terms for the member. The interested member is responsible for tracking the annual total, and the delegation may not exceed one year or the end of the board’s term, whichever comes first.

4. What counts as an “indirect interest”?

Article 17 of the Implementing Regulations lists, by way of example, the categories in which a board member’s interest is deemed indirect:

• The member’s relatives, defined by the Law as parents and grandparents, children and grandchildren, and spouses.
• A general partnership, limited partnership or LLC in which the member or any relative is a partner.
• A joint stock company or simplified joint stock company in which the member or relatives, separately or together, hold 5% or more of the shares.
• A non-corporate establishment owned or managed by the member or a relative.
• A company in which the member or a relative is a manager, board member or senior executive.

5. Limited liability companies

The Article 27 prohibitions apply to an LLC manager exactly as they apply to a JSC board member. Article 62 of the Implementing Regulations extends the JSC authorisation rules to an LLC board of managers unless the articles of association provide different rules, and allows an interested manager to deliberate and vote if the articles say so. In these companies, therefore, the drafting of the articles of association decides whether the partners authorise each contract, delegate to the managers within a ceiling, or leave the matter unregulated, which is the worst option because the default is prohibition.

6. A transaction file that survives the auditor, the assembly and the court

The Law requires disclosure and authorisation but does not describe the file. From our audit and dispute work, this is what is expected to exist:

Element	What it should contain	Basis
Related-party register	An annual declaration by every manager and board member listing relatives, companies, establishments and directorships, updated on any change	Art. 26(f) of the Law; Art. 17 of the Regulations
Prior disclosure	A letter or minute entry proving notification before contracting, with the interested person abstaining from the vote	Art. 71 (JSC); Art. 62 of the Regulations (LLC)
Authorisation	A resolution of the partners or the general assembly, or a board resolution within a delegation that meets Art. 16 of the Regulations	Art. 27
Evidence of fair terms	Comparative quotations or a market study showing terms equal to those the company offers the general public	Art. 27(5)(b); Art. 16(1)(c) of the Regulations
Auditor’s special report	A report on the business and contracts in which a board member has an interest, attached to the notification to the general assembly	Art. 71(1)
Financial statement disclosure	Related-party note: nature of the relationship, transaction amounts, outstanding balances and terms	IAS 24 / Section 33 of the IFRS for SMEs, as endorsed in the Kingdom
Zakat and tax effect	Arm’s-length pricing between related persons, the disclosure form and documentation files above the thresholds	ZATCA Transfer Pricing Bylaws

The auditor’s special report: what it examines

The report does more than list contracts. The auditor typically tests the completeness of the transaction list against the related-party register and the members’ declarations, the existence of disclosure and authorisation before each transaction was executed, the consistency of terms with those granted to third parties, and the accuracy of the amounts and balances disclosed in the financial statements. Where the work uncovers undisclosed dealings, the effect is not confined to the board report: a materially incomplete related-party note affects the audit opinion itself. We prepare this report within our external audit service, and we recommend commissioning it early rather than days before the assembly.

The zakat and tax angle

Dealing with a related party at a non-market price is not only a governance problem. Under the amendments to the Transfer Pricing Bylaws approved by ZATCA’s board in March 2023, the arm’s-length principle and documentation requirements were extended to zakat payers for financial years beginning on or after 1 January 2024, with value thresholds for related-party transactions that determine when the local file and master file become mandatory (SAR 48 million and SAR 100 million, in two phases). Inflated salaries and rents paid to partners’ relatives are also among the most common adjustments in assessments. See our zakat and tax service for this aspect.

7. Recurring mistakes we see

• Retrospective authorisation: presenting a contract to the assembly years after execution. Later ratification does not defeat an annulment and disgorgement claim if disclosure did not precede the contract.
• Verbal disclosure: a notification not recorded in the minutes equals no notification when a dispute arises.
• Open-ended delegation: delegating to the board without a ceiling or a term, contrary to Article 16 of the Regulations.
• Mixing personal and company money: paying partners’ personal expenses from the company account and booking them to partners’ current accounts without a resolution. That is a related-party transaction requiring disclosure, and in a dispute it becomes a characterisation question: loan, distribution in breach of Article 22, or misappropriation. See our guide on settling accounts between partners in a dispute.
• Silent competition: a manager owning an establishment in the same line of business without authorisation, for which Article 27(7) allows compensation.

8. How we help

Within our governance service we build a conflict-of-interest and related-party policy that can actually be operated: the annual declaration form, the related-party register, delegation limits, the approval path at board and assembly level, and the link to the delegation-of-authority matrix. In external audit we prepare the special report required by Article 71. When the matter turns into a dispute, we provide the court-directed accounting report that traces the transactions and quantifies the profit or benefit to be returned.

Sources

• Companies Law, Royal Decree M/132 dated 1/12/1443H, Articles 1, 26–31, 71 and 95 (Bureau of Experts, Council of Ministers)
• Implementing Regulations of the Companies Law dated 25/6/1444H, Articles 11, 16, 17 and 62 (Umm Al-Qura Gazette)
• Corporate Governance Regulations for Unlisted Joint Stock Companies, Articles 43 and 44 (Ministry of Commerce)
• Transfer Pricing Bylaws and disclosure form (Zakat, Tax and Customs Authority)