Investment Contract Drafting
Investment contracts are legal documents that regulate the relationship between a foreign investor (or group of investors) and the host country, whereby the investor injects capital or resources into a specific project in exchange for a share of the profits, partial ownership, or other commercial terms. In this article, Al-Salama Law Firm provides a comprehensive overview of how investment contracts are properly drafted.
Legal Tips for Drafting an Investment Contract
At Al-Salama Law Firm, we offer you a detailed set of legal recommendations for drafting investment contracts, based on the latest legal practices in Saudi Arabia and international standards, including the following:
Precise Identification of the Parties
The contract should begin by clearly identifying all involved parties (the investor, the investee company, and any relevant third parties such as advisors or partners). Full legal details must be included to avoid any future ambiguity or disputes.
Defining the Purpose of the Investment
The purpose of the investment must be clearly outlined—whether it is to fund expansion, research and development, or operational costs. A well-defined purpose facilitates tracking of fund usage and reduces potential conflicts.
Clarifying Key Terms and Conditions
This includes the investment amount, payment schedule, type of investment (equity, loan, bonds, etc.), ownership percentage or equity stake granted to the investor, company valuation at the time of investment, repayment terms, and interest if the investment is structured as a loan.
Defining Investor Rights
The contract should explicitly outline investor rights, including voting rights, access to financial reports, board seat or attendance rights, and exit rights (such as sale, transfer, or IPO options).
Including Protection and Control Clauses
Such clauses may include:
- Anti-dilution provisions, to ensure the investor’s ownership is not diluted upon future investment rounds.
- Liquidation preference, to define the order of payout in the event of company liquidation.
- Confidentiality, non-compete, and intellectual property protection clauses.
Legal Compliance Measures
Ensure that the contract complies with local laws (such as the Capital Market Law, Companies Law, or Securities Law), and that all disclosure and transparency requirements are met.
Drafting the Investment Contract
Accurate drafting of the investment contract is critical to safeguard the rights of all parties and prevent future disputes. Key elements to be included are:
Parties’ Identification Information
Full name, nationality, ID or commercial registration number, legal status (individual or legal entity), and the elected address for legal correspondence.
Contract Subject Matter
A clear description of the investment type (company, real estate, industrial project, etc.), purpose of the contract, investment scope, and geographical scope (domestic or international).
Capital and Payment Mechanism
The contract should specify the exact investment amount, currency, payment method (lump sum or installments), and whether the funding is in-kind or in cash.
Ownership Percentage and Return
The contract should clearly state each party’s share in the project, profit and loss distribution mechanism, whether returns are annual or periodic, and whether guaranteed returns apply in certain years.
Voting Rights and Management
The contract must specify whether the investor has management rights or is merely a shareholder, how major decisions are made, the existence of a joint board of directors, and who holds veto power.
Duration and Renewal
The contract must state the investment duration, withdrawal or sale options, and conditions for unilateral termination.
Intellectual Property Protection
It must clarify who owns the intellectual property (ideas, trademarks), and whether any party has the right to use them after the agreement ends.
Warranties and Representations
The contract should include representations by the investee party to not misuse the funds, and warranties for minimum transparency—such as the investor’s right to review financial accounts.
Dispute Resolution and Jurisdiction
The contract should state whether disputes are resolved through arbitration or courts, identify the jurisdiction (e.g., London or Riyadh), and name the arbitration center (e.g., Saudi Center for Commercial Arbitration (SCCA) or the London Court of International Arbitration (LCIA)).
Confidentiality and Non-Compete Clauses
The contract must require both parties to maintain confidentiality, especially in technology transfer agreements, and prohibit the investor from engaging in competing projects for a specified period.
Drafting a successful investment contract requires a delicate balance between protecting legal rights and ensuring flexibility. Every word in the contract could later be scrutinized in court or arbitration, leaving no room for error or haste. At Al-Salama Law Firm, we offer full legal services related to investment contracts, working closely with general management and foreign investors. Our firm has extensive expertise in drafting and advising on investment agreements with a focus on sustainability and long-term success. Do not hesitate to contact us
Read More : Investment Contracts under the Saudi Legal Framework
