Formality under the Saudi Companies Law… How Can You Lose Your Shareholding Rights Despite a Signed Contract?

The case centers on a dispute over entitlement to 33% of the shares in a joint stock company. The claimant alleged that in 2019 he purchased a 33% stake from the foreign partner for SAR 75 million, pursuant to a signed contract and bank documentary credits. However, the transfer of ownership was not completed due to an objection raised by another partner.

At the end of 2022, the claimant was surprised to learn that the same foreign partner had sold his entire stake (35%) to other partners at a very low price (approximately USD 1.123 per share). This transaction was approved by the company’s General Assembly in February 2023.

Accordingly, the claimant sought to invalidate the later sale (2022) and to confirm the validity of the earlier sale (2019) in his favor.

Claimant’s Arguments:

He relied on the existence of offer and acceptance, a contract with a specified price, and a five-year documentary letter of credit issued by the Arab National Bank to finance the transaction.
He relied on official letters issued by the selling partner (the defendant) addressed to the bank and to the partners, notifying them of the agreement to sell the shares to the claimant.
He alleged collusion by the defendants to dispose of the shares at a nominal price in order to deprive him of his acquired right since 2019.
He submitted a written witness statement confirming the existence of prior negotiations and agreements relating to the sale.

Defendants’ Arguments:

The selling partner denied the existence of a final sale contract meeting all legal requirements, characterizing what occurred in 2019 as mere “understandings” or an incomplete “offer to purchase.”
They argued that the claimant continued to attend general assemblies from 2019 to 2022 as the owner of only 20% of the shares, without objection, which constitutes an implied acknowledgment that he did not own the additional stake.
They asserted that the later sale was conducted in accordance with the procedures stipulated in the company’s articles of association and was approved by the General Assembly.
They argued that the witness statement did not prove a sale but merely a memorandum of understanding, and that it was inadmissible under the law since the value of the dispute exceeds SAR 100,000, pursuant to the Law of Evidence.

Judgment:

The court dismissed the claim, thereby confirming the validity of the share sale carried out in 2022 in favor of the other partners, and declining to recognize the alleged sale claimed by the claimant in 2019.

Grounds:

The court affirmed that the Companies Law and the company’s articles of association expressly provide that the transfer of ownership of shares shall not be effective vis-à-vis the company or third parties except from the date of registration in the shareholders’ register. As the 2019 sale was not registered, it is legally non-existent in relation to the company.
In closed joint stock companies, there is a prescribed statutory procedure for the sale of shares (Article 12 of the company’s articles), which includes:
- Notifying the Board of Directors first; and
- Offering the shares to the remaining shareholders to exercise their pre-emptive rights.
The court found that the 2019 sale was conducted “off-record” and did not follow these official channels, whereas the 2023 sale satisfied the requirements of notification, offering, and approval by the General Assembly with a voting majority of 87.5%.
The court noted a contradiction in the claimant’s conduct: in 2022, when the company re-offered the shares for sale, the claimant submitted a new purchase offer through his office. The court considered this new offer as an implied admission that the alleged 2019 sale was neither final nor complete; otherwise, he would not have sought to purchase the same shares again.
Since the General Assembly convened with a valid quorum and approved the latest sale by the required majority, its resolutions acquire binding legal force unless fraud or violation of public order is proven—neither of which was established.

Legal Takeaway:

The core principle affirmed by the court is the primacy of statutory formality over contractual reality.

Under company law regimes, a share sale is not regarded as a mere factual transaction completed by payment of the price or execution of a document; rather, it is a procedural process. The court held that:

Even if the selling partner signs in favor of the buyer, the sale remains conditional upon the other shareholders not exercising their pre-emptive rights.
Based on the principles of publicity and enforceability, as long as the 2019 sale was not registered in the company’s records, it has no legal existence vis-à-vis the company.
The claimant’s request to purchase the shares again in 2022 undermined his alleged intention to own the shares since 2019, as the law presumes that an owner does not seek to purchase what he already owns.

Advice from Al-Salamah Law Firm & Legal Consultants:

Al-Salamah provides five key recommendations when entering into share or equity acquisition transactions in closed companies:

Do not consider yourself a shareholder merely upon signing a contract or transferring the price. Your agreement should expressly stipulate that final payments (or a substantial portion of the price) are conditional upon the issuance of an updated shareholders’ register or amendment of the commercial registration. Delay in registration—as occurred from 2019 to 2022 in this case—is a form of legal suicide.
Before paying a single riyal, require the selling partner to provide written approval from the Board of Directors or minutes of a General Assembly evidencing the waiver of pre-emptive rights by the other shareholders. Absent this step, any partner may later invalidate your transaction through litigation.
If a dispute arises over share ownership, never act before the company solely as a shareholder holding the old percentage. In this case, the claimant continued to attend assemblies and vote with only 20%, which created a judicial impression of acceptance of the existing status quo. A formal reservation must be recorded in every meeting minute regarding the non-registration of the purchased shares.
In major transactions (such as the SAR 75 million deal in this case), the purchase price should be placed in an escrow account and released to the seller only after full statutory effectiveness (registration in the shareholders’ register). This protects the buyer against seller delay or resistance by other shareholders.
Although the claimant relied on a bank letter of credit, the court did not consider it sufficient to transfer ownership. The recommendation is to draft the purpose of the letter of credit as payment for a finalized sale approved by the General Assembly, rather than merely financing a future or conditional acquisition.