How Are Related-Party Contracts Managed in Companies?

Related parties in companies include managers, members of the board of directors, and shareholders. The new Companies Law and its Implementing Regulations have had a clear impact on corporate regulation, establishing explicit frameworks and practical models for corporate governance. Among the most important of these is the principle that no company operates without internal regulations and methodologies governing the company’s interests and its dealings with such parties.

This prompts the question: Does every contract entered into by a related party undermine the company’s credibility? If the answer is yes, why did the regulator allow managers and board members to contract with the company once the conditions are met, authorization is granted, and disclosure is made? This article clarifies the mechanism governing related-party contracts in companies.

Table Of Content

Related parties include any board member or manager who has a direct or indirect interest in contracts or transactions carried out for the account of the company.

Direct interest: Where the board member or manager is a party to the contract or transaction with the company.
Indirect interest (by way of example, without limitation):
Relatives of a board member.
A general partnership, limited partnership, or limited liability company in which the board member or any of their relatives is a partner.
A joint-stock company or simplified joint-stock company owned or managed by the board member or any of their relatives.
An establishment (other than a company) owned or managed by the board member or any of their relatives.
A company in which the board member or any of their relatives serves as a manager, board member, or senior executive.

For the purposes hereof, “relatives” means: father and mother (and ascendants), children and their descendants, and the husband or wife.

Transactions with related parties are divided into two categories:

Transactions in which a board member or manager has an interest.
Transactions in which no board member or manager has an interest.

Each category is subject to specific procedures as set out in the Companies Law and its Implementing Regulations. If any disclosure requirement is breached, the regulator permits the company to file a claim against the board members or the manager seeking:

Nullification of the contract, and
Restitution of profits and compensation for losses resulting from such contract.

Article (20) of the Implementing Regulations of the Companies Law further provides that if the General Assembly refuses to grant authorization to a board member regarding related-party contracts, the board member must submit their resignation; otherwise, their membership shall be deemed terminated—unless the member elects to withdraw from the contract, transaction, or competition before the expiry of the period specified by the board of directors.

Given the fundamental role of shareholders in decisions presented to the General Assembly, each shareholder has the right to:

Attend shareholders’ assemblies,
Participate in deliberations,
Vote on resolutions, and
Discuss related-party contracts.

Any shareholder wishing to participate effectively in general assemblies should, by way of example and without limitation:

Prepare adequately by reviewing the board of directors’ report.
Review the agenda items in advance of the meeting and study the proposed items and available information.
Make use of discussion opportunities by raising questions to the extent that does not prejudice the company’s interests.
Be fully aware of their rights by reviewing the general rights of shareholders under the relevant laws and regulations.

This raises another question: Does a related-party contract approved by the General Assembly become immune from challenge?

In response, and pursuant to Article (99) of the Companies Law—and without prejudice to the rights of bona fide third parties—any shareholder may apply to the Commercial Court to seek nullification of a shareholders’ resolution, even if such resolution includes approval of authorization for board members in related-party contracts, provided that the resolution violates the provisions of the Law or the company’s Articles of Association, and that the shareholder objected during the meeting or was absent for an acceptable excuse.

An action for nullification shall not be heard after the lapse of ninety (90) days from the date of issuance of the resolution, provided that the claimant remains a shareholder at the time of filing the claim and throughout all its proceedings.

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Questions & Answers

They are contracts entered into by a board member or manager who has a direct or indirect interest in contracts or transactions conducted for the account of the company.

The manager
Members of the board of directors
Shareholders

By reviewing the Shareholders’ Rights Guide for listed joint-stock companies issued by the Capital Market Authority, and by consulting a lawyer specialized in corporate law and governance.

Conclusion

The regulator has established a clear, highly transparent pathway for related-party contracts, supported by oversight mechanisms and an affirmation of the roles of the board of directors, management, and shareholders’ assemblies in regulating the company and safeguarding its interests, without conflict or abuse of interests