{"id":146087,"date":"2026-01-20T23:09:40","date_gmt":"2026-01-20T20:09:40","guid":{"rendered":"https:\/\/salamahlaw.com\/?p=146087"},"modified":"2026-02-07T17:31:59","modified_gmt":"2026-02-07T14:31:59","slug":"formality-under-the-saudi-companies-law-how-can-you-lose-your-shareholding-rights-despite-a-signed-contract","status":"publish","type":"post","link":"https:\/\/salamahlaw.com\/en\/formality-under-the-saudi-companies-law-how-can-you-lose-your-shareholding-rights-despite-a-signed-contract\/","title":{"rendered":"Formality under the Saudi Companies Law\u2026 How Can You Lose Your Shareholding Rights Despite a Signed Contract?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The case centers on a dispute over entitlement to <\/span><b>33% of the shares<\/b><span style=\"font-weight: 400;\"> in a joint stock company. The claimant alleged that in <\/span><b>2019<\/b><span style=\"font-weight: 400;\"> he purchased a <\/span><b>33% stake<\/b><span style=\"font-weight: 400;\"> from the foreign partner for <\/span><b>SAR 75 million<\/b><span style=\"font-weight: 400;\">, 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the end of <\/span><b>2022<\/b><span style=\"font-weight: 400;\">, the claimant was surprised to learn that the same foreign partner had sold <\/span><b>his entire stake (35%)<\/b><span style=\"font-weight: 400;\"> to other partners at a very low price (approximately <\/span><b>USD 1.123 per share<\/b><span style=\"font-weight: 400;\">). This transaction was approved by the company\u2019s <\/span><b>General Assembly in February 2023<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Accordingly, the claimant sought to <\/span><b>invalidate the later sale (2022)<\/b><span style=\"font-weight: 400;\"> and to <\/span><b>confirm the validity of the earlier sale (2019)<\/b><span style=\"font-weight: 400;\"> in his favor.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Claimant\u2019s Arguments:<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">He relied on the existence of offer and acceptance, a contract with a specified price, and a <\/span><b>five-year documentary letter of credit<\/b><span style=\"font-weight: 400;\"> issued by the Arab National Bank to finance the transaction.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">He submitted a written witness statement confirming the existence of prior negotiations and agreements relating to the sale.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Defendants\u2019 Arguments:<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The selling partner denied the existence of a <\/span><b>final sale contract<\/b><span style=\"font-weight: 400;\"> meeting all legal requirements, characterizing what occurred in 2019 as mere \u201cunderstandings\u201d or an incomplete \u201coffer to purchase.\u201d<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They argued that the claimant continued to attend general assemblies from 2019 to 2022 as the owner of <\/span><b>only 20%<\/b><span style=\"font-weight: 400;\"> of the shares, without objection, which constitutes an implied acknowledgment that he did not own the additional stake.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They asserted that the later sale was conducted in accordance with the procedures stipulated in the company\u2019s articles of association and was approved by the General Assembly.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">They argued that the witness statement did not prove a sale but merely a <\/span><b>memorandum of understanding<\/b><span style=\"font-weight: 400;\">, and that it was inadmissible under the law since the value of the dispute exceeds <\/span><b>SAR 100,000<\/b><span style=\"font-weight: 400;\">, pursuant to the Law of Evidence.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Judgment:<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The court <\/span><b>dismissed the claim<\/b><span style=\"font-weight: 400;\">, thereby confirming the validity of the share sale carried out in <\/span><b>2022<\/b><span style=\"font-weight: 400;\"> in favor of the other partners, and declining to recognize the alleged sale claimed by the claimant in <\/span><b>2019<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Grounds:<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The court affirmed that the <\/span><b>Companies Law<\/b><span style=\"font-weight: 400;\"> and the company\u2019s <\/span><b>articles of association<\/b><span style=\"font-weight: 400;\"> expressly provide that the transfer of ownership of shares shall not be effective vis-\u00e0-vis the company or third parties <\/span><b>except from the date of registration in the shareholders\u2019 register<\/b><span style=\"font-weight: 400;\">. As the 2019 sale was not registered, it is legally non-existent in relation to the company.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In <\/span><b>closed joint stock companies<\/b><span style=\"font-weight: 400;\">, there is a prescribed statutory procedure for the sale of shares (Article 12 of the company\u2019s articles), which includes:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Notifying the Board of Directors first; and<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Offering the shares to the remaining shareholders to exercise their <\/span><b>pre-emptive rights<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The court found that the 2019 sale was conducted \u201coff-record\u201d and did not follow these official channels, whereas the <\/span><b>2023 sale<\/b><span style=\"font-weight: 400;\"> satisfied the requirements of notification, offering, and approval by the General Assembly with a voting majority of <\/span><b>87.5%<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The court noted a contradiction in the claimant\u2019s conduct: in <\/span><b>2022<\/b><span style=\"font-weight: 400;\">, 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 <\/span><b>implied admission<\/b><span style=\"font-weight: 400;\"> that the alleged 2019 sale was neither final nor complete; otherwise, he would not have sought to purchase the same shares again.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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\u2014neither of which was established.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Legal Takeaway:<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The core principle affirmed by the court is the <\/span><b>primacy of statutory formality over contractual reality<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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 <\/span><b>procedural process<\/b><span style=\"font-weight: 400;\">. The court held that:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Even if the selling partner signs in favor of the buyer, the sale remains <\/span><b>conditional<\/b><span style=\"font-weight: 400;\"> upon the other shareholders not exercising their pre-emptive rights.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Based on the principles of <\/span><b>publicity and enforceability<\/b><span style=\"font-weight: 400;\">, as long as the 2019 sale was not registered in the company\u2019s records, it has no legal existence vis-\u00e0-vis the company.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The claimant\u2019s request to purchase the shares again in 2022 undermined his alleged <\/span><b>intention to own<\/b><span style=\"font-weight: 400;\"> the shares since 2019, as the law presumes that an owner does not seek to purchase what he already owns.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Advice from Al-Salamah Law Firm &amp; Legal Consultants:<\/span><\/h2>\n<p><span style=\"font-weight: 400;\"><a href=\"https:\/\/salamahlaw.com\/en\/\">Al-Salamah<\/a> provides five key recommendations when entering into share or equity acquisition transactions in closed companies:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Do not consider yourself a shareholder merely upon signing a contract or transferring the price. Your agreement should expressly stipulate that <\/span><b>final payments (or a substantial portion of the price) are conditional upon the issuance of an updated shareholders\u2019 register or amendment of the commercial registration<\/b><span style=\"font-weight: 400;\">. Delay in registration\u2014as occurred from 2019 to 2022 in this case\u2014is a form of <\/span><b>legal suicide<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Before paying a single riyal, require the selling partner to provide <\/span><b>written approval from the Board of Directors<\/b><span style=\"font-weight: 400;\"> or <\/span><b>minutes of a General Assembly<\/b><span style=\"font-weight: 400;\"> evidencing the waiver of pre-emptive rights by the other shareholders. Absent this step, any partner may later invalidate your transaction through litigation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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 <\/span><b>non-registration of the purchased shares<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In major transactions (such as the <\/span><b>SAR 75 million<\/b><span style=\"font-weight: 400;\"> deal in this case), the purchase price should be placed in an <\/span><b>escrow account<\/b><span style=\"font-weight: 400;\"> and released to the seller only after full statutory effectiveness (registration in the shareholders\u2019 register). This protects the buyer against seller delay or resistance by other shareholders.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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 <\/span><b>payment for a finalized sale approved by the General Assembly<\/b><span style=\"font-weight: 400;\">, rather than merely financing a future or conditional acquisition.<\/span><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"<p>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&#8230;<\/p>\n","protected":false},"author":37,"featured_media":146089,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[26],"tags":[],"class_list":["post-146087","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general-articles"],"acf":[],"_links":{"self":[{"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/posts\/146087","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/users\/37"}],"replies":[{"embeddable":true,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/comments?post=146087"}],"version-history":[{"count":2,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/posts\/146087\/revisions"}],"predecessor-version":[{"id":146163,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/posts\/146087\/revisions\/146163"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/media\/146089"}],"wp:attachment":[{"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/media?parent=146087"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/categories?post=146087"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/salamahlaw.com\/en\/wp-json\/wp\/v2\/tags?post=146087"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}