Family business charters in Saudi Arabia

Why family companies need written rules

Family businesses usually start with informal understandings between founders. Those understandings rarely survive the second or third generation, when ownership is spread across siblings and cousins who may not work in the business. The most common disputes are predictable: who can work in the company, how leaders are chosen, how much profit is paid out, and whether a family member can sell shares to an outsider.

What the law allows

Article 11 of the Companies Law allows partners and shareholders to conclude agreements regulating their relationship with each other and with the company, and specifically to adopt a family charter regulating family ownership of the company. It can deal with governance, management, work policies, the employment of family members and the distribution of profits.

What a charter usually covers

• Values and purpose. Why the family owns the business together.
• Governance bodies. A family council or assembly, and how it relates to the board.
• Family employment. Qualifications, roles and pay for family members working in the business.
• Leadership succession. How the chair and chief executive are chosen.
• Ownership and transfers. Who may hold shares, pre-emption rights, valuation and buy-backs.
• Dividends. A policy that balances reinvestment and family income.
• Disputes. Escalation, mediation and, if needed, arbitration.

Making it work with the company's documents

A charter that conflicts with the articles of association causes the very disputes it was meant to prevent. Transfer restrictions and board rules should appear in the articles; private family matters can stay in the charter; and a shareholder agreement can bridge the two.