Shareholder agreements in Saudi Arabia — what to include

The legal basis

Article 11 of the Companies Law allows founders, partners and shareholders to conclude agreements regulating their relationship with each other and with the company. The law also recognises tag-along and drag-along rights for joint stock companies. This gives shareholder agreements a clear footing that they lacked under the previous law.

Clauses to consider

Board and management. Who appoints directors or managers, and how many each shareholder can appoint.

Reserved matters. Decisions requiring special approval, so a minority investor is not overruled on fundamental issues.

Funding. Whether shareholders must provide further funding, and what happens if one does not.

Transfers. Pre-emption rights, lock-up periods and approval requirements for transfers to third parties.

Tag-along and drag-along. Protecting minorities on a sale (tag-along) and enabling a clean sale of the whole company (drag-along).

Deadlock. Escalation, mediation and buy-sell mechanisms.

Exit and valuation. How a departing shareholder is bought out and at what price.

Non-compete and confidentiality. Restrictions on shareholders competing with the company.

Disputes. Courts or arbitration, and the governing law.

Fitting it with the articles

Some provisions only work if they are also in the articles of association — particularly transfer restrictions and board appointment rights. Draft the two documents together and make sure they do not contradict each other.