Guiding Charter for Family Owned Businesses in Saudi Arabia

The Saudi Arabian Ministry of Commerce and Investment (“MoCI”) issued a Guiding Charter for Family Owned Businesses (“Charter”) on 02-08-1439H corresponding to 18-04-2018G.

This article will provide a summary of the key provisions of the Charter and the added benefits it will bring to family owned businesses in Saudi Arabia (“FOBs” or the “Company” as the case may be).

FOBs play an important role in Saudi Arabia’s economy, investment environment and job market. However, despite their various contributions to the economy, FOBs have at times failed to realize their full potential due to various factors some of which include a lack of transparency with respect to the management and operations of the Company, inadequate succession planning and the absence of a well-defined dispute resolution mechanism for addressing conflicts within the Company.

Although the Charter is not binding, the issuance of the Charter is a welcome development as its main aim is to promote the growth of FOBs in Saudi Arabia, and provide them with a set of guiding principles that will allow them to operate in line with international best practices and standards.

To which Companies does the Charter apply?

The Charter is intended for use by FOBs that are incorporated as closed joint stock companies in Saudi Arabia.

FOBs that are listed on the Saudi Arabian stock exchange (the “Tadawul”) as open joint stock companies are already subject to the Capital Market Authority’s corporate governance regulations.

However, the vast majority of FOBs operating in Saudi Arabia are not listed on the Tadawul. MoCI therefore recognized a need to fill this gap by establishing protocols for FOBs to follow.

The Saudi Arabian Companies Law issued by Royal Decree no. M/3 dated 28-01-1437H corresponding to 11-11-2015G (as amended) (the “Companies Law”) will take precedence over the provisions of the Charter as the Charter is meant to be complementary to the Companies Law and provide a set of guiding principles for FOBs to implement in conjunction with their existing regulatory obligations.

What are the Charter’s Objectives?

The objectives of the Charter include the following:

• Provide a guiding framework for FOBs to operate in an efficient and growth-oriented manner in conformance with international best practices and standards.
• Provide a common vision for family members with respect to the Company’s values and strategic objectives.
• Enhance accountability and control mechanisms for the shareholders of FOBs.
• Set-up well-defined strategies and protocols that promote transparency and govern the interaction of the family within the Company.
• Achieve a proper and fair balance between the interests of the family members and the interests of the Company.
• Put succession plans into place (for both ownership and management) to ensure their survival and orderly transition.
• Provide a well-defined mechanism for the timely resolution of any family disputes that may occur, and to ensure that such disputes do not impede decision-making within the Company.

Shareholders’ Assemblies

Similar to what is provided in the Companies Law, shareholder meetings are conducted through the Ordinary General Assembly and Extraordinary General Assembly (collectively referred to as the “Shareholders’ Assemblies”).

The Shareholders’ Assemblies are required to hold all of their meetings in accordance with the provisions of the Companies Law and the Company’s articles of association.

Resolutions passed during any meeting held by the Shareholders’ Assemblies are valid and binding upon all of the family members in the Company, regardless of whether such family members attended the meetings in which the resolutions were issued.

The Family Board is entitled to submit a written request to the Board of Directors to invite the Ordinary General Assembly (or the Extraordinary General Assembly as the case may be) to convene provided the written request contains justifications for convening the Ordinary General Assembly. In the event the Board of Directors fails to respond to the Family Board’s written request, then the Family Board (discussed in further detail below) is entitled to seek the written approval of family members representing at least 5% of the Company’s share capital in order to obligate the Board of Directors to invite the Ordinary General Assembly to convene.

In order to ensure that the Company operates in an institutional manner, family members are prohibited from taking any adverse actions that would prevent the Shareholders’ Assemblies from exercising their functions set out in the Companies Law, the Company’s articles of association and Charter.

Family Board

The Charter prescribes the formation of a Family Board. The Family Board’s competencies include the following:

• Monitor the overall performance of the Board of Directors and ensure they are compliant with the provisions of the Companies Law and the articles of association of the Company. For this purpose, the Family Board can provide an opinion on potential candidates for the Board of Directors. They also have the authority to investigate whether any member of the Board of Directors is engaging in an activity that is detrimental to the Company such as whether there is a potential conflict of interest or unauthorized disclosure of the Company’s trade secrets.
• Resolve any disputes that arise between family members that may affect the Company’s operations (further details on the dispute resolution mechanism will be provided below).
• Consider recommendations from family members for the investment of the Company’s assets and presenting them to the Board of Directors for their approval.
• Take any necessary actions to ensure that new generations of family members are trained and prepared to manage the Company in the future.

The competencies of the Family Board cannot be in direct conflict with the competencies of the Shareholders’ Assemblies and Board of Directors under the Companies Law, the articles of association of the Company and the Charter.

It is recommended for a Family Board to be formed when there are more than 12 family members in the Company.

In order to ensure the Family Board exercises its competencies in an effective manner, there should not be more than 6 Family Board members. Members of the Family Board are elected by secret ballot at a special meeting held for this purpose. Members should be elected based on their personal and professional capabilities.

A member of the Family Board is not permitted to be a member of the Board of Directors or the executive team of the Company.

The term of the Family Board members is restricted to 3 years, and a member is not permitted to be on the Family Board for more than 2 consecutive terms.

Elections for Family Board members take place under the direction of an Election Committee consisting of 5 family members or any other members appointed by the Ordinary General Assembly. A member appointed to the Election Committee is prohibited from serving as a Family Board member. The Election Committee is required to hold elections for the Family Board members at least 25 days prior to the end of their term. The Election Committee should ensure that the election process is held transparently and impartially.

The Family Board should have a Chairman and Deputy-Chairman. They are selected by the Family Board members through secret ballot under the supervision of the Election Committee.

The Family Board is required to hold at least 4 meetings each financial year. The Family Board should hold a special meeting prior to any meeting held by the Shareholders’ Assemblies in order to consider the agenda items and to make any recommendations it considers necessary within the scope of its competencies.

The majority of the Family Board members should be present in order for a meeting to be valid. Resolutions issued by the Family Board will need to be approved by a majority of the members present at the meeting. In the event of a deadlock, the Chairman will have the casting vote. The Chairman will invite the Family Board to convene when requested to do so by 2 or more members.

Family Board members are entitled to receive remuneration for attending meetings. Remuneration will be equivalent to what is prescribed to Board of Directors members who attend meetings.

As referenced above, the Charter prescribes a multi-tiered mechanism for the resolution of any disputes that may occur between family members.

Initially, private discussions are held between members of the Family Board to determine the reasons for the dispute and the most optimal way forward to resolving the dispute. The Family Board assigns the Chairman or one of its members who do not have any involvement in the dispute to take the lead in amicably resolving the dispute. The Family Board member assigned to resolve the dispute will then hold discussions with the disputing parties in an effort to resolve the dispute in a manner that is in the best interests of both the family members and the Company.

In the event the dispute cannot be settled amicably, a conciliation body consisting of non-family members will be formed in an attempt to settle the dispute in a fair and impartial manner. The Family Board, in consultation with the disputing members, will determine the scope and composition of the conciliation body.

If the conciliation body referred to in the preceding paragraph cannot be formed or is unable to resolve the dispute, the Family Board will recommend the disputing parties to resolve their dispute through arbitration or a court. The Family Board will need to take necessary measures to ensure that this does not have an adverse effect on the Company’s operations. The Family Board should continue to make an effort to resolve the dispute until a final binding decision is issued by the arbitration tribunal or court. When a final binding decision is issued, the Family Board should ensure that this decision is implemented.

Board of Directors

Similar to what is provided in the Companies Law, the Board of Directors has wide ranging authority to manage the affairs of the Company and maximize its value. All shareholders are prohibited from interfering with the Board’s functions or the executive team of the Company, unless they are members of the Board or the executive team.

Board members of the Company will be elected by the Ordinary General Assembly. The recommended number of Board members should be between 5 and 9.

A Chairman and a Deputy Chairman will need to be elected by the Board of Directors through secret ballot. The Chairman of the Board of Directors is not permitted to hold an executive position within the Company.

When electing Board members, the Ordinary General Assembly should take into consideration each candidate’s personal and professional capabilities such as his or her ability to lead, competence, financial expertise and medical fitness.

The term of the Board of Directors cannot exceed 3 years. Board members may be re-elected for 1 or more terms.

The CEO of the Company is selected through a resolution issued by the Board of Directors. It is not permissible for the CEO to be the Chairman or Deputy Chairman of the Board of Directors.

The Board of Directors has the authority to form an Advisory Board to assist it with its functions. The members of the Advisory Board should have the necessary experience and competence to assist the Board of Directors in developing strategic objectives to ensure the Company’s continuity and growth. The Board of Directors is tasked with establishing the bylaws for the Advisory Board which must then be submitted to the Ordinary General Assembly for approval.

The Board of Directors has the authority to form additional committees as it deems necessary to assist it with its functions.

Sale of Shares

Any shareholder who intends to sell all or part of his or her shares in the Company will be required to notify all of the shareholders in writing through the Board of Directors. Each shareholder may exercise their priority right to purchase the shares put up for sale within 30 days from the date of notification. In the event 30 days elapse and no shareholder exercises his or her right to purchase the shares, the shareholder may proceed to sell the shares to a third party. It should be noted that this procedure will not be applicable to any transfer of shares by legal inheritance.

Company Policy

A human resources policy should be developed for the Company that contains clear rules for employing a family member, which will address issues such as qualifications, experience, performance, evaluation and termination.

It is not permissible to create a position for the specific purpose of appointing a family member. Additionally, it is not permissible to terminate, without a valid justification, an employee who is not a family member in order to replace him or her with a family member instead.

The salary of an employee, whether or not a member of the family, should be commensurate with the employee’s position, responsibilities, academic qualifications and level of performance.

The work of a family member employed in the Company should not be subject to the supervision of another family member. In addition, no more than 1 member of the family should work in the same department unless it is in the best interests of the Company.

Additional Provisions

A family member is entitled to submit a proposal to amend the Charter. The Family Board will assess the proposal to amend the Charter and prepare a report on its findings which will be presented to the Ordinary General Assembly for its consideration and approval.

The articles of association of the Company should be amended in order to be commensurate with the provisions of the Charter.

The Charter should be reviewed by shareholders on a regular basis.

It is advisable for the Charter to include the names and signatures of each shareholder of the Company on the final page.

Conclusion

In conclusion, even though the Charter is merely a guide and is not mandatory for FOBs operating in Saudi Arabia, its issuance is nevertheless a positive development as it will raise a general awareness amongst FOBs of the importance of implementing proper governance frameworks and point the way to international best practice and standards and allow them to increase their contribution to the local economy. It may also provide a roadmap for the enactment of future legislation that will be binding on FOBs.