Saudi Appeal Court Upholds Board Remuneration and Clarifies Shareholder Voting and Conflict-of-Interest Rules in LLCs

6 min 24 sec

Written by

Ahmed Basrawi

Partner, Head of Office - Jeddah

a.basrawi@tamimi.com View LinkedIn Profile

Lina Samaha

Senior Associate

l.samaha@tamimi.com View LinkedIn Profile

In a notable ruling providing important guidance on the governance of limited liability companies (LLCs) in the Kingdom of Saudi Arabia, the Jeddah Court of Appeal overturned a first instance judgment and upheld the validity of shareholders’ assembly resolutions, including a resolution approving the payment of SAR 2.1 million in remuneration to the company’s board of directors.

The judgment addresses several important questions under the Saudi Companies Law, including the applicable quorum and voting requirements for shareholders’ assembly resolutions, the scope of conflict of interest provisions in the context of shareholder voting, the distinction between the separate legal personality of corporate shareholders and the natural persons behind them, and the factors relevant to assessing the appropriateness of board remuneration.

This article examines the key aspects of the judgment and its practical implications for companies, shareholders, and legal practitioners in Saudi Arabia.

Case background

The case arose from a dispute concerning a Saudi LLC operating in the commercial agencies, industrial, and manufacturing sectors. The company’s shareholders’ assembly passed a number of resolutions, including a resolution approving the payment of SAR 2.1 million in remuneration to the company’s board of directors. Certain minority shareholders, representing less than 7% of the company’s share capital, challenged the validity of the shareholders’ assembly resolutions before the Jeddah Commercial Court.

The claimants challenged the resolutions on several grounds. First, they argued that the applicable quorum and voting requirements under the Saudi Companies Law and the company’s articles of association had not been satisfied. Second, they contended that certain shareholders who voted in favour of the remuneration resolution had interests in the resolution and should therefore not have been permitted to participate in the vote. The alleged conflict of interest arose from the fact that certain members of the board of directors were also indirect shareholders in the company through corporate vehicles. The claimants therefore sought to attribute the interests of those individuals to the corporate shareholders through which they indirectly held their interests.

The Court of First Instance ruled in favour of the challenging shareholders. The defendants subsequently appealed the judgment and secured a favourable judgment from the Court of Appeal, which overturned the first instance judgment and upheld the validity of the challenged shareholders’ assembly resolutions.

Court findings

On appeal, the Jeddah Court of Appeal examined the shareholders’ assembly resolutions, the company’s articles of association and the applicable provisions of the Saudi Companies Law. The Court overturned the first instance judgment and upheld the validity of the challenged resolutions.

Quorum and voting requirements

The Court found that the challenged shareholders’ assembly resolutions had been approved by shareholders representing 89% of the company’s share capital. The Court concluded that the applicable quorum and voting requirements under Article 166(3) of the Saudi Companies Law had been satisfied and that the resolutions were also consistent with the requirements of the company’s articles of association. Accordingly, the Court rejected the challenge to the resolutions based on the alleged failure to satisfy the applicable quorum and voting requirements.

Scope of the conflict of interest provisions

In addressing the alleged conflict of interest, the Court considered Articles 26 and 31 of the Saudi Companies Law and drew an important distinction between restrictions applicable to decision making at the board level and the exercise of voting rights by shareholders at a shareholders’ assembly.

The Court found that the relevant conflict of interest restrictions under those provisions apply to board-level decision making and did not, in the circumstances of this case, prevent the relevant shareholders from exercising their voting rights at the shareholders’ assembly.

The judgment therefore provides important guidance on the distinction between restrictions imposed on directors when participating in decisions in which they have an interest and the separate question of whether a shareholder may exercise its voting rights at a shareholders’ assembly.

Separate legal personality of corporate shareholders

Importantly, the Court distinguished between the board members acting in their personal capacities and the corporate vehicles through which they indirectly held shares in the company. The Court recognised the separate legal personality of the corporate shareholders, holding that the interests of individuals associated with a corporate shareholder do not automatically disqualify that corporate shareholder from voting.

Taking this distinction into account, together with the level of shareholder approval and compliance with the applicable quorum and voting requirements, the Court found that the alleged conflict of interest did not affect the validity of the challenged resolutions. This aspect of the judgment is particularly relevant to corporate and family groups in which individuals may indirectly hold interests in an LLC through separate corporate vehicles.

Appropriateness of board remuneration

The Court also considered the substance of the remuneration resolution and whether the SAR 2.1 million awarded to the board of directors was appropriate in the circumstances. Rather than assessing the remuneration in isolation, the Court considered the size of the company, the nature and scale of its business and operations, and its annual net profit. Having regard to these factors, the Court concluded that the remuneration awarded to the board of directors was appropriate.

The judgment therefore provides useful guidance on the factors that may be relevant when assessing the appropriateness of board remuneration in Saudi LLCs. It indicates that such remuneration should be considered in the context of the company’s overall size, activities, operations, and financial performance, as well as the directors’ efforts and contribution to the growth and profitability of the company’s business, including by reference to its net profits in previous years. On the basis of these findings, the Court of Appeal overturned the first instance judgment in its entirety and upheld the validity of the shareholders’ assembly resolutions.

Conclusion

The judgment provides important guidance on several aspects of corporate governance and shareholder decision-making in Saudi LLCs.

First, it confirms the importance of assessing the validity of shareholders’ assembly resolutions by reference to both the quorum and voting requirements prescribed by the Saudi Companies Law and the company’s articles of association. In this case, the resolutions were approved by shareholders representing 89% of the company’s share capital, and the Court found that the applicable statutory and constitutional requirements had been satisfied.

Second, the judgment provides useful clarification on the scope of the conflict of interest provisions under Articles 26 and 31 of the Saudi Companies Law. The Court distinguished between restrictions applicable to board-level decision-making and voting by shareholders at a shareholders’ assembly, finding that the relevant provisions did not, in the circumstances of the case, prevent the shareholders concerned from exercising their voting rights.

Third, the Court’s recognition of the separate legal personality of corporate shareholders is an important aspect of the judgment. The interests of natural persons associated with a corporate shareholder do not automatically disqualify that corporate shareholder from voting. This distinction provides useful guidance for corporate and family groups in which individuals may hold their interests in Saudi LLCs through separate corporate vehicles.

Finally, the judgment provides a practical framework for assessing the appropriateness of board remuneration. Rather than applying a rigid numerical test in determining that the SAR 2.1 million board remuneration was appropriate in the circumstances, the Court considered the company’s size, the nature and scale of its business and operations, its annual net profit, and the directors’ efforts and contribution to the growth and profitability of the company’s business, including by reference to its net profits in previous years.

Companies and their advisers should take these considerations into account when convening shareholders’ assemblies, structuring board remuneration arrangements, and assessing potential conflicts of interest. Maintaining a clear record demonstrating compliance with both the Saudi Companies Law and the company’s articles of association may be particularly important where shareholders’ assembly resolutions are subsequently challenged.