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Saudi Appeal Court Upholds Shareholders’ Statutory Pre-emption Rights in LLCs and Protects Family-Owned Company Structures
9 min 24 sec
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a.basrawi@tamimi.com 
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In a significant ruling concerning shareholder rights in family-owned limited liability companies (LLCs), the KSA’s Jeddah Court of Appeal delivered judgments overturning first instance decisions that had permitted minority shareholders to transfer their shares in eight family-owned companies to a separate entity wholly owned by them.
A key concern underlying the dispute was that permitting the transfer could subsequently enable the transferring shareholders to transfer ownership or control of the transferee company to third parties. This could indirectly introduce non-family members into the ownership structure of the eight companies and potentially trigger change-of-control provisions under the companies’ existing commercial arrangements with third parties.
The Court of Appeal’s judgments:
- reaffirm the binding nature of a company’s articles of association;
- uphold the statutory pre-emption rights available to shareholders in Saudi LLCs and the mechanisms governing the exercise of those rights under the Saudi Companies Law; and
- provide important guidance on the protection of family-owned company structures in the Kingdom of Saudi Arabia.
The cases raise fundamental questions regarding the interplay between shareholders’ ability to dispose of their equity interests and the contractual restrictions that shareholders voluntarily accept under a company’s articles of association.
The judgments also address:
- the doctrine of abuse of rights under the Saudi Civil Transactions Law;
- the mechanism for determining the price of shares in a contested transfer; and
- the legal considerations relevant to preserving the ownership structure and commercial interests of family-owned companies.
The judgments are particularly instructive for practitioners advising on corporate governance, shareholder disputes, and share transfer mechanisms in Saudi LLCs, and provide important guidance on the scope and timing of statutory shareholders’ pre-emption rights.
Case background
The dispute arose among members of a prominent family group with interests in eight family-owned LLCs engaged in commercial agencies, industrial activities, real estate, and other business activities. The share capital of the eight companies was held by various family members and related entities.
Three shareholders (the claimants) — sisters who collectively held 6.45% of the share capital of each of the eight companies, with each holding 2.15% — sought to transfer their shares, held in their personal capacities, to a separate company wholly owned by them (the transferee company), without monetary consideration.
On 5 December 2023, the claimants formally notified the companies’ directors of their intention to effect the proposed transfer. Article 14(1) of the companies’ articles of association provided that “a shareholder may transfer his share to one of the shareholders or to a third party with the approval of the remaining shareholders”.
The remaining shareholders (the defendants) — comprising five individual shareholders and two single-person LLCs, all within the same family group — did not provide unconditional approval of the proposed transfer. Their position, however, was not an absolute refusal. Rather, they indicated their willingness, in good faith, to approve the transfer subject to certain conditions, including the execution of a shareholders’ agreement governing any future transfer of shares in the transferee company.
The boards of directors subsequently initiated a process under Article 17 of the articles of association and Article 180 of the Companies Law for each company to purchase the claimants’ shares. On 16 February 2024, shareholders representing 78% of the share capital approved shareholders’ resolutions transferring their statutory pre-emption rights to the respective companies and authorising the companies to exercise those rights.
The companies subsequently made two purchase offers: the first in February 2024 at approximately SAR 62 million to 63 million per claimant, and the second in May 2024 at approximately SAR 68 million per claimant, payable in five instalments. The latter reflected an aggregate valuation of approximately SAR 200 million for the claimants’ combined 6.45% interest.
The claimants rejected both offers. Among other conditions, they required the appointment of two independent valuers at the purchaser’s expense, while reserving the right to reject the resulting valuations. They also insisted on full payment in a lump sum within 90 days, being the period agreed upon in the companies’ articles of association for exercising the pre-emption right.
The companies, in turn, proposed appointing one of the Big Four accounting firms to conduct a professional valuation at their expense, which the claimants did not accept. Negotiations ultimately failed, and the dispute was referred to a mediation platform without resolution.
At first instance, the Commercial Court ruled in favour of the claimants, ordering their exit from the companies, the transfer of their shares to the transferee company, and the corresponding amendment of the companies’ articles of association.
The defendants appealed. The Jeddah Court of Appeal overturned the first instance decisions and rejected the claimants’ claims in their entirety.
Court findings
The Court of Appeal reviewed the facts, the companies’ articles of association and the applicable statutory framework. In overturning the first instance decisions and rejecting the claimants’ claims, the Court relied on the following key findings.
Binding nature of the articles of association
The Court affirmed that the requirement for the remaining shareholders’ consent under Article 14(1) of the companies’ articles of association was valid and enforceable.
Although Article 178 of the Companies Law permits the transfer of shares in an LLC to third parties following the expiry of the applicable period for exercising the statutory pre-emption right, the Court found that a company’s articles of association may impose additional conditions on such transfers — including requiring the consent of the remaining shareholders — provided that those conditions do not conflict with the law or public policy.
The Court further referred to Article 11 of the Companies Law, which permits shareholders to enter into agreements regulating their relationship with one another, including family charters and shareholders’ agreements, reinforcing the ability of shareholders in family-owned companies to establish consensual governance arrangements over their relationship and ownership structure.
Remaining shareholders acted in good faith
The Court also found that the remaining shareholders’ non-approval of the proposed transfer was neither absolute nor without basis. Rather, they had acted in good faith by indicating their willingness to approve the transfer, subject to certain conditions, including the execution of a shareholders’ agreement governing any future transfer of shares in the transferee company.
These conditions were intended to address the risk that ownership or control of the transferee company could subsequently be transferred to third parties, thereby indirectly introducing non-family members into the ownership structure of the eight companies and potentially triggering change-of-control provisions under the companies’ existing commercial arrangements.
Valid exercise of the statutory pre-emption right
The Court held that the statutory pre-emption mechanism had been validly exercised. The remaining shareholders had transferred their statutory pre-emption rights to the respective companies and authorised the companies to exercise those rights, as formally documented in shareholders’ resolutions.
The Court considered this together with the companies’ statutory right to acquire shares in their own share capital under Article 180 of the Companies Law and Article 66 of its Implementing Regulations, as well as the amendments made to the companies’ articles of association on 20 February 2024 to reflect this right.
Taken together, the transfer of the statutory pre-emption rights to the respective companies, the shareholders’ resolutions documenting that, and the companies’ statutory ability to acquire shares in their own share capital supported the validity of the companies’ exercise of the pre-emption mechanism. The companies’ subsequent purchase offers therefore constituted a valid exercise of the statutory pre-emption rights triggered by the claimants’ notification of their intention to transfer their shares.
Price determination mechanism
The Court found that the parties’ failure to agree on the price did not, in itself, invalidate the exercise of the statutory pre-emption right. Relying on Article 313 of the Saudi Civil Transactions Law, the Court considered it sufficient for the price to be capable of determination by reference to sound and objective criteria, such as an assessment by an accredited valuer.
Accordingly, the companies’ proposal to appoint a certain firm of the Big Four accounting firms to conduct a professional valuation at their expense constituted a reasonable mechanism for determining the value of the shares, notwithstanding the claimants’ refusal to accept that proposal.
Duration of the statutory pre-emption right
The Court further held that the 90-day pre-emption period stipulated in the companies’ articles of association had not expired. The Court reasoned that the relevant period ran from the date on which the price was agreed or determined by a valuer, rather than merely from the date on which the claimants notified the companies of their intention to transfer their shares. On this interpretation, which the Court considered consistent with Article 178(3) of the Companies Law, the statutory pre-emption rights remained in effect at all material times.
Abuse of rights
In a notable application of Article 29 of the Civil Transactions Law, the Court found that the conditions imposed by the claimants in connection with the proposed transfer constituted an abuse of rights.
In particular, the Claimants had required the appointment of two independent valuers at the purchaser’s expense, while reserving a unilateral right to reject the resulting valuations. They had also insisted upon payment of approximately SAR 200 million in a single lump sum within 90 days and rejected payment by instalments.
The Court considered that these conditions imposed a disproportionate burden on the companies’ liquidity relative to the benefit to be obtained by the claimants, particularly given that the shares in question represented an aggregate 6.45% interest in each company.
Protection of the family-owned company structure
The Court placed significant emphasis on the family-owned nature of the companies and the commercial consequences that could arise from changes to their ownership structure. The Court noted that certain third-party contracts, including foreign commercial agency arrangements, contained change-of-control provisions restricting ownership changes outside the family. The introduction of non-family ownership or control could therefore jeopardise those commercial arrangements and potentially affect important sources of revenue.
Referring to the legal maxims reflected in Article 720 of the Civil Transactions Law, the Court applied the principles that “greater harm is prevented by lesser harm”, “prevention of harm takes precedence over gaining benefits”, and “harm must be removed”.
Recognition of the personal consideration in LLCs
The Court’s decision also reflects the significance of the personal consideration (intuitu personae) inherent in the ownership structure of an LLC, particularly where the shareholders are family members and the company is family owned. The identity of the shareholders, and the personal relationship and mutual confidence between them, may form an important consideration underlying their participation in the company.
Accordingly, restrictions on the transfer of shares are not merely procedural limitations on a shareholder’s ability to dispose of their interest, but may serve to preserve the personal composition of the shareholder base and prevent the introduction, directly or indirectly, of third parties without the consent of the existing shareholders.
The judgments therefore provide an important illustration of the recognition and practical significance of the intuitu personae concept in the context of Saudi LLCs, particularly where the articles of association expressly make the admission of a new shareholder subject to the approval of the existing shareholders.
The proposed transfer could not proceed
Finally, the Court concluded that, because the statutory pre-emption rights remained in effect, the claimants’ shares remained subject to third-party rights and could not be unilaterally transferred to the transferee company. The pre-emption rights could only cease to apply upon the relevant company’s consent to the proposed transfer or upon expiry of the applicable 90-day period following determination of the price. Accordingly, the Claimants were not entitled to compel the proposed transfer while the pre-emption mechanism remained in effect.
Written by
In a notable application of Article 29 of the Civil Transactions Law, the Court found that the conditions imposed by the claimants in connection with the proposed transfers constituted an abuse of rights.
Conclusion
The Jeddah Court of Appeal’s judgments constitute a landmark decision on the rights and obligations of shareholders in family-owned LLCs under Saudi law. By overturning the first instance decisions, the Court confirmed that the contractual framework established through a company’s articles of association — including consent requirements and share transfer restrictions — may be given full effect where consistent with the Companies Law and public policy.
The judgments are also notable for their application of the abuse of rights doctrine in a corporate context. The Court scrutinised the conditions imposed by the claimants in connection with the proposed transfer and concluded that those conditions constituted an abuse of rights under Article 29 of the Civil Transactions Law.
At the same time, the court found that the remaining shareholders’ non-approval of the proposed transfer was neither absolute nor without basis. Rather, the remaining shareholders had acted in good faith by indicating their willingness to approve the transfer, subject to certain conditions, including the execution of a shareholders’ agreement governing any future transfer of shares in the transferee company. These conditions were aimed at addressing the risk of non-family members being indirectly introduced into the ownership structure of the eight companies and protecting the companies’ existing commercial arrangements and sources of income.
For practitioners and family businesses, the judgments offer several important practical takeaways. Articles of association should be drafted carefully — particularly in relation to consent requirements, pre-emption rights and valuation mechanisms — as such provisions may play a decisive role in future shareholder disputes. Shareholders seeking to transfer their interests must also comply with the applicable contractual and statutory transfer mechanisms and cannot assume that a transfer to a wholly-owned related entity will necessarily fall outside those restrictions.
The judgments further demonstrate that the absence of an agreed transfer price does not necessarily prevent the operation of a pre-emption mechanism where the price is capable of determination through a reasonable and objective valuation process. More broadly, the decisions illustrate the Saudi courts’ willingness to consider the commercial consequences of changes in ownership and to apply the principles of good faith, abuse of rights, and prevention of harm when resolving disputes affecting the ownership structure and commercial viability of family-owned companies.
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