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published on 11 September 2020 | reading time approx. 6 minutes
The legislation of Saudi Arabia contains and specifies duties and liabilities of managers and directors of businesses in the country, which especially came into the spotlight during Covid-19. In this article, we will focus on liabilities and duties of managers of the Limited Liability Company (LLC) and the Joint Stock Company (JSC).
The legislation of Saudi Arabia contains and specifies the duties and liabilities of managers and directors of businesses in the country, which especially came into the spotlight during Covid-19 and are highly important as managements are facing additional significant legal difficulties. The Saudi legislation shall be a guideline to avoid violations while practicing business, since penalties arise if managers or directors violate the law or breach any contract. In this article, we will mainly focus on the liabilities and duties of managers of the two most frequently used company forms, namely the Limited Liability Company (LLC) and the Joint Stock Company (JSC). We noted that the term director is mostly not used in the legislation for LLCs but rather for JSCs, since LLCs are usually managed by one or more managers. However, this is just a different terminology. In most cases, a LLC is managed by either one single manager or a whole board of managers, which are elected by the shareholders.
The country’s main legislation (also known as the Basic Law) was issued by King Fahd ibn Abd al-Aziz in 1992. The constitution is based on Islamic Law, as interpreted by the Hanbali School of Law and consequently less governed by codifications but rather by Sharia Law. Such law contains the Islamic Law principles which derive from the following three sources: the Quran, the Sunnah and the Ijma. Whereas the Sunnah verbally refers to the traditions and practices of the Prophet Muhammad, the Ijma specifies the consensus or agreement of Islamic scholars on a point of Islamic Law. In addition to the Sharia Law, codifications can also be found in some parts of Saudi Law. However, these are limited and subordinate to Sharia Law, as defined in Article 7 and 48 of the Basic Law of the Kingdom of Saudi Arabia (KSA). Thus, in case of a conflict with Sharia Law, one shall refer to Sharia principles which remains the most relevant basis for Saudi Law.
The Companies Law of Saudi Arabia, which was published in the Saudi Arabian Official Gazette on the 4 December 2015 and entered into force in May 2016, defines the liabilities of managers for both LLCs and JSCs individually. The manager liabilities for JSCs are specified in Article 78 and for LLCs in Article 165. In general, LLCs are less regulated under such law than JSCs. However, despite of the different form of a company, both articles generally stipulate that persons in a management position of a company will be individually and jointly liable towards the company, its shareholders and third parties for any violations of their duties, breaches of the company’s AOA or their mismanagement. Despite the fact that both articles do not specifically mention the management liability for fraudulent actions, it can be said that there in fact are obligations since both articles provide an extension of those as mentioning any other cases than fraud and forgery. Furthermore, a clear definition of the term fraud is not defined by Saudi Law and therefore it remains unclear how the local courts will apply fraud with regard to management liability.
Within the Saudi Companies Law, the duties of managers of LLCs are not clearly defined. In contrast to the UAE legislation, the duties of directors of JSCs are not automatically transferrable to the duties of LLCs. However, in the past, those duties were identically used in the old Saudi Companies Law from 1965. Consequently, one can argue that under these circumstances, the articles of the new Companies Law stating the liabilities of JSC managers can also be applied to LLC managers. Nevertheless, this interpretation has not yet been tested in front of Saudi Arabian courts.
As a matter of fact, the general duties of managers are founded in Sharia Law, which keeps the highest priority in the Saudi legislation, and is therefore applicable for both companies regardless their organizational form.
With respect to duty of loyalty, the legislation of Saudi Arabia does not specifically any obligations. However, Article 72 of the Companies Law stipulates that any manager of a JSC shall not be in competition with the firm, whether being engaged in any competitive commercial activity or doing business in any branch of the activities conducted by the company without prior permission, which must be issued by the resolution of the general assembly and also must be renewed every year. Additionally, the use of insider information is prohibited by Article 74 of the Companies Law.
In addition to the above mentioned principles, Sharia Law also does provide a general duty of loyalty, since the manager can be seen as an agent to his principles, which are in fact the shareholders of the firm and shall therefore operates in their interests. Consequently, the managers must always operate with full loyalty to the firm and treat all shareholders equally fair. Furthermore, with respect to the aspect of self-dealing, Article 71 of the Companies Law stipulates that directors of an JSC shall not have a direct or indirect personal interest in any business, may it be a transaction or commercial contract, which has been conducted on behalf of the firm. Otherwise, as regulated in Article 78, the director is liable for any damage or loss occurred to the business, its shareholders or third parties for his or her mismanagement.
However, the Saudi Companies Law does mention some further duties and obligations imposed specifically on all managers and directors of limited liability companies, which are the following:
If managers fail to comply with the above-mentioned duties and obligations, Article 211 and following state that those may be punishable towards not more than 5,000,000 riyals and even imprisonment with no longer than five years for every director who has been found guilty of the following:
With respect to the so called Saudi Vision 2030, which among other aspects covers the diversification of the Saudi economy with new segments ranging from the arms industry to entertainment and tourism, opening the country to investments, digitalizing the cumbersome bureaucracy, reforming the education system and building a tolerant country, it can be estimated that the above mentioned duties and liabilities for both JSCs and LLCs will further be developed and continued to be implemented within the next years.
Since managers and directors in Saudi Arabia are often not aware of their whole duties and obligations which come along with keeping the highest position in a firm. Consequently, it is advisable to manage all affairs of the company in a proper and diligent manner and to seek for legal consultation if questions or uncertainties arise.
Nicola Lohrey
Managing Partner
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