Alignment of the Articles of Association Under the New Companies Law: When Does the Judiciary Compel a Partner to Agree?
The Saudi Companies Law entered into force in 2023, obligating existing companies to align their legal status with its provisions within a specified grace period. Upon the law’s enactment, most legal articles addressed alignment as a regulatory procedure aimed at updating companies’ articles of association and bylaws. However, practical application in subsequent years demonstrated that alignment can raise legal issues exceeding procedural aspects, particularly when it becomes a subject of dispute among partners.
Alignment is inherently a procedure aimed at updating a company’s statutory documents to conform with the new law. This is often achieved by amending the drafting of certain articles or reordering them in accordance with approved templates. In many cases, this modification does not lead to a change in the substance of the provisions; rather, it is limited to reorganizing the text or converting certain powers into a clearer format, such as incorporating them into detailed schedules. For this reason, a comparison between old and new versions of articles of association should focus on the substantive provisions rather than differences in drafting or article ordering.
However, practical application revealed a different challenge. In some companies, the issue lay not in drafting the aligned contract, but in consenting to the alignment procedures themselves. This manifested in several disputes that reached the commercial courts, where a partner refused to consent to the notarization of the aligned articles of association or to complete the associated electronic procedures. This resulted in obstructing the update of the commercial registration or halting the execution of certain partner resolutions.
Among the judicial precedents reflecting this issue is a judgment issued by the Court of Appeal in Case No. 4570852479 of 1445 A.H., between a domestic pilgrim services company and two defendants who were partners in the company. The dispute centered on the two partners’ refusal to consent to the notarization of the aligned articles of association under the new Companies Law, despite the consent of the remaining partners.
The plaintiff grounded its claim on the premise that alignment is a statutory obligation imposed on existing companies, and that the refusal to consent to the notarization of the aligned contract obstructs the fulfillment of this obligation and leads to the suspension of certain services linked to the commercial registration. The plaintiff further argued that the aligned contract introduced no new modifications to the partners’ rights, but merely aimed to update the articles of association to align with the new law.
Upon reviewing the case, the court focused its reasoning on two main issues. First, the new Companies Law obligated existing companies to rectify their status in accordance with its provisions within the prescribed period, making alignment a statutory obligation that is not subject to the discretion of the partners. Second, upon examining the substance of the aligned contract, the court found that it contained no new modifications to the terms of the articles of association agreed upon by the partners, but intended solely to record them in a format compatible with the new law.
Accordingly, the court concluded that the defendants’ refusal to agree to the alignment procedures lacked statutory justification, and that the document to be submitted to the Ministry of Commerce was the exact same contract approved by the partners, aligned with the provisions of the new law. The court concluded by overturning the initial judgment and rendering a new ruling compelling the defendants to complete the statutory procedures for notarizing the aligned articles of association pursuant to the new Companies Law.
This case reveals an important practical dimension to the matter of alignment. While it is predominantly viewed as a regulatory procedure to update a company’s constitutional documents, it can, in certain instances, become a means to disrupt partner decisions or delay corporate management if a partner refuses to complete its procedures. It also demonstrates that commercial courts may intervene to compel a partner to complete the alignment whenever such refusal lacks statutory justification and leads to obstructing a legal obligation imposed on the company.
In light of these judicial precedents, it can be stated that alignment is no longer a mere formal matter concerning the redrafting of articles of association; rather, it has become part of the statutory framework ensuring that companies comply with new legislation and maintain their capacity to conduct business regularly. Consequently, reviewing articles of association post-alignment should not be restricted to comparing texts, but must extend to understanding its practical effects on corporate management and the relations among partners.
Frequently Asked Questions (FAQs)
What happens if one partner refuses to sign or electronically notarize the aligned articles of association?
Executing the alignment of articles of association is a mandatory statutory obligation under the new Saudi Companies Law, not a discretionary option. If a partner refuses without legitimate statutory justification and causes harm to the company (such as the suspension of the commercial registration or services), the company or the remaining partners have the right to initiate a lawsuit before the Commercial Court to compel them judicially to complete the procedures immediately, based on established judicial principles (such as the judgment in Case No. 4570852479 of 1445 A.H.).
Does the majority in a Limited Liability Company (LLC) have the right to align the articles without the consent of the minority partner?
Technically, through the Ministry of Commerce platform, notarizing the aligned contract requires the consent and electronic signature of all partners. However, if the alignment is limited to updating the drafting without prejudice to substantive rights (such as shares and ownership percentages), the minority’s refusal is deemed unlawful obstinacy. The Commercial Court will intervene to compel them to sign upon the request of the majority to protect the interest of the commercial entity.
Do profit percentages, shares, or liabilities automatically change after aligning the articles of association?
No. Procedural alignment does not affect the substantive content of rights and obligations agreed upon by the partners in the original contract (such as profit and loss distribution ratios and share sizes). Alignment aims solely to restructure clauses, draft them, and allocate administrative powers in accordance with the structure and text of the new Companies Law.
What are the penalties or damages incurred by the company in the event of failure to complete the alignment?
Refusal or delay in rectifying the company’s status and updating its articles of association leads to:
- Suspension of the update or renewal of the company’s commercial registration at the Ministry of Commerce.
- Freezing of the company’s bank accounts and government services linked to official platforms (such as Qiwa, Absher Business, and GOSI).
- Exposing the company and members of its management to the risk of statutory financial fines resulting from non-compliance with the status-rectification deadlines.
How can a company protect itself from partner obstinacy during contract alignment?
At Alsalamu Law Firm, we recommend following this preventive course of action: issue a formal written notice to the refusing partner detailing the grave damages and fines the company will incur due to their delay, granting them a specified deadline. In the event of continued non-compliance, an urgent lawsuit should be filed before the Commercial Court seeking an order to compel them to complete the electronic notarization, while reserving the company’s right to claim compensation from them for all damages resulting from the obstruction.
