Corporate Governance in Saudi Companies: How Deficient Governance Uncovers Partnership Disputes Before They Occur
In numerous companies, a breakdown does not initiate with a financial collapse, a director’s resignation, or a lawsuit before the Commercial Court; rather, it frequently originates from a minute detail that appears ordinary at the time: a General Assembly that is not convened, financial statements that are not dispatched, minutes of a meeting left unsigned, a partner obstructed from exercising their inspection rights, or a resolution adopted within a closed circle and subsequently imposed upon the remaining parties as a fait accompli.
These details do not appear perilous when the relationship between the partners is harmonious. However, upon the first dispute, they turn into sharp legal inquiries: Who was aware? Who voted? Were the financial statements presented? Were the partners summoned? Was the resolution issued by the competent body? And was the company managed as a true corporate entity or as an extension of an individual, a family, or a director?
Herein, corporate governance manifests not as an aesthetic administrative framework, but as an early warning system. A company that fails to regulate its assemblies, financial statements, and inspection rights does not merely await a dispute; it actively and slowly manufactures it.
Is Corporate Governance an Administrative Luxury or a Mandatory Prerequisite for Unlisted Companies?
A broad segment of owners of Limited Liability Companies (LLCs) and Closed Joint Stock Companies (unlisted) in the Saudi market erroneously believe that governance is a requirement exclusively concerning companies listed with the Capital Market Authority (CMA). This conception constitutes a fatal legal and commercial error. Closed or family-owned companies may occasionally possess a more acute and pressing need to implement rigorous governance principles than listed companies, due to several pivotal reasons outlined in the following comparative table:
| Bases of Comparison | Companies Listed on the Financial Market (Tadawul) | Unlisted Companies (Closed Joint Stock & LLCs) |
| Nature of the Relationship Among Owners | A purely investment-oriented relationship predicated upon shares and trading volume. | A personal or familial relationship fundamentally built upon mutual trust from the outset. |
| Centralization of Management Authority | Statutorily distributed among the Board of Directors, committees, and the executive management. | Frequently concentrated in the hands of a single director or a controlling majority partner. |
| Flow of Financial Information | Equitable and instantaneous via official disclosure platforms (Tadawul). | Inequitable, and frequently withheld from minority partners or non-managing partners. |
| Impact of the Absence of Documentation | Virtually impossible due to the strict and continuous oversight exercised by the CMA. | Highly elevated; excessive trust leads to the neglect of formal procedures and documentation. |
When a company is a startup, family-owned, or small, documenting resolutions and enabling partners to access statutory and financial information flows becomes more critical, not less. The imminent peril in these entities does not stem from the complexity of administrative structures, but rather from their excessive simplicity which leads to the omission of statutory formalities.
The primary instruments of governance—such as regular financial statements, minutes of general assemblies, periodic directors’ reports, shareholders’ registries, and board resolutions—are not redundant bureaucratic paperwork; rather, they are preventive mechanisms designed to protect the company as an independent legal entity prior to protecting an individual partner. This vision aligns with the Corporate Governance Principles issued by the Organisation for Economic Co-Operation and Development ($OECD/G20$), which view governance as an institutional framework designed to protect investors, build market confidence, and improve companies’ access to capital through transparency, accountability, and the protection of minority rights.
How Do You Transition from a Company on Paper to an Institutional Corporation?
One of the deepest anomalies in the corporate environment is that certain entities are established in a legally sound manner externally, yet are not managed internally as an independent institutional entity. They may possess a commercial registration, articles of association, bylaws, and bank accounts, but in reality, they are managed with a single-person mindset: the resolution rests with them, the information rests with them, and the execution rests with them, while the remaining partners are merely summoned when there is a need for signatures, financing, or absorbing losses.
The gravity of this condition does not surface during periods of harmony; it manifests during a dispute, when a partner inquires about financial statements, requests assembly minutes, objects to a financial transaction, or demands to know how the external auditor was appointed or why they were not invited to a meeting.
At that juncture, the question ceases to be administrative and becomes strictly legal: Did the company respect the partner’s rights? Did the director satisfy their fiduciary duties? Was the resolution adopted by the competent body? And can the company substantiate the propriety of its resolutions from the reality of its records?
An article published upon the establishment of the General Department of Governance and Compliance at the Ministry of Commerce in 2016 indicated that this direction was initiated to verify companies’ compliance with the regulations and standards governing corporate management and the protection of shareholders’ and stakeholders’ rights. This angle remains present today; because numerous modern partnership disputes confirm that deficient governance is not a formal defect, but a direct catalyst for escalating disputes.
Financial Statements: An Absolute Statutory Right or a Matter of Management Discretion?
Among the most recurring points of dispute among partners in LLCs and Closed Joint Stock Companies is the method of handling the company’s financial statements. Certain directors and executives treat these statements as an internal affair concerning the financial department exclusively, or assume that providing partners with them is a discretionary matter subject to management’s preferences. This is a fundamental legal error that entails severe personal liability.
Financial statements are not merely mute mathematical figures; they are the sole statutory language through which a partner or investor understands the true performance of their company. Through them, they obtain answers to the following questions:
- Did the company generate actual profits or mere accounting/book losses?
- What is the volume of short-term and long-term liabilities and debts?
- Are there personal financial withdrawals made under the accounts of partners or directors?
- Are there financial transactions and contracts executed with “related parties” without a statutory license?
The Ramifications of Depriving a Partner of Inspecting Financial Statements:
When a partner is deprived of financial statements or when their delivery is delayed past the deadlines prescribed in the New Saudi Companies Law, they are not merely deprived of paperwork; rather, they are statutorily stripped of the capacity to adopt a conscious and legal investment position, such as:
- Voting on whether or not to discharge the director or members of the Board of Directors from liability.
- Approving the continuity of the company or adopting a resolution to inject new capital.
- Objecting to suspicious financial transactions or filing a liability lawsuit (دعوى المسؤولية) against management.
Global governance principles ($OECD/G20$) emphasize that the governance framework must support full and timely disclosure on all material developments, and facilitate shareholders’ access to financial information to enable them to exercise their rights effectively. In judgments issued by Saudi Commercial Courts, the invalidation of resolutions and the dismissal of directors repeat constantly based on the withholding of or stalling in delivering financial statements, given that such conduct constitutes a breach of statutory management duties.
The General Assembly is Not a Protocol Meeting
The General Assembly is not a formal occasion designed to ratify what management has predetermined; it is the statutory arena where partners or shareholders exercise their fundamental rights: discussion, voting, appointing the external auditor, electing the board of directors, approving financial statements, examining the continuity of the company upon absorbing losses, or adopting material resolutions affecting the capital or corporate structure.
Obstructing the assembly, delaying it, or summoning it in an incomplete manner opens a wide door for disputes. A resolution that may appear sound in its ultimate outcome may become subject to invalidation if it was not preceded by a proper enablement of shareholders or partners to access data, or if the summoning and voting procedures were violated. Therefore, a company that fails to organize its assemblies clearly places itself before two problems: a compliance problem before the regulatory authority, and an evidentiary enforceability (حجية) problem before the judiciary when a dispute arises.
The governance matrix issued by the International Finance Corporation ($IFC$) for family-owned or unlisted enterprises underscores that the baseline of governance practices initiates from the existence of a clear board or management, an annual meeting of owners or shareholders, core shareholder rights, and regular financial disclosure.
How is Time an Integral Element of Governance?
Governance is not confined to the validity of a resolution; it extends to its timing and the procedures for objecting to it. An assembly resolution may be subject to a challenge when it violates the law or the articles of association/bylaws, but delaying the objection may lead to the immunity (تحصين) of the resolution and the forfeiture of the opportunity to contest it.
Published commercial judgments reveal that a lawsuit seeking the nullification of an assembly resolution shall not be heard after the expiration of the statutorily prescribed period, even if the plaintiff asserts the existence of violations in the resolution or its procedures. This is because the stability of the company’s statutory and economic positions is linked to respecting the limitation periods for challenges.
This is a pivotal point in managing partnership disputes. A partner who becomes aware of a violation and fails to act within the prescribed time may lose a critical protective mechanism. Conversely, a company that documents its summons, procedures, and resolutions in a timely manner possesses a more robust defense upon a challenge. Time, therefore, is not a procedural detail; it is an element of governance. Assemblies have deadlines, objections have deadlines, and depositing resolutions and updating data have deadlines; any delay in any of them may transform an administrative defect into a judicial dispute or a regulatory violation.
The Right of Inspection is Not a Secondary Right
A partner’s or shareholder’s right of inspection (حق الاطلاع) is one of the most critical instruments of internal oversight in unlisted companies. A non-managing partner cannot monitor management, evaluate its resolutions, or protect their stake unless they can access the baseline of information and records.
It is an error to handle an inspection request as an adversarial act or a threat. In a healthy company, an inspection request is part of the statutory relationship between the partner and the company. Denying it or stalling gives an opposite signal: that there is something to be concealed, or that management does not practically recognize partners’ rights.
Published commercial judgments demonstrate that an inspection request may be independent of the summons to an assembly, and a director’s refusal to enable a partner to inspect the company’s documents may turn into a ground that compels them to resort to the judiciary, which may entail ramifications extending beyond the mere subsequent delivery of documents.
Here, attention must be paid to a practical point: delivering documents after the initiation of a dispute does not always erase the effect of prior stalling. The issue is not merely “Was the document delivered?”—but rather “Was the partner forced to resort to an administrative or judicial authority to obtain it?”
Governance is Not Limited to Transparency: Conflicts of Interest Are Equally Perilous
A common error is restricting governance to transparency alone. Transparency is vital, but insufficient; financial statements may be dispatched and assemblies convened, yet the company remains exposed to another governance risk: conflicts of interest.
A conflict of interest surfaces when a board member or a director possesses a direct or indirect interest in a contract or transaction executed for the company’s account, or when they compete with the company, or exploit its assets, information, or opportunities to achieve a private interest. This is not an abstract ethical matter; it is a statutory issue that opens the door to liability, claims for damages, the nullification of transactions, or compelling the interested party to disgorge any realized benefits.
Published commercial judgments uncover that conflict-of-interest disputes manifest in multiple forms: a competing entity owned by or partnered in by a board company member, contracts or transactions with related enterprises, leasing a property to the company without sufficient disclosure, or alleging the concealment of material data from the board or assembly.
In one judgment, the Court did not accept a claim seeking the restitution of a board member’s remuneration merely because conflict-of-interest violations were attributed to them; because the Court determined that the basis of a remuneration claim differs from the basis of a claim for accounting and damages arising from conflict-of-interest violations. This is an important outcome: the poor selection of a prayer (الطلب القضائي) may weaken a lawsuit, even if the facts are viable from another perspective. This confirms that governance does not merely concern “the existence of a violation,” but its proper legal characterization as well. Unfair competition, conflicts of interest, restitution of remunerations, damages, and the nullification of contracts are all distinct tracks, each possessing its own conditions, evidence, and effects.
The Role of the Ministry of Commerce in Governance and Compliance
Within the Ministry of Commerce sits the General Department of Corporate Governance and Compliance. The Ministry states that this department aims to verify companies’ compliance with the Companies Law and its regulations. Its mandates encompass monitoring the implementation of governance controls, inspecting companies, overseeing the execution of commercial laws, tracking the convening of general assemblies and the submission of financial statements, and examining violations of the Companies Law.
This role is vital because it renders certain governance violations subject to administrative recording, rather than being confined to judicial disputes among partners. Failing to convene an assembly, failing to submit financial statements, or failing to enable a partner to exercise their statutory rights may constitute the subject of an administrative complaint, inspection, or referral to a specialized committee.
The Ministry of Commerce further provides an electronic service for reporting violations of the Companies Law, allowing the notification of practices that may constitute a breach of the Law or its Implementing Regulations, accompanied by supporting documentation, without the need to visit the Ministry’s branches. Published commercial judgments reveal that correspondences from the General Department of Governance and Compliance can form the basis for presenting violations before the Committee for Reviewing Violations of the Companies Law Provisions, such as the failure to invite for assemblies or failure to provide the Ministry with financial statements, and these administrative tracks may subsequently intersect with judicial disputes among partners or against the Ministry’s decisions. However, the Ministry of Commerce’s role does not imply that every dispute will terminate administratively; the Ministry records, examines, and handles the violation from a regulatory standpoint, whereas private rights—such as damages, nullification of a resolution, or specific performance—require recourse to the Commercial Court.
Why Do Governance Disputes Constantly Reoccur Before the Judiciary?
The recurrence of this category of disputes before Commercial Courts is not a coincidence. The reason is that deficient governance postpones the problem rather than resolving it. When resolutions are undocumented, financial statements undispatched, assemblies unconvened, and partners obstructed from inspection, the relationship remains entirely predicated upon personal trust. If trust terminates, nothing remains to govern the relationship except documentation. If documentation is deficient or disorganized, the dispute mutates into an evidentiary battle.
At this stage, the company loses before the partner loses; because management’s time is consumed by responses, complaints, and lawsuits, corporate reputation is impaired, financing entities or investors hesitate, and the company’s resolutions become subject to skepticism. A company that cannot prove the propriety of its resolutions internally will find it difficult to defend them externally.
This is not merely a legal inference; economic studies link the quality of governance to investor confidence and corporate performance. The International Finance Corporation ($IFC$) launched an empirical study to test the relationship between the governance quality of its clients and their financial and economic performance over an investment period typically spanning four to five years. The study materials concluded that better governance is associated with superior outcomes and supports value creation.
Governance in Family-Owned Companies: It is Not Just Succession, But Dispute Management
In family-owned companies, governance is not restricted to regulating management; it extends to regulating the nexus between the family, ownership, and the enterprise. Here, the risk multiplies; because a commercial disagreement can quickly turn into a family dispute, and a family dispute directly reflects upon the company’s resolutions.
Recent reports on family businesses confirm that good governance reduces disputes, clarifies decision-making tracks, and supports multi-generational sustainability. KPMG’s 2025 Global Family Business Report indicates that 67% of high-performing family businesses possess formal boards, compared to 61% in the global sample, and notes that the Middle East and Africa recorded the highest percentage of formal boards within the regional sample.
Furthermore, PwC materials concerning leadership succession planning in family businesses in the region point to the importance of transitioning toward more institutional boards, introducing independent members from outside the family, and adopting appropriate legal and organizational structures to safeguard the continuity of family enterprises. This is particularly relevant to the Saudi market; because a substantial portion of unlisted companies possesses a familial or quasi-familial character. In these enterprises, the existence of articles of association or bylaws is insufficient; what is required is the existence of practical rules to manage the relationship between the family and the company, between ownership and management, and between the founding generation and the succeeding generation.
A Procedural Roadmap for the Protection of Partners and Directors
To avoid falling into the pitfalls of judicial disputes and reaching the stage of corporate liquidation, our Firm outlines a preventive and practical roadmap for all parties to the corporate relationship:
First: What Must a Partner (Non-Manager) Do?
- Avoid Emotional and Verbal Escalation: Initiate immediately by submitting written, formal, and dated requests via the communication channels approved in the articles of association.
- Define the Scope of the Request Precisely: Draft the request in a professional manner that specifies the required document (e.g., the books of account for the financial year ended in 2025 AD), stating the statutory basis and defining a reasonable grace period for compliance.
- Document the Refusal/Withholding: Retain proofs of delivery of requests and the company’s responses (or its silence) to construct a robust evidentiary file (حجية) prior to approaching the Ministry of Commerce or the Commercial Judiciary.
Second: What Must the Company and the Chief Executive Officer Do?
- Institutionalize Procedures Internally: Adopt written internal policies and regulations that govern inspection rights, assembly schedules, and delineate the mechanism for disclosing conflicts of interest and the matrix of authorities (مصفوفة الصلاحيات).
- Handle Requests Professionally: Do not handle inspection requests as a threat; rather, treat them as a periodic audit tool for compliance. Inspection of confidential data can be organized through controls that protect the company’s interests without expropriating the core of the partner’s right.
- Document the Propriety of Executions: A director or board member must document all their commercial resolutions with due diligence studies and supporting records, presenting them to the General Assembly or the Board for statutory licensing. Governance protects the competent director, proves their commitment to the duties of care and loyalty, and wards off personal and joint liability (المسؤولية التضامنية).
Conclusion: Governance is Prior Prevention, Not Late Therapy
Governance is not a file to be opened upon a dispute; it is the system that prevents the dispute from the outset, or renders it limited if it occurs.
In unlisted Saudi companies, the most perilous disputes are not permanently those that initiate with a financial claim, but those that initiate with a loss of trust in information: financial statements left undelivered, an assembly unconvened, minutes that fail to appear, a partner obstructed from inspection, a board member possessing an undisclosed interest, or an assembly resolution challenged after the expiration of the statutory period.
When a company loses its capacity to prove that it managed its resolutions with transparency, every resolution becomes subject to interrogation, every delay subject to interpretation, and every deficiency in documentation capable of mutating into a full-scale lawsuit.
A company that respects governance does not merely protect the partner; it protects itself from having its daily management transformed into judicial litigation. Good governance is not an abundance of paperwork; it is clarity in resolutions, equity in information, and the capacity to provide proof at the first sign of disagreement.
