Sakina Advisory — Market Entry & Governance in Saudi Arabia

The legal framework for shareholder agreements

The Ministry of Commerce explains that the Companies Law permits founders, partners and shareholders to conclude agreements governing their relationship during or after incorporation. These arrangements can be incorporated into the company's constitutional documents — its articles of association or equivalent — or maintained as separate agreements between the parties.

The appropriate structure for governance arrangements, and the enforceability of individual provisions, require transaction-specific legal assessment. This article sets out the questions that a joint venture governance framework should address; it does not substitute for advice on the specific transaction.

Decision rights: the core of any governance framework

The most important governance questions concern who can decide what. A joint venture governance framework should specify, for each significant category of decision, whether it can be made by management alone, requires board approval, requires approval by one partner, or requires the agreement of both partners.

The categories that typically require careful treatment include: approval of the annual budget and any material variance from it; new borrowing or the provision of security; capital expenditure above a defined threshold; entry into contracts above a defined value or with related parties; appointment and removal of senior management; changes to the business plan or scope; and any transaction that would affect the ownership structure.

Decisions that require both parties' agreement — sometimes called reserved matters or consent rights — give each partner a veto. Use them carefully. Too many reserved matters can paralyse the business; too few can leave a minority partner without meaningful protection. The right balance depends on the relative stakes, the partners' roles in the business and the nature of the commercial opportunity.

Funding: what happens when more capital is needed

One of the most common sources of joint venture disputes is disagreement about additional funding. The governance framework should address: what happens if the business needs more capital than the initial investment; whether partners are obliged to contribute additional funding; what happens if one partner is willing to contribute and the other is not; and whether the business can borrow externally and on what terms.

If partners are not obliged to contribute additional funding, the framework should specify what happens to the ownership structure if one partner contributes and the other does not. Dilution provisions — where the non-contributing partner's stake is reduced — are common, but the mechanics need to be agreed in advance. Disputes about dilution are much harder to resolve after the fact.

Management: appointment, authority and accountability

The governance framework should specify how the management team is appointed, what authority management has to act without board approval, and how management performance is assessed and, if necessary, addressed. Where one partner nominates the chief executive and the other nominates the chief financial officer, the framework should address what happens if the two nominees disagree on a significant matter.

Related-party transactions — contracts between the joint venture and one of its partners or their affiliates — deserve specific treatment. The framework should require disclosure, independent approval and, where appropriate, benchmarking against market terms. Related-party transactions that are not properly governed are a common source of minority partner complaints and regulatory scrutiny.

Intellectual property, transfers and exit

If one or both partners are contributing intellectual property to the joint venture, the framework should address ownership, licensing terms and what happens to the IP if the joint venture is dissolved or one partner exits. IP contributed to a joint venture can be difficult to recover if the arrangements are not clearly documented at the outset.

Transfer restrictions — rights of first refusal, tag-along rights, drag-along rights — determine what happens if a partner wants to sell its stake. These provisions protect both partners: a right of first refusal gives the remaining partner the opportunity to buy before a third party does; tag-along rights allow a minority partner to sell alongside a majority partner; drag-along rights allow a majority partner to compel the minority to sell in a trade sale.

Exit provisions — including put and call options, deadlock mechanisms and dissolution procedures — address what happens if the partners cannot agree or one partner wants to exit. Deadlock mechanisms are particularly important in 50/50 joint ventures where neither partner has a casting vote.

Checking the arrangements against Saudi law

Ask advisers to check how the negotiated governance arrangements work with the company's constitutional documents and applicable Saudi law. Some provisions that are standard in joint venture agreements in other jurisdictions may require adaptation for Saudi Arabia. The Companies Law framework has specific provisions about shareholder agreements and constitutional documents that affect how governance arrangements are structured and enforced.