How does a partner sell a stake in a Saudi LLC, and what must the share transfer agreement state?

When may a partner transfer their share?

Article 178 of the Companies Law distinguishes two cases. The first is a transfer to one of the existing partners, which is permitted under the conditions set in the company's articles of association, so it does not go through the pre-emption procedure the article sets for transfers to outsiders, though it remains subject to whatever the articles require. The second is a transfer to a person who is not a partner, whether for consideration or without it, and here notice through the manager is required and the other partners have a right of pre-emption before the share reaches the outsider.

• Transfer to an existing partner: first review the share transfer chapter of the articles of association, which may require consent, notice or a particular split among the partners.
• Transfer to an outsider, for consideration or not: notice through the manager is required, every partner has the pre-emption right, and the right to transfer to the outsider arises only once its period ends without it being exercised.
• A share passing by inheritance, by will or under a judgment of the competent judicial authority: the pre-emption right does not apply to it under paragraph 4 of Article 178.

Notice through the manager and the pre-emption right, step by step

The pre-emption right is the safeguard that prevents an outsider entering the company without the partners first having the chance to buy the share on the same terms. Article 178 sets it out in a clear sequence that starts with the selling partner and ends either with the partners or the company buying the share, or with freedom to sell to the outsider.

1. The partner wishing to transfer notifies the other partners through the company's manager, stating in the notice the name of the transferee or buyer and the terms of the transfer or sale.
2. The manager notifies the other partners as soon as the notice reaches him, without holding or delaying it.
3. Each partner may ask to redeem the share and pay its value, or for the company to buy it, within thirty days from the date of the manager's notice, at the price agreed.
4. If more than one partner asks to redeem, the share is divided among them in proportion to each one's share of the capital.
5. If the value of the share is disputed, one or more accredited valuers assess it in a report setting out the fair value of the transferring partner's share, at the cost of the partner seeking redemption or of the company, as the case may be.
6. If the period ends without a redemption request, or the requesting partner does not pay the value, or the company does not buy the share within it, the partner may transfer it to the outsider.

The articles of association play a large role here, since paragraph 3 of Article 178 allows the articles to provide other procedures for notice of the transfer, another valuation method, or a longer period to exercise the pre-emption right and pay the value or for the company to buy the share. The text specifically mentions a longer period, so do not assume the articles can shorten the thirty days. A purchase by the company of its own shares requires that its articles allow it. So read the articles of association before any step, as they may contain something that changes the whole route.

What does the share transfer agreement state, section by section?

Once it is clear that the transfer is permitted and that the pre-emption right has been exhausted or does not apply, the agreement that governs the relationship between transferor and transferee follows. A good agreement does not stop at stating the price; it ties each obligation to the stage at which it falls due.

• Parties: full details of the transferor and the transferee, the company's details and commercial register, and the capacity of anyone signing for a legal entity together with their authority document.
• The share and its percentage: the number of shares transferred, their nominal value and their percentage of the capital, and whether the transfer is full or partial.
• Price and payment: the amount in riyals, the payment dates, what is paid on signing and what is deferred until after registration in the commercial register, and the account it is paid into.
• Representations and warranties: ownership of the share and its freedom from pledge and attachment, proper notice and the lapse of the pre-emption period, and what is disclosed about the company's liabilities.
• Conditions: what must happen before the transfer completes, such as the partners resolution, the amendment of the articles of association and registration in the commercial register.
• Handover of rights and obligations: from what date the transferee steps into the transferor's place for profits and obligations, how profits declared before the transfer are treated, and the handover of documents and authorities.

The partners resolution and the amendment of the articles of association

The articles of association of a limited liability company contain the partners' names and the distribution of capital among them, so every transfer that changes these details needs an amendment of the articles. The Companies Law allows the articles to be amended with the approval of one or more partners representing at least three quarters of the capital, unless the articles require a higher proportion. The partners therefore issue a resolution recording approval of the transfer and adopting the amended articles with the new partners' names and percentages.

• The resolution's preamble: the company's name and register, the date of the meeting or circulation, and those present with their percentages of the capital.
• Approval of the transfer: the transferor, the transferee and the number of shares, with a reference to the pre-emption procedure having been exhausted or waived.
• Amendment of the articles: the amended articles in their new wording, especially the article on capital and its distribution.
• Authorisation: who completes registration with the commercial register and the other authorities.

Registration in the commercial register and updating the company's data with the Ministry of Commerce

This step is not a formality. Under the Companies Law, ownership of shares in a limited liability company passes by registration in the commercial register, and the transfer is effective against the company or third parties only from the date of that registration. A buyer who paid the price and signed the agreement is not treated as a partner before the company and third parties until the amendment is registered. Amending the articles of association and updating the partners' data are done electronically through the Ministry of Commerce services, and the practical details vary with the company's situation, so check them on the official platform at the time.

1. Prepare the partners resolution, the amended articles of association, the transfer agreement and the evidence of notice and of the lapse of the pre-emption period.
2. Submit the request to amend the articles through the Ministry of Commerce e-services, and complete the partners' approvals required on the platform.
3. Confirm that the amendment is registered and that the new partners' names and percentages appear in the commercial register before paying the deferred part of the price.
4. Update the company's details with the bank and the other bodies it deals with, and review the zakat and tax consequences of the deal with a specialist before signing.

The final checklist for the seller and the buyer

1. Read the share transfer chapter of the articles of association and any existing shareholders agreement.
2. Establish whether the buyer is an existing partner or an outsider, as the route differs.
3. Send the notice through the manager with the name and terms, and keep proof of the date it arrived.
4. Wait for the full pre-emption period to lapse or obtain the partners' written waiver of it.
5. Sign the transfer agreement with its six sections, and tie part of the price to registration.
6. Issue the partners resolution and adopt the amended articles of association by the required majority.
7. Complete registration in the commercial register, then hand over the documents and authorities.

This guide covers the transfer transaction itself, while the shareholders agreement covers the exit rules the partners agree in advance before any of them wants to sell, so turn to the guide on the LLC shareholders agreement to draft those rules. To draft and record the resolution, see the guide on partners resolutions and general assembly minutes; if your company has a collective management, see the guide on board of managers resolutions; and for how profits are treated on a transfer, see the guide on the dividend distribution resolution.

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