The LLC Shareholders Agreement: Why the Articles of Association Are Not Enough
The contract that governs the relationship between partners, settles disputes before they arise, and protects your stake in the company.
When two or more partners establish a limited liability company, they sign the articles of association and register them with the Ministry of Commerce, assuming the relationship between them is now complete. The truth is that the articles of association alone are not enough. They are a brief official document that records the company's existence, the partners' shares, and its purpose, but they rarely answer the hard questions that surface years later: who decides when partners are deadlocked? May one of them sell his stake to an outsider? When and how are profits distributed? What happens if a partner wants to exit or passes away?
This is where the shareholders agreement comes in. It is a private contract concluded between the partners themselves alongside the articles of association, regulating in detail what the official document does not cover. The new Companies Law issued by Royal Decree M/132 of 2022 reinforced this flexibility, granting partners broad freedom to organise their relationship so long as it does not contravene the mandatory provisions of the law.
Sighaty template F-02 gives you a ready, certified, bilingual shareholders agreement covering management, profit distribution, transfer restrictions, dispute resolution, and exit. This guide explains each clause and why it matters.
Get the F-02 Shareholders AgreementWhy the Articles of Association Alone Are Not Enough
The articles of association are a public document registered with the competent authority and accessible to third parties, so they are usually drafted briefly, limited to essential data. The shareholders agreement, by contrast, is a private document between the partners that remains confidential among them, can be far more detailed and flexible, and is easily amended without having to alter and re-register the official deed each time.
- The articles prove the company's existence and the shares; the shareholders agreement governs how that existence is managed day to day.
- The articles are public and published; the shareholders agreement is confidential and seen only by its parties.
- Amending the articles requires formal procedures and registration; the shareholders agreement is amended by the partners among themselves by their agreement.
- The articles are usually silent on disputes, exit, and deadlock; the shareholders agreement is built specifically for these situations.
Management and Decision Thresholds
The most common disputes between partners arise when decisions are made. The shareholders agreement should therefore define who manages the company, which day-to-day decisions the manager takes alone, and which major decisions require partner approval by a defined majority or unanimously. It is customary to distinguish between simple-majority decisions and reserved decisions that touch the core of the company.
- Appointing and removing the manager and setting his powers and remuneration.
- Reserved decisions that require a higher threshold, such as increasing capital, borrowing above a set limit, selling material assets, admitting a new partner, or amending the company's purpose.
- The mechanism for calling partner meetings, the quorum for their validity, the voting method, and the recording of minutes.
Defining thresholds precisely protects the minority partner from having fateful decisions imposed by the majority, and protects the majority from the minority obstructing day-to-day operations.
Profit Distribution
The default is that profits are distributed in proportion to shares, but partners may agree otherwise so long as it does not contravene the law. What matters most is a clear rule: when the financial year closes, how the statements are approved, what percentage is retained for the company's growth before distribution, and when a partner is actually entitled to claim his share.
توزع الأرباح الصافية القابلة للتوزيع على الشركاء بنسبة حصة كل منهم في رأس المال بعد اعتماد القوائم المالية السنوية، وبعد حسم النسبة التي يتفق الشركاء على احتجازها لاحتياطي الشركة، على ألا تتجاوز (٢٠٪) من صافي الأرباح في السنة الواحدة ما لم يقرر الشركاء بأغلبية (٧٥٪) خلاف ذلك. ويستحق كل شريك نصيبه خلال (٦٠) يوماً من تاريخ اعتماد القوائم.
Distributable net profits shall be distributed to the partners in proportion to each one's share in the capital after approval of the annual financial statements, and after deducting the percentage the partners agree to retain as the company's reserve, provided it does not exceed (20%) of net profit in any single year unless the partners decide otherwise by a (75%) majority. Each partner is entitled to his share within (60) days of the date the statements are approved.
Adjust the percentages and periods to suit your company's nature and reinvestment policy.
Transfer Restrictions and Pre-emption
Among the gravest threats to a family company or a company between friends is that one partner sells his stake to a stranger who forces himself as a partner on the others. The shareholders agreement therefore includes restrictions on transfer, foremost the right of pre-emption, which obliges a partner wishing to sell to first offer his stake to the remaining partners on the same terms before selling to any outsider.
لا يجوز لأي شريك أن يتنازل عن حصته أو جزء منها للغير إلا بعد عرضها كتابةً على بقية الشركاء بالثمن والشروط ذاتها المعروضة من الغير. ويكون للشركاء حق أولوية شرائها كل بنسبة حصته خلال (٣٠) يوماً من تاريخ الإشعار. فإذا انقضت المدة دون استعمال الحق، جاز للشريك التنازل للغير بذات الثمن والشروط المعروضة، وذلك مع مراعاة أحكام نظام الشركات.
No partner may transfer his stake or part of it to a third party except after offering it in writing to the remaining partners at the same price and terms offered by the third party. The partners shall have a right of pre-emption to purchase it, each in proportion to his share, within (30) days of the date of notice. If the period lapses without exercise of the right, the partner may transfer to the third party at the same offered price and terms, subject to the provisions of the Companies Law.
This clause is optional if the partners want free transfer, but it is strongly recommended for closely held companies.
Tag-Along, Drag-Along, and Exit
When a large stake is sold to an outside investor, partners need two complementary mechanisms. Tag-along rights protect the minority, giving the smaller partner the right to sell his stake on the same terms on which the larger partner sells, so he is not left locked in with a new owner he does not know. Drag-along rights protect the majority, enabling partners holding a defined majority to compel the minority to sell alongside them when a serious offer to buy the entire company arrives.
- Tag-along: if the larger partner sells, the smaller has the right to join the sale on the same terms.
- Drag-along: if holders of a defined majority accept an offer to buy the whole company, the rest are obliged to sell.
- Exit provisions: govern a partner's withdrawal, death, or incapacity, and how his stake is valued and paid out.
Resolving Deadlock and Disputes
Deadlock occurs when partners are evenly split and the majority needed to take a decision is unavailable, paralysing the company. A good shareholders agreement does not leave this to chance; it sets a ladder of resolution beginning with amicable negotiation, then mediation, then more decisive mechanisms such as a buy-sell (shotgun) clause in which one partner names a price and the other chooses to either sell or buy at that same price, ending with arbitration before an accredited centre.
- Direct negotiation between the partners within a defined period of the dispute arising.
- Resort to neutral mediation if direct agreement proves impossible.
- Activate the buy-sell mechanism if deadlock over fateful decisions persists.
- Refer the unresolved dispute to arbitration before the Saudi Center for Commercial Arbitration under its rules.
في حال نشوء جمود بين الشركاء يتعذر معه اتخاذ قرار في مسألة جوهرية، يلتزم الشركاء أولاً بالتفاوض الودي خلال (٣٠) يوماً، فإن لم يتوصلوا إلى حل أحيل النزاع إلى التحكيم أمام المركز السعودي للتحكيم التجاري وفقاً لقواعده، ويكون قرار هيئة التحكيم نهائياً وملزماً للأطراف.
In the event of a deadlock between the partners that makes it impossible to take a decision on a material matter, the partners shall first undertake amicable negotiation within (30) days; if they reach no resolution, the dispute shall be referred to arbitration before the Saudi Center for Commercial Arbitration under its rules, and the arbitral tribunal's decision shall be final and binding on the parties.
The deadlock clause is optional, but it is essential in companies between two equal partners.
Frequently asked questions
Is the shareholders agreement legally binding alongside the articles of association?
Yes, the shareholders agreement is a binding contract between its parties provided its elements are present, its terms are valid, and it does not contravene the mandatory provisions of the Companies Law. It complements the articles of association and does not replace them; if its terms conflict with the registered articles or the law, what is binding under the law prevails.
When should the shareholders agreement be signed?
It is best signed at the company's formation and before operations begin, when the relationship between partners is clear and bargaining is easier. Delaying it until a dispute arises makes agreeing on its terms much harder. Nonetheless it can be concluded at any later time by agreement of all partners.
What if we are only two partners with equal shares?
This is the case most in need of a shareholders agreement, because parity means a permanent deadlock that no majority can break is possible. Here the deadlock provisions such as mediation, the buy-sell mechanism, and arbitration become necessary rather than optional, ensuring the company continues or one partner exits fairly instead of being paralysed.
This guide was prepared and reviewed by a lawyer licensed in the Kingdom. The content is general guidance, not legal advice; consult a licensed lawyer for your specific case. Where an Arabic and an English text exist, the Arabic text prevails.