In light of the Kingdom of Saudi Arabia's commitment to investment diversification and attracting numerous investments within the Kingdom, and considering investors' desire to join legal entities based on personal liability, one of the most significant legal entities according to the Saudi system issued by Royal Decree No. (M/132) dated 1/12/1443 AH is the "partnership company." It serves as a strategic partner for the partners due to being established on personal considerations for each partner. Each partner is personally liable for all their assets and jointly liable for the company's debts and obligations. This article discusses how to establish a partnership company within the Kingdom of Saudi Arabia, as well as its regulations, summarized as follows:
- Concept of a partnership company.
- Management of the partnership company and the scope of partners' powers.
- Prohibited business activities for the manager and partners.
- Is it permissible for the company's manager to resign from their position, and the procedure for their removal.
- Evaluation of partners' shares and their transfer.
- Admission of new partners to the partnership company, their withdrawal, and the transfer of their shares in the company.
- Distribution of profits and losses among partners.
- Execution against the partner's assets in case of proven debts.
- Cases leading to the dissolution of the partnership company.
The concept of a partnership company:
It is a company established by two or more individuals, whether natural or legal persons, where they are personally liable for all their assets and jointly liable for the company's debts and obligations. The partner in this company acquires the status of a merchant.
Management of the partnership company and the scope of partners' authorities:
The partners manage the company, with one of them being designated as the representative in management if they are a legal person.
The partners may agree in the founding contract or in a separate agreement to appoint one or more directors, whether among themselves or from outside.
In case of multiple directors (whether partners or outsiders) without specifying their responsibilities, each of them may individually carry out any management task. The other directors have the right to object to any action before it becomes binding in dealing with outsiders. The decision is based on the majority opinion of the directors, and in case of a tie, the matter is presented to the partners to make a decision on it.
The director or directors undertake all activities related to the company's business and represent it before the judiciary, arbitration bodies, and others unless the founding contract explicitly limits their powers.
In all cases, the company is bound by any action the director takes on behalf of the company within the scope of its activities, unless the party dealing with the company acted in bad faith.
Decisions of the partners are made by numerical majority, unless the decision concerns amending the founding contract, in which case it must be made by unanimous agreement of the partners unless the founding contract states otherwise.
Prohibited business activities for the manager and partners:
The manager is prohibited from directly engaging in activities that do not serve the company's purpose unless authorized by the partners or explicitly stated in the company's founding contract. The following activities are prohibited:
- Establishing or closing company branches, except with a decision from the partners or explicit provision in the company's founding contract.
- Donations, except for customary small donations.
- Guaranteeing the company for third parties.
- Settling the company's rights.
- Selling the company's real estate or mortgaging it unless the sale aligns with the company's purpose.
- Selling the company's commercial premises or mortgaging them.
- Borrowing on behalf of the company.
The manager is also prohibited from entering into contracts for their personal benefit with the company unless authorized by all partners, issued separately in each instance. The partners can delegate one or more directors to grant such authorization to any of the company's directors in case of multiple directors.
The manager and partners are prohibited from engaging in activities of the same nature as the company's business without permission from all partners, which must be renewed annually. The partners can delegate one or more directors to grant this permission to any of the company's directors in case of multiple directors.
- It is not permissible for a non-manager partner to interfere in the company's management. However, they are allowed, or those they authorize, to inspect the company's operations twice during the fiscal year. They may examine the company's records and documents and prepare a brief statement on the company's financial position based on these records and documents. They can offer opinions to the company's manager, and any agreement contrary to this provision is deemed null and void. (not clear)
Is it permissible for the company's manager to resign from their position, and what is the procedure for their removal?
The company's manager, whether a partner or an outsider, may resign from their managerial position, provided that they inform the partners in writing at least sixty days in advance unless the founding contract or separate agreement specifies otherwise. Otherwise, they will be responsible for compensating any resulting damages due to their resignation.
The manager's resignation or removal from their position does not lead to the company's dissolution unless the founding contract states otherwise.
If the manager is a partner according to the founding contract, they cannot be removed except by a decision unanimously agreed upon by the partners unless the founding contract states otherwise. If the manager is appointed through a separate agreement, they can be removed by a decision made by a numerical majority of the partners.
If the manager is not a partner, whether appointed under the founding contract or a separate agreement, they can be removed by a decision made by a numerical majority of the partners.
The appointed manager under the founding contract or a separate agreement, whether a partner or an outsider, can be removed based on a final ruling from the competent judicial authority.
Evaluation of partners' shares and relinquishing them:
In accordance with Article 42 of the Saudi system issued by Royal Decree No. (M/132) dated 1/12/1443 AH, it stipulates the following:
- The partners' shares cannot be represented in tradable securities.
- A partner cannot relinquish all or part of their shares except while considering the limitations specified in the company's founding contract or with the consent of the remaining partners. Any agreement to relinquish shares without adhering to the restrictions or obtaining the partners' approval is considered void.
- A partner can transfer their financial rights associated with their shares in the company to a third party, and this transfer only affects the parties involved.
The estimation of a partner's share in a partnership company is conducted as follows:
1. In the event of a partner exiting the partnership company, withdrawing, initiating liquidation proceedings according to the insolvency system, or in case of the partner's death with no entry of their heirs into the company, and if the founding contract does not specify an evaluation method, a report prepared by one or more certified appraisers demonstrating the fair value of each partner's share in the company's assets at the time of the event shall determine the process. The partner or their heirs shall not have a share of what occurs thereafter (not legal English) unless it is a result of operations preceding that event.?????
2. In the event of a partner relinquishing their shares and the founding contract does not specify an evaluation method, the evaluation of their share will be based on the agreed-upon value with the transferee.
Joining, withdrawing, and transferring shares in a partnership company:
Joining, Withdrawing, Exiting, or Transferring Ownership:
1. If a partner enters with a new share, they become personally liable for all their assets and jointly liable with the other partners for the debts of the company, both existing and future debts related to their entrance. Nonetheless, they may be exempted from previous debts with the consent of all partners, and this agreement applies to creditors from the date of their registration in the commercial registry.
2. In the case of a partner's withdrawal or exit from the company, they are not responsible for debts arising after their withdrawal is recorded in the commercial registry of the company. They remain liable for debts incurred before that unless relieved of this responsibility by the consent of the remaining partners and the company's creditors.
If a partner transfers their share, the transferee becomes responsible for debts, both existing and future debts related to their new ownership. The transferee is not liable to creditors unless they object to being relieved of liability within 30 days from being informed by the company. In case of objection, the transferee is jointly liable for debts preceding the share transfer.
Procedures for a partner's withdrawal and exit from the company:
1. A partner has the right to withdraw from the company at their sole discretion, provided they notify the other partners at least 60 days before the withdrawal, unless the company's founding contract specifies otherwise.
2. The founding contract of the company may stipulate procedures for partners' exits. If not specified, a numerical majority of the partners can request the competent judicial authority for the exit of one or more partners if there are legitimate reasons for doing so. The company remains intact among the remaining partners.(must be rephrased!!!)
3. The exiting partner or the remaining partners, in the case of a partner's exit, must have the withdrawal recorded in the company's commercial registry. The withdrawal does not affect external parties until the registration comes into effect.
4. The competent judicial authority can decide to dissolve the company based on the request of one or more partners if circumstances warrant the dissolution.
Distribution of Profits and Losses Among Partners:
At the end of the company's financial year, each partner's share of profits and losses is determined based on the approved financial statements in accordance with the accounting standards in the Kingdom. Each partner becomes a creditor to the company for their share of profits once determined unless the founding contract specifies special provisions regarding profits and losses.
Any capital deficiencies due to losses in the company are covered from profits in subsequent years. Otherwise, a partner cannot be obligated to cover their capital share shortfall due to losses without their consent.
Execution against a partner's assets in case of proven debts:
A partner cannot be held liable for a debt owed by the company unless the company's liability is proven through a final court judgment or an enforceable instrument. Furthermore, the partner must be formally notified to fulfill the debt, and if the company fails to do so, the partner's assets may be targeted for execution. The partner then has the right to seek reimbursement from the other partners proportionate to what they paid on behalf of each partner's share.
Cases leading to the dissolution of a partnership company:
According to Article 50 of the Saudi system issued by Royal Decree No. (M/132) dated 1/12/1443 AH, the cases leading to the dissolution of a partnership company include:
- A partnership company does not dissolve upon the death, withdrawal, or exit of a partner, or upon their incapacitation, or the commencement of liquidation proceedings according to the insolvency system unless the founding contract specifies otherwise. The company continues among the remaining partners (need to be rephrased!!!, and the deceased partner or their heirs inherit their share in the company's assets. The evaluation of their share is conducted according to the previously explained procedures.
- The founding contract can stipulate that in the event of a partner's death, the company continues with the deceased partner's heirs,(must be rephrased)!! even if they are minors or prohibited from engaging in trade. (not clear). They are only liable for the company's debts up to the extent of their inherited share in the company's capital. The company must be transformed within a year from the date of the deceased partner's death into a simple recommendation company (simple partnership )???, where the minor or the individual prohibited from trading becomes a recommended partner???? NOT CLEAR . If this transformation does not occur within the specified timeframe, the company is dissolved by law after the year, unless the minor reaches the age of maturity during that period or the reason for the prohibition from engaging in trade no longer applies, and the minor or the person prohibited from trading wishes to become a full partner.
- In the event of a partner's death, withdrawal, exit, incapacitation, or the start of liquidation proceedings according to the insolvency system, if only one partner remains in the company, they are given a grace period of 90 days to rectify the company's status by either bringing in another partner or converting the company into another form of company permitted by the Saudi system. Otherwise, the company is dissolved by law after the end of that period.
In conclusion, partnership companies remain the optimal choice to embody the element of mutual cooperation in the world of Saudi entrepreneurship when legally and properly utilized according to the provisions of the Saudi system. This contributes to economic and investment prosperity in the Kingdom of Saudi Arabia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.