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Family Charter in Saudi Companies: How Does It Regulate Ownership and Management and Reduce Disputes?

Family-owned businesses play a significant role in the business sector in the Kingdom of Saudi Arabia. As a company grows and ownership passes from one generation to another, a number of challenges may arise:

Who will manage the company?
How will ownership be transferred?
Who is entitled to work in the company?
How should disputes among family members be handled?

This is where the Family Charter emerges as one of the mechanisms permitted under the Saudi Companies Law to provide a clearer framework for the relationship between the family and the company and to support the sustainability of the business while regulating its ownership and management.

What Is a Family Charter?

A Family Charter is an agreement that may be entered into by family-owned companies to regulate various matters related to family ownership, corporate governance and management, as well as employment policies, the employment of family members, profit distribution, the transfer or disposal of shares or interests, and mechanisms for resolving disputes and disagreements.

Article 11 of the Saudi Companies Law permits the conclusion of a Family Charter for these purposes. It also allows the charter to form part of the company’s Articles of Incorporation or Bylaws, provided that it does not conflict with the law, the Articles of Incorporation, or the company’s Bylaws.

In simple terms, a Family Charter allows family members to agree in advance on how important matters will be managed, rather than leaving these matters to become sources of conflict when circumstances arise.

What Does a Family Charter Regulate?

There is no single Family Charter model that is suitable for every family-owned company. The needs of each family business differ depending on its activities, size, number of partners, shareholders, and family members.

However, the Companies Law identifies a number of matters that may be addressed in a Family Charter, including:

1. Regulating Family Ownership

One of the most important matters requiring clear regulation is company ownership.

As the number of family members increases or ownership passes from one generation to another, questions may arise regarding shares or ownership interests, how they may be transferred, and how they should be dealt with among family members.

Having a clear agreement from the outset can help regulate these matters in accordance with the parties’ agreement and applicable legal requirements.

2. Corporate Governance and Management

Not every family member necessarily needs to have the same role in managing the company.

Accordingly, a Family Charter may address management and governance mechanisms, regulate the relationship between family members and the company, and define the roles and responsibilities agreed upon by the parties.

This is particularly important for companies that have expanded to include multiple branches, business activities, or a larger group of partners and shareholders.

3. Family Employment Policy

One of the most sensitive issues that may arise in family-owned companies is the employment of family members.

Is being a family member sufficient to qualify for employment? Or should specific qualifications, experience, and professional criteria be required?

A Family Charter may establish a policy governing the employment of family members based on the parties’ agreement. This can help clarify the applicable criteria and reduce disputes concerning positions and employment opportunities within the company.

4. Profit Distribution

Profit distribution is one of the matters that requires clarity among partners and shareholders.

A Family Charter may therefore address profit distribution mechanisms and related policies, while taking into account the applicable legal requirements and the company’s Articles of Incorporation or Bylaws.

Clear rules can help reduce differences in expectations and opinions, particularly where the company has multiple partners or shareholders.

5. Transfer or Disposal of Shares or Ownership Interests

What happens if a family member decides to sell their shares or ownership interest?

Do other family members have priority? How should the admission of a new owner or shareholder be handled?

These are among the matters that may be addressed in a Family Charter, subject to the Saudi Companies Law and the company’s Articles of Incorporation or Bylaws.

6. Handling Disputes and Conflicts

Disputes within family-owned companies may begin with a relatively simple issue. However, without a clear framework for addressing them, they may escalate and ultimately affect the company itself.

For this reason, the Companies Law allows a Family Charter to include mechanisms for resolving disputes and disagreements.

The purpose is not to assume that disputes will occur, but rather to establish a clear mechanism for addressing them if they do arise.

Is a Family Charter Legally Binding?

Yes. The Saudi Companies Law provides that an agreement or Family Charter is binding. It may also form part of the company’s Articles of Incorporation or Bylaws.

However, an important point must be emphasized: the Family Charter must not conflict with the Companies Law, the company’s Articles of Incorporation, or its Bylaws.

The Implementing Regulations of the Companies Law also clarify that where a Family Charter forms part of the company’s Articles of Incorporation or Bylaws, the quorum and procedures required to amend it shall follow the procedures applicable to amendments of the Articles of Incorporation or Bylaws, depending on the company’s legal form.

This highlights the importance of drafting the Family Charter carefully and ensuring consistency with the company’s governing documents.

What Is the Difference Between a Family Charter and a Shareholders’ or Partners’ Agreement?

There may be some overlap between the two, but each serves a different purpose and scope.

The Companies Law permits founders, partners, or shareholders to enter into agreements regulating their relationship with one another or with the company, including arrangements concerning the admission of their heirs into the company.

By contrast, the Family Charter is specifically intended to address matters related to family ownership, corporate governance and management, employment policies, the employment of family members, profit distribution, the transfer or disposal of shares or ownership interests, dispute resolution, and other related matters.

Accordingly, selecting the appropriate legal instrument and ensuring that it is properly drafted in accordance with the company’s circumstances is an important step before adopting any such agreement.

Why Is a Family Charter Important for Businesses Passing from One Generation to Another?

As a company passes from its founder to children and then grandchildren, the nature of the business and the number of stakeholders may change significantly.

Arrangements that were suitable for a company managed by a founder and his children may no longer be appropriate for a company owned by a larger number of family members.

This is where a clear framework governing ownership, management, and the relationship between the family and the company becomes particularly important.

The Companies Law also permits arrangements governing how heirs may enter the company, whether individually or through a company established by them for this purpose.

This provides family-owned businesses with greater flexibility to organize ownership succession and relationships between generations in a clearer and more structured manner.

Does Every Family-Owned Company Need a Family Charter?

There is no single Family Charter that is suitable for every company, and simply copying a template and applying it to any family business may not be sufficient.

The company’s needs may vary depending on:

The company’s legal form and business activities.
The number of partners and shareholders.
The number of family members.
The ownership structure and distribution of shares or ownership interests.
The involvement of multiple generations in the business.
The current management structure.
Expansion plans.
Ownership succession arrangements.
The nature of the relationship between the family and the company.

Therefore, the most important consideration is to ensure that the Family Charter is tailored to the company’s actual circumstances and objectives and is consistent with the Companies Law and the company’s Articles of Incorporation or Bylaws.

Common Mistakes That May Weaken a Family Charter

There are several issues that should be carefully considered when preparing a Family Charter:

First: Using a Generic Template Without Assessing the Company’s Circumstances

Every family-owned company has its own circumstances. Relying on a generic template may leave important matters unaddressed.

Second: Including Provisions That Conflict with the Company’s Governing Documents

The Family Charter must be consistent with the applicable law, the company’s Articles of Incorporation, and its Bylaws.

Third: Failing to Address Intergenerational Ownership Succession

If ownership succession is not clearly addressed, disputes may arise upon the death of a partner or the transfer of ownership to the next generation.

Fourth: Failing to Establish a Dispute Resolution Mechanism

Agreeing on a clear mechanism for dealing with disputes from the outset is preferable to addressing the issue only after a conflict has arisen.

Fifth: Focusing on Ownership While Neglecting Management

A Family Charter is not simply about answering the question, “Who owns what?”

It may also regulate matters relating to management, governance, employment policies, the employment of family members, and other important aspects of the relationship between the family and the company.

A Family Charter as a Step Toward Business Sustainability

A successful family business is not merely one that generates profits today. It is also one that can maintain stability and continue to operate successfully as generations change.

For this reason, regulating the relationship between the family and the company is an important consideration during periods of growth and expansion.

The Saudi Companies Law allows family-owned businesses to benefit from Family Charters to regulate ownership, corporate governance, management, profit distribution, the transfer or disposal of shares or ownership interests, dispute resolution, and other matters, thereby supporting the sustainability and effective organization of family businesses.

When Should a Family-Owned Company Review Its Family Charter?

If the company is entering a new stage, such as:

The entry of a new generation.
A change in the ownership structure.
Significant business expansion.
The admission of new partners or shareholders.
Management restructuring.
Changes in the distribution of shares or ownership interests.

it is important to review the Family Charter and the company’s related documents and ensure that they remain consistent with the company’s current circumstances.

Arrangements that were appropriate several years ago may need to be updated as the company, family, and ownership structure evolve.

Conclusion

A Family Charter is not merely an additional document for a family-owned company.

It is a tool for organizing the relationship between the family and the company across a range of important matters, including:

Ownership.
Management.
Corporate governance.
Employment of family members.
Profit distribution.
Transfer or disposal of shares or ownership interests.
Dispute resolution mechanisms.

More important than simply having a Family Charter is ensuring that it is clearly drafted, consistent with the Saudi Companies Law and the company’s Articles of Incorporation or Bylaws, and tailored to the company’s actual circumstances and needs.

If your company is family-owned and you need to organize the relationship between family members and the company or review an existing Family Charter, specialized legal review can help you understand the available options and structure them in accordance with the applicable laws and regulations in the Kingdom of Saudi Arabia.

Al-Omari Law Firm

Lawyers and Legal & Sharia Consultants

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Legal Disclaimer: This article is provided for general educational and informational purposes only and does not constitute legal advice for any specific case. Rights, obligations, and applicable procedures may vary depending on the facts of each case, the type of legal action involved, and the applicable laws and regulations. Accordingly, professional legal advice should be sought where appropriate.