Why the founding document a company files once at incorporation is usually the one that causes the most expensive disputes years later — and how to draft it properly under the Companies Law.
| — | Saudi law uses two different terms for a company’s founding document depending on structure: LLCs, joint liability, and limited partnership companies use “articles of association,” while joint stock companies, simplified joint stock companies, and single-shareholder LLCs use “bylaws.” |
| — | The Companies Law leaves significant room for customization within its default rules — governance structure, share classes, transfer restrictions, and exit mechanics can all be shaped in the document itself, rather than defaulting to the statutory baseline. |
| — | Founders, partners, managers, or board members are jointly liable for damages resulting from a failure to register the constitutional document, or its amendments, with the Commercial Register. |
| — | A joint stock company’s minimum issued capital is set by statute at SAR 500,000, with at least one-quarter paid at incorporation — a figure that does not apply to LLCs or Simplified Joint Stock Companies, whose capital is left to the founders’ own agreement. |
| — | A generic, boilerplate constitutional document is one of the most common causes of later shareholder disputes, since it leaves exactly the questions that matter under pressure — deadlock, exit, valuation, transfer — unanswered. |
A company’s articles of association, or bylaws, are signed once, at incorporation, and then often filed away and forgotten — until a dispute, a new investor, or an exit event forces everyone back to the document to see what it actually says. At that point, a generic template copied from another jurisdiction, or from a previous company, tends to reveal exactly the gaps that cause the most expensive problems.
Saudi Arabia’s Companies Law (Royal Decree No. M/132) gives founders real flexibility to shape this document deliberately. This guide explains what the law requires, what it leaves open to the parties, and where careful drafting actually earns its keep.
01 Articles of Association or Bylaws? The Terminology Depends on the Structure
Saudi law does not use one universal term for a company’s constitutional document. Joint liability companies, limited partnership companies, and ordinary limited liability companies use articles of association, drawn up and signed by the partners. Joint stock companies, simplified joint stock companies, and single-shareholder limited liability companies instead use bylaws. This is not a stylistic difference — it reflects the underlying legal character of each structure, and using the wrong terminology in a filing is the kind of small error that can create friction with the Commercial Register.
02 Registration Is Not Optional, and Liability Attaches to Getting It Wrong
Under the Companies Law, a company’s incorporators, partners, managers, or board members must register the constitutional document, and any subsequent amendments to it, with the Commercial Register. This is not administrative housekeeping: the same founders, partners, managers, or board members are jointly liable for damages resulting from a failure to complete this registration. A constitutional document that exists only as a signed PDF sitting in a lawyer’s file, never filed or updated after an amendment, exposes the very people responsible for it to personal liability if a third party is harmed as a result.
03 Capital Provisions: What the Law Fixes, and What It Leaves to the Founders
For a joint stock company, Article 59 sets a statutory minimum issued capital of SAR 500,000, with at least one-quarter of that amount required to be paid in at incorporation. Article 58 confirms that a joint stock company can be incorporated by one or more natural or legal persons — there is no minimum number of founders under the current law. Neither the LLC nor the Simplified Joint Stock Company carries an equivalent statutory minimum; their capital is generally left to what the founders themselves agree and record in the constitutional document, subject to any higher threshold a specific regulator or activity may separately impose.
Because the statutory floor only applies to the JSC, drafting the capital clause well matters more, not less, for an LLC or SJSC — the founders are setting the actual commercial baseline themselves, not simply restating a number the law would otherwise supply.
Capital can be contributed in cash or in kind, and the constitutional document should specify which applies to each founder’s contribution, since in-kind contributions typically require independent valuation to be properly documented. A capital clause that simply states a total figure, without recording how each founder actually funded it, creates avoidable ambiguity if a dispute over contribution obligations arises later.
04 Governance: Building In the Structure That Actually Fits
The Companies Law gives founders more governance flexibility than many assume. An LLC can be managed by a chief executive officer, one or more managers, or a full board of directors — the choice is the founders’ to make in the constitutional document, not a fixed default imposed by the statute. A Simplified Joint Stock Company goes further, allowing largely contract-based governance tailored to the parties’ own agreement, which is part of why it suits startups and venture-backed structures with evolving investor rights. An ordinary Joint Stock Company, by contrast, requires a board of directors as a matter of course.
| — | Decision-making thresholds. Which matters require unanimous consent, a simple majority, or a supermajority should be set out explicitly, rather than left to the statutory default, particularly for major decisions like new financing rounds, related-party transactions, or a sale of the business. |
| — | Manager and director appointment and removal. The document should specify how managers or directors are appointed, for what term, and on what grounds they can be removed, rather than assuming this will be worked out informally if a dispute arises. |
| — | Shareholders’ meetings. Under the current Companies Law, the more formal general assembly structure has been simplified into shareholders’ meetings, with notice, quorum, and voting mechanics that the constitutional document should confirm rather than leave ambiguous. |
05 Share Classes, Transfer Restrictions, and Pre-emptive Rights
Joint stock companies and simplified joint stock companies can issue different classes of shares — ordinary, preference, and redeemable — each carrying different rights, and the constitutional document is where those rights are actually defined. For unlisted joint stock companies and simplified joint stock companies, share transfers are not valid against the company or third parties until registered in the shareholders’ register, which makes the transfer mechanics in the constitutional document a practical, not just theoretical, concern.
| — | Pre-emptive rights. Where existing shareholders should have the first opportunity to buy shares issued for cash in a capital increase, this needs to be stated in the document, along with the process and timeline for exercising it. |
| — | Transfer restrictions. Right of first refusal, tag-along, and drag-along provisions are not imposed by statute — they exist only if the founders write them into the constitutional document or a related shareholders’ agreement. |
| — | Different profit-sharing ratios. The Companies Law permits a company’s bylaws or articles to specify that a shareholder’s share of profits differs from their proportional ownership of capital, which is a meaningful tool in structuring founder and investor arrangements that don’t map neatly onto simple percentage ownership. |
06 Minority Protection and Derivative Actions
The Companies Law gives minority shareholders a statutory route to act where the company itself will not: a single partner or shareholder, or more, representing at least 5% of the company’s capital, may initiate a derivative action on the company’s behalf if the company fails to bring the action itself — unless the constitutional document sets a lower percentage. This is a default a company can improve upon for minority shareholders, but never worsen, which is worth keeping in mind when negotiating investor protections into the document.
07 Dividends and Financial Provisions
Both joint stock companies and LLCs may distribute annual or interim dividends under the Companies Law, with the specific conditions to be set out in the Implementing Regulations and, in practice, in the company’s own constitutional document. A well-drafted document should address the mechanics of interim dividend decisions, reserve requirements, and how distributions interact with any differentiated profit-sharing arrangement the founders have agreed — leaving this vague is a common source of disagreement once a company becomes profitable enough for the question to matter.
08 Keeping the Document Current and Verifiable
A constitutional document is not a one-time deliverable. Amendments — a capital increase, a new share class, a change in management structure — all need to be registered with the Commercial Register to take effect against third parties, and the company’s registered details should be verifiable through Wathq so that counterparties, banks, and regulators see a record that actually matches the current constitutional document. A mismatch between what the constitutional document says and what is publicly recorded is exactly the kind of inconsistency that slows down financing, contracting, and licensing processes.
Common Drafting Mistakes
| — | Using a generic template without adapting governance, transfer, and exit provisions to the actual shareholder relationship |
| — | Using the wrong terminology (articles of association vs. bylaws) for the chosen structure |
| — | Failing to register amendments with the Commercial Register after a capital increase, governance change, or new share class |
| — | Leaving deadlock, valuation, and exit mechanics unaddressed until a dispute forces the question |
| — | Recording a capital figure without documenting how each founder actually funded their contribution |
| — | Assuming pre-emptive rights, tag-along, or drag-along protections exist automatically, when they only apply if written into the document |
Frequently Asked Questions
What is the difference between articles of association and bylaws in Saudi Arabia?
Both are constitutional documents governed by the Companies Law, but the terminology depends on structure: LLCs, joint liability, and limited partnership companies use articles of association, while joint stock companies, simplified joint stock companies, and single-shareholder LLCs use bylaws.
Is there a minimum capital requirement for an LLC’s articles of association?
No. Unlike a joint stock company, which has a statutory minimum issued capital of SAR 500,000, an LLC’s capital is generally set by the founders themselves in the constitutional document, subject to any activity-specific or regulatory minimum that may separately apply.
Can a joint stock company be formed by a single shareholder?
Yes. Under the current Companies Law, a joint stock company can be incorporated by one or more natural or legal persons, with no statutory minimum number of founders.
What happens if a company fails to register its articles of association?
Founders, partners, managers, or board members are jointly liable for damages resulting from a failure to register the constitutional document, or its amendments, with the Commercial Register.
Do minority shareholders have any statutory protection under Saudi law?
Yes. A shareholder or group of shareholders holding at least 5% of a company’s capital can bring a derivative action on the company’s behalf if the company itself does not, unless the constitutional document sets a lower threshold.
Drafting or Reviewing a Company’s Constitutional Document?
Our corporate team drafts articles of association and bylaws tailored to the actual shareholder relationship, not a generic template.
This article is provided for general informational purposes and does not constitute legal advice. Requirements vary by company structure and activity and may change; founders should seek tailored advice from Abdulaziz Bin Ali & Partners before finalizing a constitutional document.
Principal Sources: Companies Law (Royal Decree No. M/132, 2022) and its Implementing Regulations; Saudi Bureau of Experts at the Council of Ministers; Ministry of Commerce.
