LLC Partner Dispute in Saudi Arabia: Solutions Before Liquidation

Two partners own a contracting company, 50% each. One wants to buy equipment for SAR 1 million. The other wants to distribute this year's profits. Three months have passed without a decision, supplier payments are late, and each threatens the other with court and dissolving the company.

The short answer: a dispute between partners does not end a limited liability company (LLC) by itself. Before liquidation, ask what exactly has stopped: money, voting, or trust in the accounts. The Companies Law gives partners specific tools for each: inspecting records, calling the assembly, removing the manager, a liability claim, challenging a decision, or selling the share.

Does a dispute between partners dissolve the company automatically?

No. Article 243 of the Companies Law limits the general grounds for a company ending to: expiry of its term, the partners agreeing to dissolve it, or a final court judgment dissolving it or declaring it void, plus grounds specific to each company type. Article 184 states that an LLC does not end because a partner dies, withdraws or becomes insolvent, unless the articles of association say so.

The provision allowing the court to dissolve a company when the partners cannot continue together appears in paragraph 4 of Article 46, in the rules for general partnerships. So in an LLC, do not build your plan on the idea that disagreement alone is enough to end it. Start with the tools the law gives this company type.

Many partners say "I want to dissolve the company" when the real problem is that the manager gives them no information, or profits were not distributed, or a partner spends company money on personal matters. Each problem has a different remedy, and liquidating a successful business can destroy value that dividing what is left will never replace. Identify the act you object to, its date and its document. A loss alone does not prove that anyone took money, and disagreement about how to run the business is not a legal violation. The rules here concern LLCs. General partnerships and joint stock companies have different rules.

Start with the documents: the articles of association and the partners' agreement

Read the latest version of the articles of association and its amendments: shareholdings, who the manager is and his powers, voting majorities, transfer conditions, and any arbitration clause. Then look for any partners' (shareholders') agreement or family charter. Article 11 makes such an agreement binding as long as it does not conflict with the law or the articles.

If you have no written agreement, now is the time. Article 11 allows a partners' agreement that governs your relationship with each other and with the company, including how heirs join. In family companies it allows a charter covering governance, management, employment of family members, profit distribution, share transfers and dispute resolution. A good settlement does not end with a verbal promise that "things will improve". Write down who manages, who approves spending above a set limit, when reports are sent, who reviews the accounts, and how future disputes are settled.

Separate the different roles of one person. He may be a partner, a manager, an employee, and a creditor of the company for a loan he gave. A dispute over his salary does not affect his share, his loan does not become capital, and removing him from management does not remove him from the company.

What tools does a partner have inside the company before going to court?

• Inspection: a non-manager partner, or someone he authorises, may inspect the company's records and documents at its office twice in each financial year. The company must respond within 15 days, and any clause to the contrary is void (Article 171).
• Calling the assembly: a partner or partners holding 10% of the capital may ask for the general assembly to be called at any time (Article 165).
• Agenda: if a partner asks for an item to be added, the manager must do so, or the partner may take it to the assembly. The manager must answer partners' questions (Article 169).
• Annual information: the manager must give the partners the financial statements and activity report at least 21 days before the annual assembly (Article 167).

Make the inspection request in writing and specify the period and documents: bank statements, revenue and expense records, and contracts related to the disputed transactions. Using a chartered accountant saves time and gives your findings weight. Then turn the result into a list: amount, date, beneficiary, what was received in return, and ask for a written answer to each item. Remember that Article 171 requires anyone who receives information to keep it confidential, and makes him liable for compensation if he uses it to harm the company or a partner. Do not share the documents in group chats or use them to pressure the other side.

Ordinary decisions need approval by partners holding more than half the capital (Article 166). Amending the articles of association needs at least three quarters of the capital (Article 172). In a 50/50 company neither side alone has a majority for an ordinary decision, so negotiation or a deadlock clause in the articles is usually the way out.

Can you fix the management instead of ending the business?

The solution may be changing the manager while the company continues. Article 164 allows the partners to remove the manager even if he was appointed in the articles of association, and to appoint a replacement. A manager who is a partner does not vote on his own removal. Article 63 of the Implementing Regulations sets the quorum for removal as the usual quorum for partners' decisions. Partners holding at least a quarter of the capital may ask the court to remove him. This is a right to apply, not a guarantee of the judgment.

Sometimes redistributing powers is enough: dual signatures on transfers, a monthly report to the partners, and appointing more than one manager or a board of managers. The change must be made by a valid decision and recorded in the commercial register, because Article 162 makes the appointment, change or limitation of a manager's powers effective against third parties only after registration. Removal does not affect ownership: a removed manager keeps his share as a partner.

When should you go to court or arbitration?

The Commercial Court has jurisdiction over claims arising under the Companies Law, and territorial jurisdiction lies with the court where the company's head office is. But Article 173 allows the articles of association to provide for arbitration or another alternative method to settle disputes between partners, or between the company and its managers, except for criminal acts. If such a clause exists, it is your first route. If it does not, one partner's wish for arbitration does not bind the others. The Arbitration Law (Article 9) requires a written agreement, which can be made even after the dispute arises.

Define your goal before asking for "accountability of the partners" in general terms. A liability claim against the manager (Article 29) is filed by the company. If it does not file, partners holding 5% of the capital, or a lower percentage set by the articles, may file it for the company's benefit, provided the claim has a valid basis, they act in good faith, they are still partners when filing, and they notify the manager of their intention at least 14 days before. Damage that you suffered personally has a separate claim. A claim to cancel an unlawful assembly decision is not heard after 90 days from the decision, and only partners who objected in writing, or could not object after learning of it, may bring it (Article 170). The period runs from the decision, not from the end of negotiations.

If you fear documents will be lost or company assets disposed of during the dispute, Article 36 of the Commercial Courts Law allows urgent requests, including judicial receivership, preservation of specific documents, and a ban on disposal. Before filing a lawsuit, most commercial claims require written notice to the defendant at least 15 days before.

When is leaving better than staying?

If trust is truly gone, selling the share is usually faster and cheaper than a long dispute. A partner may sell to another partner under the terms of the articles, or to a third party after notifying the partners through the manager, and the partners then have a pre-emption (buy-back) right within 30 days (Article 178). The company may buy the share if its articles allow it (Article 180).

The remaining partners do not have to buy the share at the price its owner asks. And a partner cannot be forced to sell just because the majority wants him out, unless the articles contain a drag-along clause approved by partners holding at least 90% of the capital, allowing the majority to make the minority accept a good-faith buyer's offer for all shares on the same terms (Article 181). When negotiating, separate the share's value from the partner's loans to the company, his declared profits and his personal guarantees.

Two partners own a distribution business. One is the manager and the other is the financier. The financier notices transfers to a company owned by the manager's relative.

He asks in writing to inspect the records, and an accountant reviews them and produces a list of transfers without supporting documents.

The manager justifies some with invoices. They agree that he returns the rest and that a finance manager is appointed with dual signatures, recorded in a partners' decision.

If the manager had denied everything and not responded, the financier could have filed a liability claim for the company or asked for his removal.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the objecting partner or the smaller shareholder:

• Turn a general complaint into specific requests: a particular document, an agenda item, or a specific amount.
• Make your inspection request in writing and keep its date, because the 15 days start from it. Use an accountant to review what you receive.
• Object in writing immediately to any decision you think is unlawful. A written objection is a condition for a cancellation claim, so do not wait for the outcome of negotiations.
• If you see damage to the company and nobody acts, notify the manager in writing of your intention to file a liability claim 14 days before filing, after checking the arbitration clause in the articles.
• If you decide to leave, ask for a valuation by an accredited valuer instead of negotiating over a guessed figure.

If you are the managing partner or the majority shareholder:

• Allow the partner to inspect within the legal deadline, and provide the accounts, authorisations and invoices in an organised way. Refusing strengthens his position in court.
• Explain any dealing with a party close to you with documents, and propose an independent financial review agreed by both sides. It protects you if your position is sound.
• Send the financial statements and activity report at least 21 days before the assembly, and calculate the majority for each decision by its type.
• If you want the partner to leave, offer to buy his share at an independent valuation instead of withholding his profits or sidelining him.
• If an error is found, record the settlement in a signed decision stating the amount, how it will be returned, and what the release covers.

Partner disputes vary a lot depending on the articles of association and the shareholdings. If you send us the articles and a summary of the dispute on WhatsApp, we will go through your options with you before you take any step.