Selling a Share in an LLC in Saudi Arabia: Partners' Pre-emption

An investor offers one partner SAR 900,000 for his 25% share in a limited liability company (LLC). The day before signing, another partner calls and says: "I have the better right to it, and I will not allow an outsider in." Can he stop the sale?

The short answer: he can buy the share instead of the outsider if he follows the procedure and pays on time, within 30 days of the manager being notified of the price. A bare objection stops nothing.

Is selling to a partner different from selling to an outsider?

Article 178 of the Companies Law allows a partner to transfer his share to any of the other partners under the conditions in the articles of association. If the articles are silent, a sale within the circle of partners is easier. The rule here is lighter than for general partnerships, where Article 44 requires the articles' restrictions or the other partners' consent to be respected, and treats a transfer that breaches them as void.

If the buyer is from outside the company, the seller must notify the other partners through the company manager of the buyer's name and the terms of sale, whether the transfer is for payment or not. The manager must pass the notice to the partners as soon as he receives it. These rules apply to shares (quotas) in an LLC. Shares in joint stock companies have their own rules, and the sale of an asset owned by the company, such as property or a shop, is a different matter.

How does a partner exercise the pre-emption right?

Each partner may ask to buy back the share and pay its value, or ask the company to buy it, within 30 days. The period starts from the date the manager is notified of the agreed price, not from the day the partner heard the news. So the seller should give written notice that proves its date, and the partner should keep the date he received it.

• The seller's notice reaches the manager, with the buyer's name, the price and the terms.
• The manager informs the other partners immediately.
• A partner who wants the share submits a written pre-emption request and pays the value within 30 days.
• If several partners ask, the share is divided between them in proportion to their shares in the capital.
• If they disagree on value, one or more accredited valuers set it in a report showing the fair value, at the cost of the partner asking for pre-emption or the company.

If the period ends without any request, or a partner asks but does not pay, or the company does not buy, the seller may sell to the outsider. The articles of association may set a longer period or a different valuation or notice method, so read your company's articles before you count the days.

When does the pre-emption right not apply?

Article 178 excludes shares passing by inheritance, by will, or by judgment of the competent court. So if a partner dies and his share passes to his heirs, the other partners cannot buy it back under this provision. But if the share is sold by force to pay a partner's personal debt, Article 34 keeps the other partners' pre-emption right under the law.

If several people jointly own one share and do not choose who represents them before the company within the deadline it sets, the company may sell it for their account. It is offered first to the partners and then to outsiders under Article 178, unless the articles say otherwise (Article 174).

Can the company buy the share instead of the partners?

Article 180 allows the company to buy its own shares if its articles of association allow it, and these shares have no vote in the assembly. Article 66 of the Implementing Regulations requires the partners to approve the purchase and waive their pre-emption right, and to authorise the manager to complete it within 30 days of approval, unless the articles set a longer period.

When does the buyer actually become a partner?

Article 25 states that ownership of a share in an LLC passes by registration in the commercial register, and the transfer counts against the company and third parties only from the date of registration. So a buyer who paid the price but is not yet registered does not vote in the assembly and is not treated as a partner by banks and authorities.

For this reason the parties usually agree on payments linked to clear steps: one payment when the pre-emption period ends, and the rest on registration. They also agree what happens to the current year's profits, and what happens if completion is not possible. If the share is pledged, the pledgee may collect its profits unless agreed otherwise (Article 180), so check this before buying.

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 all parties

If you are the selling partner:

• Send the notice to the manager in writing with the name, the price and all the real terms. Any hidden term may open the door to a dispute.
• Keep proof of the date the notice reached the manager. The 30-day period starts from it.
• If the deal's terms change materially after the notice, give notice again with the new terms.
• Do not hand over management or accounts to the buyer before registration in the commercial register.

If you are a partner who wants to buy back the share, or a buyer from outside:

• Partner: submit your pre-emption request in writing and have the money ready before the 30 days end. A request without payment is not enough.
• Partner: if you think the price is inflated, ask for a valuation by an accredited valuer instead of refusing.
• Buyer: ask for the articles of association and the latest financial statements, and check that the share is not pledged.
• Buyer: make your obligation to pay conditional on the pre-emption period ending without a request, and on registration being completed.

Before you sign to sell or buy a share, send us the articles of association and the draft agreement on WhatsApp, and we will review the notice and pre-emption dates and the payment terms with you.