Partnership Agreement in Saudi Arabia: Key Clauses for Partners

Two friends decided to open a café. The first pays SAR 300,000, and the second runs the shop and knows the market. They agreed verbally that “profits are split half and half”. A year later, the first wants his capital back before any distribution, the second thinks his effort is worth as much as the money, and each has a different meaning of “half” in his head. Nothing is written.

The short answer: a partnership in Saudi Arabia needs a written contract in both cases. If it is a partnership in a project without forming a company, the Civil Transactions Law requires the partnership contract to be in writing, or it is void. If you form a registered company, such as a limited liability company, it has articles of association, and alongside them you may sign a binding partners' agreement under Article 11 of the Companies Law. The most important things to write in either one: shares, profits, management, exit, and how disputes are settled.

A contract-only partnership or a registered company?

Article 529 of the Civil Transactions Law defines a partnership (sharika) as a contract in which two or more partners each contribute money, work or both to a project to share its profit or loss. But it excludes companies governed by special laws. So if you register a limited liability company or a joint stock company, the Companies Law governs it, and the rules on contractual partnerships do not automatically apply to it.

Article 528 requires partnership contracts, and any amendment to them, to be in writing, or they are void. However, a partner cannot rely on this invalidity against third parties, and between the partners it takes effect only if one of them asks the court to declare it, and only from the date the case is filed. This means the lack of a written document does not erase what happened before the case, but it weakens everyone's position.

For a registered company, the articles of association or bylaws, and any amendment, must be written and entered in the commercial register, and cannot be relied on against third parties until registered (Articles 7 and 8 of the Companies Law). The Commercial Court hears disputes arising from the Companies Law, and also disputes arising from partnership contracts under the Civil Transactions Law, after Article 16 of the Commercial Courts Law was amended.

Is a shareholders agreement binding in Saudi Arabia?

Yes. Article 11 of the Companies Law allows founders, partners or shareholders, during or after formation, to sign an agreement regulating their relationship with each other or with the company, including the entry of their heirs. It also allows a family charter that regulates family ownership, governance, employment of family members, profit distribution and dispute settlement. The text states clearly that the agreement is binding, provided it does not violate the law or the articles of association.

The articles of association are the official document that third parties see; the agreement sets out the details between you. If you agree in it to transfer shares, a transfer of a share in a limited liability company has effect against the company and third parties only from the date it is entered in the commercial register (Article 25). If you make the agreement part of the articles of association, amending it needs the same majority required to amend the articles (Article 4 of the Implementing Regulations). Read both documents together, and fix any conflict now, not when a dispute starts.

Partners' contributions: money, work and equipment

In a contractual partnership, a partner's contribution cannot be his influence, reputation or creditworthiness, and a non-cash contribution is valued at its value when the contract is made or on a basis the partners agree (Article 530). Each partner's share is what he committed to in the contract, and he can increase it only with the others' consent (Article 532). So an extra transfer one of you makes to pay overdue rent does not automatically become an increase in his share; write down whether it is a loan to the project or a share increase.

In a registered company, a work contribution is allowed in a limited liability company and in partnerships in return for a share of profits, but it does not form part of the capital, and it is not allowed in joint stock and simplified joint stock companies (Article 13). A partner whose contribution is work must actually perform it, any income from it belongs to the company, and he may not do the same work for his own account (Article 14). A partner who is late in providing his contribution owes it to the company, which may claim it or suspend his right to profits and voting, with compensation (Article 15).

Can a partner receive a fixed profit or an unequal share?

Unequal ratios are allowed; a fixed profit is not. In a contractual partnership, profits are divided according to shares unless agreed otherwise, and losses are always divided according to shares (Article 534). Article 535 prohibits a partner's share of profit being a fixed amount, depriving him of profit, or exempting him from loss. So a phrase like “you get SAR 10,000 a month whatever happens” takes the contract outside the meaning of partnership.

The partners may agree on how and when profits are distributed, provided distribution happens only when the capital is intact (Article 536). In a registered company, Article 23 of the Companies Law allows unequal profit and loss ratios in the articles, and treats a clause depriving a partner of profit or exempting him from loss as if it were not written. A partner who contributes only work may be exempted from loss if he receives no salary.

In the café story, if the partners had written that the investor contributes SAR 300,000, the manager contributes his work without a monthly salary, net profit is split 60% to the investor and 40% to the manager after expenses, and distribution happens every six months after confirming the capital is intact, there would be no dispute about the meaning of “half”.

If the café makes a net profit of SAR 120,000 in six months, the investor takes 72,000 and the manager 48,000. Nothing is distributed in a six-month period in which the capital was reduced.

Management and access to the accounts

The partners may appoint one of themselves or an outsider to manage the partnership's assets. If they appoint no one, each partner acts as agent for the others in management, any of them may object to an act before it is completed, and the majority of shares may reject the objection, unless they agree otherwise (Article 537). This default rule may not suit you, so write down the powers to buy, borrow, sign and withdraw, and their limits.

Every partner, or a person he authorises, may inspect the books and documents, and any agreement preventing this is void (Article 538). The manager must act with care and must not act in a way that harms the partnership or exceeds his powers (Article 539), and must not give away or lend its money without permission (Article 540). No partner may keep any of the partnership's money for himself, and a partner who spends his own money on a useful and urgent expense may recover it (Article 541).

How does a partner exit, and what if decisions are blocked?

In a contractual partnership with no fixed term, a partner may withdraw if he informs all the others in writing a reasonable time in advance, and his withdrawal is not fraudulent or at an unsuitable time. In a fixed-term partnership, he may not withdraw before the end of the term, but he may ask the court to release him for acceptable reasons, compensating the partners for any harm (Article 545). The contract may set how any partner can be removed (Article 546). As a rule, the contract ends on the death or withdrawal of a partner, unless you agreed it continues with the heirs or between the remaining partners (Article 547).

In a limited liability company, a partner who wants to sell his share to a non-partner must inform the others, through the manager, of the buyer and the terms. Each partner may claim the share for himself within thirty days of the manager's notice, and if they disagree on the value, an accredited valuer sets it. The articles may set another valuation method or a longer period, and this pre-emption right does not apply to inheritance, wills or court judgments (Article 178). In a simplified joint stock company, the bylaws may ban disposal of shares for up to ten years (Article 151).

Two equal partners are more exposed to deadlock. Write a negotiation period, then an expert opinion on technical matters, then a mechanism for one of you to buy the other's share at a price set by a valuer. If you choose arbitration, the arbitration agreement must be in writing or it is void (Article 9 of the Arbitration Law). If no solution remains, the partners' agreement to dissolve the company is a ground for its dissolution (Article 243 of the Companies Law), followed by liquidation.

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 managing partner or the partner contributing work:

• Ask for your powers and their financial cap to be written down; this protects you from later claims that you exceeded them.
• Write whether you have a monthly salary separate from your share of profit, because this affects whether you bear losses.
• Record every important decision with an approval message or signed minutes.
• Give the partners regular statements of account before they ask; their right of inspection cannot be blocked.
• Do not carry out the same activity for your own account if your contribution is your work.

If you are the financing partner or the minority partner:

• Do not accept a fixed return under the name of partnership; write a percentage of net profit and how it is calculated.
• Require your approval for key decisions such as borrowing and selling assets.
• Agree in advance how your share will be valued on exit and when its value will be paid.
• Make sure any change in ownership is actually entered in the commercial register or the shareholders' register.
• Write what happens if a partner dies, so the contract does not end by operation of law.

If you have a draft partnership contract or partners' agreement and want to know where the gaps are before signing, send it to us on WhatsApp and we will go through it with you clause by clause.