Saudi Arabia
JordanAl Madani & Co. Law Firm & Legal Consultants
The Guiding Charter for Saudi Family Businesses: A Manual for Success and Sustainability
Family businesses are a fundamental pillar of the Saudi economy, contributing significantly to the national GDP and providing employment opportunities for thousands. Despite their importance, these companies face numerous challenges, such as family cohesion, generational succession, and corporate governance.
A family business can be defined as an enterprise primarily owned or managed by members of a single family. These companies are often governed by family charters or regulatory agreements aimed at ensuring sustainability and smooth intergenerational transitions.
To guarantee the continuity of these vital businesses and due to their contribution to the national economy, the Ministry of Commerce issued a guiding charter for family businesses in Saudi Arabia in May 2018. This charter provides an effective regulatory framework to enhance governance and sustainability, laying the foundations for a robust and enduring business structure.
This article will assist you in drafting your family business charter in alignment with this guiding framework, offering practical guidance to tailor it to your specific needs and bolster your company’s long-term success.
I. What Is the Guiding Charter for Family Businesses and Why Is It Important?
In light of Vision 2030, the need for structured regulation of family businesses through sustainable mechanisms and effective governance has become more pronounced. Key benefits of the charter include:
1. Enhancing Governance: Defining responsibilities to reduce tensions and improve transparency.
2. Ensuring Business Sustainability: Facilitating smooth leadership transitions between generations.
3. Organizing Family Relations: Setting clear boundaries between family affairs and business operations.
4. Legal Compliance: Ensuring alignment with Saudi governance regulations.
II. Structure and Elements of the Guiding Charter
The new Companies Law (1444H) encourages the adoption of such a document to ensure corporate stability and facilitate ownership and management succession across generations. The guiding charter model includes 11 provisions regulating the following:
1. Family Values and Objectives:
This section highlights the family’s vision and strategic goals pursued through the business entity. It aims to foster sound collaboration between family interests and corporate objectives, ensuring no conflict arises between them.
2. Governance Structure:
Focuses on the Family Council, Board of Directors, and General Shareholders’ Assemblies.
A) Family Council:
The Family Council is an internal organizational body established within family businesses to enhance communication among family members, manage relationships with the company, and make strategic decisions regarding family ownership.
The council typically comprises a specified number of family members chosen based on agreed-upon criteria, with due consideration for representation of different generations to ensure continuity. This diversity allows fair representation and interaction between seasoned experience and fresh aspirations.
Regular meetings are held to ensure effective communication and harmony among members, with at least four meetings recommended per fiscal year. A special meeting must be convened before any general assembly—ordinary or extraordinary—to ensure alignment with family and business objectives.
Duties of the Family Council:
o Supervising the Board of Directors: Monitoring board performance and providing opinions on board candidates while maintaining confidentiality and protecting business secrets.
o Conflict Resolution: Settling family disputes that may affect business operations through mechanisms such as confidential consultations or conciliation committees.
o Proposing Amendments: Recommending modifications to the company’s bylaws in a manner that serves both family and corporate interests.
To safeguard decision independence and avoid conflicts of interest, Family Council members are prohibited from concurrently serving on the Board of Directors or the company’s executive team.
The term for Family Council membership is three years, and no member may serve more than two consecutive terms to ensure leadership renewal.
3. Ownership and Management Transition Policies:
Clear plans are developed to facilitate smooth and well-structured transfers of ownership and managerial responsibilities, maintaining company stability and preventing potential family disputes.
4. Dispute Resolution Mechanisms:
Due to the familial nature of these companies, disputes may arise requiring effective resolution mechanisms. Disputes are initially addressed through the Family Council via dialogue and internal negotiation. When unresolved, arbitration committees are a legal option for swift and fair resolutions, avoiding prolonged litigation and preserving the company’s reputation.
5. Human Resources Policies:
Family businesses adopt balanced HR policies to ensure fairness among all employees, whether family members or external hires. Clear rules for appointing family members are established, based on qualifications and professional experience, to maintain managerial efficiency and sustainable success.
6. Profit Distribution Policies:
Clear and fair rules for profit distribution are set to balance the company’s interests and shareholder rights. These rules are based on transparent principles considering financial performance and expansion needs, ensuring business sustainability and equitable returns.
7. Final Provisions:
The guiding charter includes final provisions detailing how it can be amended and updated to align with the company’s evolving needs. Clear mechanisms are outlined for periodic reviews, ensuring compliance with changing Saudi regulations and internal developments within the family business structure.
III. The Role of Legal Counsel in Drafting the Guiding Charter for Family Businesses
Key roles of legal counsel include:
1. Analyzing Family and Legal Needs:
o Understanding Family Structure: Identifying influential family members and their roles.
o Studying Business Nature: Ensuring compatibility of the charter with the company’s operations.
o Identifying Potential Challenges: Addressing past or possible disputes to include preventive solutions in the charter.
2. Drafting the Charter in Compliance with Saudi Regulations:
o Preparing clear, structured provisions covering governance, decision-making, employment policies, ownership transition, and profit distribution.
o Defining rights and obligations of all parties to safeguard mutual interests.
o Including dispute resolution clauses to enable conciliation or arbitration rather than court litigation.
o Ensuring adaptability to future legislative changes.
3. Resolving Family and Business Disputes:
o Developing preventive policies, such as restrictions on selling family shares to external parties.
o Establishing formal dispute resolution mechanisms.
o Representing the family in legal disputes when necessary.
4. Monitoring and Amending the Charter:
o Conducting periodic reviews to ensure legal and economic compatibility.
o Amending provisions as needed to address family or organizational changes.
o Overseeing corporate governance compliance.
The guiding charter for Saudi family businesses is more than just a document—it is a tool for success and sustainability. Professional drafting and adoption of this charter foster cooperation among family members and ensure business continuity. Contact us for specialized legal consultations to secure your business’s sustainability and balance family and corporate interests.