An entity entering or dealing with transactions which involves legal complications should be managed and handled by a person who has the sufficient experience and knowledge, only then there would be a proper management and avoidance of any legal disputes or complications securing the rights of shareholders or concerned parties connected with such transactions.

We would like to share with a summary of previously decided case wherein the shareholders of a company failed to prove the court sale of shares and acceptance of sale by other shareholders. The reasons the shareholders lost this case because they did not follow appropriate procedures in sale of shares as per rules prescribed in the articles of associations and the transaction was not processed by the competent persons from the beginning.

This case erupted between five shareholders of company, three shareholders (Plaintiffs) filed a case against two shareholders (Defendants) claiming that two of the plaintiffs sold their shares to the third plaintiff, and after embarking on the formalities to establish the transfer of the shares, the two defendants refused to grant their approval to the transfer of such shares at the  partners assembly meeting without giving a justification for their refusal, thereby causing breach in the interests of the company.

In the petition submitted by the Plaintiffs, they stated that the two Plaintiffs sold their shares and transferred them to the third Plaintiff, and to execute the sale a directors’ resolution should be passed to establish the sale of shares and amend and reflect the ownership in the Articles of Association. The Plaintiffs demanded also that the Defendants be forced into notarizing the amendments to the shares with the notary public and to be ordered pay the notarization fee amounted to SAR 10,000 as well as the lawyers fee valued at SAR 150,000.

The defendants lawyer replied that the sale process of the first Plaintiff’s shares was made in a wrong manner as it was carried out by an attorney (agent of plaintiffs), who has not been granted with the right to sell in the power of attorney, and the attorney of the third plaintiff has not been granted the right to purchase in his power of attorney. Subsequently, the sale and purchase have been made by two persons, who had no capacity. Further, the defendants lawyer contented that the attorney of first plaintiff sold 263 shares for a value of SAR 1,600,314, per share was valued at  SAR 6108, while the attorney of second Plaintiff claims that she sold her  225  shares to the third plaintiff for SAR 1,500,000, per share value as SAR 6,666.

The first plaintiff and second plaintiff claimed that correspondence was sent to the defendants about the sale of shares, and the lawyer of the third plaintiff alleged that since the defendant did not respond as such the correspondence does imply the approval of the defendants, and he also added that the correspondence also indicated the date with the notary public for notarization and since defendants kept quite then it as an indication for approval as well.

However, the defendants lawyer denied such allegation of the third plaintiff stating that there was no approval thereof.

Then, both the parties said they are satisfied with the pleadings they gave to the court. The court, subsequently, closed the pleadings in the case and adjourned the case for deliberations after which the Circuit Court passed the following judgment based on the following grounds;

The Court cited Article No. (165) of the Companies Law states: “A partner may assign his or her share to one of the partners or to others in accordance with the terms of the Articles of Incorporation”; and the article No. (10) of the articles of incorporation has clearly stipulated in thereof: “A partner may assign its share to one of the partners or to others subject to the approval of the partners.” Thought there was a correspondence sent to the defendants as stated by the lawyer of the third Plaintiff that it does signify their approval, the Circuit Court, after verifying the same, did not establish that there was an explicit approval of the sale, although the articles of incorporation has legalized the transfer of shares among partners if partners grant their consent thereon– a claim, which was not realized.

Based on the said grounds, the Circuit Court has ruled that the said case be turned down.

Following the trial court judgement, neither of the plaintiffs approached the appeals court, losing the chance for challenging the court judgement within the time limitation 30 days for appeal, hence the Plaintiffs sought to submit a motion for reconsideration.

According to judicial rule, a reconsideration of final judgement of case will be accepted only if the conditions are found in the lawsuit more fully defined in Article 200 and reconsideration to be filed within the time limitation as defined in article 201 of the Law of Civil Procedure before Sharia Courts (law). Since the motion for reconsideration in question failed to observe the circumstances contained in Article 200 and 201 of the law, as such the reconsideration motion was dismissed.

Readers who might deal with situation in sale of shares should be aware what are the requirements and conditions before entering into a sale and take legal advice from legal experts.