Internal Governance of Startups under the Saudi Companies Law: The Complete Guide | Nova Legal

The Corporate Form Determines the Scope of Internal Governance: From the General Partnership to the Simplified Joint Stock Company

Article 4 of the Companies Law (Forms of Companies) provides that a company established pursuant to the provisions of the Law shall take one of the following forms: "(a) A general partnership. (b) A simple partnership. (c) A joint stock company. (d) A simplified joint stock company. (e) A limited liability company," so that choosing the form is the first governance decision a startup makes, because it determines the degree of regulatory intervention in its internal affairs: the two family forms (the general partnership and the simple partnership) are governed by the direct contractual relationship between the partners, the limited liability company's internal provisions are regulated by its founding contract, the simplified joint stock company grants its shareholders the broadest freedom in organizing the internal structure, and the joint stock company — particularly the unlisted form — is subject to a broader scope of statutory provisions and the Corporate Governance Regulations for Unlisted Joint Stock Companies, depending on the degree of enforceability of their provisions.

This graduation is deliberate and beneficial to startups: in the early stages, light contractual governance tools suffice, and as investors enter, the number of shareholders increases, and expectations of financial oversight and transparency rise, the company transitions to forms that allow it to build more structured internal governance without imposing burdens disproportionate to its size. This graduation is supported by the founding rules themselves: the joint stock company, the simplified joint stock company, and the single-owner limited liability company are established by articles of association pursuant to Article 7, so that the founding document itself is the first internal governance tool by which the startup regulates its internal relations.

The Simplified Joint Stock Company: The Flexible Governance Tool for Startups

Article 38 after 100 of the Companies Law (Concept of the Simplified Joint Stock Company) establishes the default rule for the governance of this form: "1- To the extent that there is no specific provision in this Chapter, and in a manner consistent with its nature, the simplified joint stock company is subject to the provisions applicable to the joint stock company, except for Articles: (61), (63), from (77) to (101), from (104) to (118), from (120) to (124), (125/1), from (126) to (128), (130), (131), (141/2), (151), and (152)," and then establishes the core principles of flexibility in the following paragraphs: "2- The shareholders of a simplified joint stock company may regulate the structure of the company and its mode of operation in the company's articles of association. 3- The shareholders substitute for the ordinary and extraordinary general assembly of the joint stock company, within the scope of the provisions applicable to the simplified joint stock company. The shareholders may designate in the articles of association those who shall exercise those competencies, to the extent that there is no specific provision in this Chapter. 4- The chairman, manager, or board of directors of the simplified joint stock company, as the case may be, exercises all the competencies assigned to the chairman and members of the board of directors of the joint stock company and substitutes for them, to the extent that there is no specific provision in this Chapter."

The Law then relieves the startup of financial constraints disproportionate to the formation stage, as Article 39 after 100 (Capital of the Simplified Joint Stock Company) provides: "1- The company's articles of association shall specify the amount of its authorized capital and the value of the paid-up capital, and may provide for an authorized capital. 2- The minimum capital requirement prescribed for the joint stock company does not apply to the simplified joint stock company," so that the minimum capital requirement is eliminated and it suffices to agree on the authorized and paid-up amounts in the articles of association. Article 50 after 100 (Single-Person Simplified Joint Stock Company) then grants the single founder a limited liability guarantee with full procedural flexibility: "If a simplified joint stock company is established by a single person, or if all of its shares are acquired by a single person, the following shall apply: the liability of that person shall be limited to what he has allocated as capital for the company. He shall have the powers and authorities of the shareholders prescribed in this Chapter, and his decisions shall be issued in writing and recorded in a special register maintained by the company."

The Articles of Association: The Internal Constitution of the Startup

Article 40 after 100 of the Companies Law (Contents of the Articles of Association) makes the articles of association of the simplified joint stock company a comprehensive internal governance document, as it must include, inter alia: "(z) The management of the company and the provisions relating thereto. (h) The transfer of shares. (t) Shareholder meetings and the quorum required for their validity. (y) Shareholder decisions and the quorum required for their issuance," and the last paragraph of the Article permits the addition of "(l) Any other provisions, conditions, or data that the founders or shareholders agree to include in the articles of association and that do not conflict with the provisions of the Law," thereby opening a broad space for internal contracting to regulate governance in a manner suited to the company's growth stage.

Article 42 after 100 (Mode of Management) then details the flexibility of managerial choice: "1- The mode of management of a simplified joint stock company shall be determined in its articles of association, and it may be managed by a chairman, one or more managers, a board of directors, or otherwise. The articles of association shall specify the method of appointing the person responsible for its management, his removal, the limits of his powers and authorities, and his mode of operation. If the articles of association contain no provision in this regard, the shareholders shall assume that responsibility. 2- The chairman, manager, or board of directors of the simplified joint stock company, as the case may be, shall have the broadest powers to manage the company in a manner that achieves its objectives," so that the startup may begin with simple management by a single manager and then transition to a board of directors as it grows, with the limits of powers, the mode of operation, and the replacement process all remaining in the hands of the shareholders through the articles of association.

Article 45 after 100 (Shareholder Meetings) preserves for the shareholders essential supervisory competencies that may not be derogated even in the flexible form: "1- The articles of association of the simplified joint stock company shall specify the matters that must be submitted to the shareholders for a decision thereon... However, the decisions falling within the competencies of the ordinary or extraordinary general assembly of the joint stock company must be taken by the shareholders in respect of increasing or reducing the company's capital, converting the company to another form, merging, dividing, or dissolving the company, appointing auditors, discussing the financial statements, distributing profits, or amending the articles of association," so that decisions on financing, structure, distribution, and amendment remain reserved for the shareholders themselves and may not be blocked by a chairman or manager.

Issuing Internal Decisions: The Assembly, Circulation, and Written Decisions

Among the most prominent features of light governance for startups are the decision-making mechanisms without actual convening. Article 66 after 100 of the Companies Law (Issuance of Partners' Decisions) regulates the matter in the limited liability company: "1- Partners' decisions shall be issued in the general assembly. However, partners' decisions may be issued by submitting them to the partners by circulation without the need to convene the general assembly. In this case, the company's manager shall send each partner the proposed decisions and the related documents for the partner to vote on in writing," and the second paragraph specifies the means of transmission: "(a) Sending them to the partners by registered letters. (b) Personal delivery to the partners or their legal representatives. (c) Sending them by e-mail or by any modern means of technology," and the third paragraph sets the quorum: "In all cases, decisions shall not be valid unless approved by one or more partners representing more than (half) of the capital at least, unless the company's founding contract provides for a greater majority."

The Law prescribes the same mechanism for the simplified joint stock company in Article 49 after 100 (Issuance of Decisions by Circulation): "1- The articles of association may provide for the issuance of a shareholder decision by submitting it to the shareholders by circulation without the need to convene them. In this case, the chairman, manager, or board of directors of the company, as the case may be, shall send the proposed decision and the related documents to all shareholders, specifying the procedure the shareholder must follow to approve it and the date by which it must be issued," and the subsequent paragraphs address the electronic means and registered letters, with the third paragraph making the quorum required for the validity of a decision by circulation a matter to be specified in the articles of association. This mechanism closely parallels the rule for the single-owner limited liability company in Article 57 after 100, which grants the owner "the powers and authorities of the manager, the board of managers, and the general assembly of the partners," and requires that "his decisions shall be issued in writing and recorded in a special register maintained by the company."

Internal Transparency: The Right of Inspection and Documents in the Limited Liability Company

Article 71 after 100 of the Companies Law (Partners' Rights and Obligations), in paragraph (3) thereof, establishes the non-managing partner's right of internal oversight over the company's management: "The non-managing partner may submit observations to the manager, and he — or his delegate — may request to inspect the company's operations at its premises and examine its records and documents (twice) during the company's fiscal year, and the company must fulfil his request within (fifteen) days from the date of his request. Any provision to the contrary is void," so that the right of inspection is twice per fiscal year at the company's premises on the records and documents, the request must be fulfilled within fifteen days, and any provision that contravenes this right is void. Paragraph (4) balances this transparency with a duty of confidentiality: "Any person who obtains any information — pursuant to this Article — must maintain its confidentiality and must not use it for any purpose that may harm the company or any of its partners therein, and must compensate for any damage arising from non-compliance therewith."

Transparency broadens upon transitioning to the corporate form, as Article 7 after 100 (Rights Attached to Shares) recognizes, among the shareholder's rights, "the right to inspect the company's records and documents without prejudice to the confidentiality of information, and to oversee the actions of the board of directors," and Article 46 after 100, applicable to the simplified joint stock company, grants the shareholder the right to obtain and inspect the information and documents relating to the matters submitted to the shareholder meeting "at any time during the (five) days preceding the date set for the meeting, unless the company's articles of association provide for a longer period."

Board of Directors' Meetings and Minutes upon Transitioning to the Corporate Form

When the startup transitions to the joint stock company form, the provisions governing board of directors' meetings in Article 80 of the Companies Law (Board of Directors' Meetings) apply: "1- The board of directors of a joint stock company shall meet (four) times at least per year at the invitation of its chairman, in accordance with the procedures set out in the company's articles of association, and the competent authority may amend the minimum prescribed in this paragraph. The chairman of the board must convene the board upon the written request of any member to discuss any matter or matters. 2- A meeting of the board of directors of a joint stock company shall not be valid unless attended by half of the members (in person or by proxy) at least, unless the company's articles of association provide for a greater proportion. 3- Decisions of the board of directors of a joint stock company shall be issued by a majority of the votes of the members present (in person or by proxy) at least, and in the event of a tie, the side supported by the chairman of the meeting prevails, unless the company's articles of association provide otherwise. 4- The board of directors shall determine the venue of its meetings, which may be held using modern means of technology," thereby establishing for the startup, upon transitioning to the corporate form, written standards for the number of meetings (at least four per year), the quorum for validity (half of the members), and the voting method, with the option of holding them via modern technology.

Articles 82 and 83 complete the procedural framework: the former permits "the board of directors of a joint stock company to issue its decisions on urgent matters by submitting them to all members by circulation, unless one of the members requests in writing that the board convene to deliberate thereon," provided that such decisions are presented to the board at the next meeting and recorded in the minutes of that meeting; and the latter provides that "the deliberations and decisions of the board of directors of a joint stock company shall be recorded in minutes prepared by the secretary, signed by the chairman of the meeting, the members of the board present, and the secretary," and that "the minutes shall be entered in a special register," with the option of using modern technology for signing and recording the deliberations, decisions, and minutes. These rules applicable to the corporate form require the startup, before transitioning, to prepare its internal structure to document its meetings and decisions, as the register and the document become cornerstones of governance for investors and regulatory authorities.

Duties of Care and Loyalty and the Business Judgment Rule in Internal Management

Internal governance under the Companies Law extends beyond the arrangement of meetings to regulate the conduct of those responsible for management. Article 26 of the Companies Law (Duties of Care and Loyalty) provides: "A company's manager or a member of its board of directors must observe the duties of care and loyalty, and in particular: (a) To exercise his functions within the limits of the powers assigned to him. (b) To act in the best interests of the company and promote its success. (c) To make decisions or vote thereon independently. (d) To exercise the care, attention, diligence, and skill that is reasonable and expected. (e) To avoid situations of conflict of interest. (f) To disclose any direct or indirect interest he has in the transactions and contracts entered into on behalf of the company. (g) Not to accept any benefit granted to him by a third party in connection with his role in the company."

Article 31 of the Companies Law (Business Judgment Rule) then balances these duties with protection of entrepreneurial decision-making in the startup: "A company's manager or a member of its board of directors shall be deemed to have performed his duty in the decision he made or voted on in good faith, provided the following conditions are met: (a) If he had no interest in the subject matter of the decision. (b) If he was sufficiently informed and aware of the subject matter of the decision to an appropriate extent in the surrounding circumstances, based on his reasonable belief. (c) If he genuinely and rationally believed that the decision served the best interests of the company," thereby establishing what is known as the business judgment rule, which encourages managers of startups to make bold commercial decisions without fear of arbitrary liability, provided there is good faith, absence of self-interest, and reasonable informed awareness of the matter. This is complemented by Article 28, which provides for the joint and several liability of the company's manager and its board members to compensate the company, the partners, the shareholders, or third parties for damage arising from a breach of the provisions of the Law or the founding documents, or from their errors, negligence, or default.

Internal Financial Discipline: Accounting Records and Financial Statements

Article 17 of the Companies Law (Accounting Records and Financial Statements) establishes the rule of internal financial discipline applicable to all startups in accordance with their nature: "1- The company must maintain accounting records and supporting documents to explain its operations, contracts, and financial statements at its principal premises or at any other location designated by its manager or board of directors. 2- Financial statements must be prepared for the company at the end of each fiscal year in accordance with the accounting standards adopted in the Kingdom, and these statements must be deposited in accordance with what the implementing regulations prescribe within (six) months from the date of the end of the fiscal year," so that the obligation of the startup to maintain accounting records and supporting documents, to prepare annual financial statements in accordance with the standards adopted in the Kingdom, and to deposit them within six months of the end of the fiscal year, is a cornerstone of internal governance that enables owners, investors, and regulatory authorities to track the company's performance.

The Law reinforces this rule with strict internal disclosure timelines upon transitioning to the corporate form, as Article 22 after 100 (Providing Shareholders with Financial Statements and Depositing Them) provides: "The chairman of the board of directors must provide the shareholders with the company's financial statements and the board of directors' report, after signing, and the auditor's report, if any, unless published through any modern means of technology, at least (twenty-one) days before the date set for the convening of the ordinary general assembly, and must also deposit these documents in accordance with what the implementing regulations prescribe," thereby establishing a clear internal timeline: providing shareholders with the statements and reports at least twenty-one days before the general assembly, unless published through modern means of technology.

Practical Internal Governance Policies for the Startup

In addition to the statutory provisions, the startup should build its internal governance on written policies that anticipate crises and take into account the requirements of investors and regulatory authorities as the company grows. Among the most important of these policies, which are grounded in the provisions of the Law:

• Conflict of Interest Policy and Disclosure: Adopting written procedures that define the obligation of management members and shareholders to avoid conflicts of interest and to disclose any direct or indirect interest in the transactions and contracts entered into on behalf of the company, based on the duties of care and loyalty in Article 26 and the rule on permission to deal in Article 27.
• Employment and Compensation Policy: Controls on the appointment of interested parties and family members, and on the compensation and incentives provided to founders and early employees, ensuring fairness and investor confidence, particularly in relation to shares allocated to employees and attractiveness incentives.
• Intellectual Property and Confidentiality Policy: Confidentiality agreements and the transfer of intellectual property developed during employment, and rules governing the use of company information, to protect the startup's most valuable assets upon the departure of employees and founders.
• Financial Separation Policy: Separating the personal accounts and funds of the founders from the company's funds, rules for expenditure and approval of expenses, and obligations relating to zakat, taxes, and fees, to protect the independence of the legal personality and limited liability.
• Documentation and Record-Keeping Policy: Retaining minutes of decisions issued by circulation or in writing in a special register, as provided in Articles 50 after 100 and 57 after 100 for the single-person company, and retaining documents, contracts, and supporting records in accordance with Article 17.
• Information and Technology Policy: Controls on access to data, its integrity, backup copies, and system security, particularly where the startup processes customer data or operates digital activities subject to specific regulatory obligations.

These policies are drafted in a volume proportionate to the company's stage, are reviewed at each financing round or upon the entry of a significant investor or expansion of activities, and are checked to ensure they do not conflict with the founding contract or the articles of association, and that they keep pace with the company's statutory obligations in accordance with its form.

Official Sources and References

This article relies on the following official statutory sources, which are the authoritative reference for all texts and figures set out in the sections above, and it is always preferable to review these official links to consult the full texts and the latest updates:

• Companies Law issued by Royal Decree No. (M/132) dated 1/12/1443H — Full text in the Official Gazette (Umm Al-Qura)
• Implementing Regulations of the Companies Law issued on 25/6/1444H — Full text in the Official Gazette (Umm Al-Qura)
• New Companies Law — Ministry of Commerce (summary of the regulation and its practical applications)
• Corporate Governance Regulations for Unlisted Joint Stock Companies — Ministry of Commerce (applicable to unlisted joint stock companies, including startups)

Methodological note: All figures, deadlines, competencies, and degrees of enforceability transmitted in this article have been taken verbatim from the official texts cited above and published in the Official Gazette (Umm Al-Qura), and the texts of the Articles are read as they appear in their statutory source without alteration. It is recommended to consult these sources to verify any subsequent updates to the texts and their effect on the resulting obligations.

Frequently Asked Questions on Internal Governance of Startups

We set out below the answers most commonly discussed among founders of startups, investors, and governance practitioners regarding internal governance in the early growth stages under the Companies Law:

Conclusion: A Graduated Internal Governance That Grows with the Startup

The governing rules for the internal governance of startups under the Saudi Companies Law can be summarized along three axes: foundational choice, based on the principle that the corporate form determines the scope of governance, so that the startup transitions from light contractual tools in the family forms, to the flexibility of the simplified joint stock company whose shareholders regulate its structure, mode of operation, administration, and decisions in articles of association that they draft themselves, without a minimum capital requirement, and then to the broader rules of the corporate form under which board of directors' meetings are bound by a prescribed quorum and frequency; procedural flexibility, based on the mechanisms for issuing decisions in writing and by circulation without convening a general meeting in the limited liability company and the simplified joint stock company, with the recording of decisions in a special register, and the right of internal inspection, which amounts to twice per fiscal year in the limited liability company; and conduct and financial discipline, based on the duties of care and loyalty and the business judgment rule that protect reasonable entrepreneurial decisions, joint and several liability for negligence and default, and the discipline of accounting records and financial statements in accordance with the standards adopted in the Kingdom and the prescribed deadlines for depositing them. At Nova Legal for Legal Consultancy, we provide our specialized advisory services for the formation of startups and the selection of the most appropriate corporate form, the drafting of their articles of association, shareholder agreements, and internal policies, and accompanying them through the transition from founder governance to institutional governance in compliance with the provisions of the Companies Law, and we are pleased to accompany you towards a graduated internal governance that grows with the growth of your startup.