The question IAD Business Services Group hears most often from family businesses is not “how do we write a governance agreement” but “have we reached the point where we need one”. The honest answer is that the right time precedes the feeling of need by years: an agreement written during a dispute is written under pressure, and one written before it is written with a cool head. The question concerns most of the economy, not a segment of it: family companies represent 95% of all companies in the Kingdom, as Al Riyadh reported the Minister of Investment saying in October 2025.
Five signs that precede a dispute
- The second generation has joined the company without a written definition of its role: owner, employee, or both, and by which criteria it is evaluated.
- Distribution decisions are taken annually by discussion rather than by rule, and differ from year to year depending on who attended the meeting.
- Nobody knows what happens to a partner's stake if they wish to exit, pass away, or fall into personal financial distress.
- The operating company and family ownership are one thing in practice: accounts, assets and decisions are mixed.
- Meetings are held only in crises, and there is no minute to refer to six months later.
Three of these five signs are enough in practice to start work on a governance agreement. There is no need to wait for the fifth, because the fifth usually arrives with the dispute itself, by which time each side has retained a lawyer before retaining a cool head.
What the law allows in a family charter
The Saudi Companies Law gave the family charter binding force in explicit terms. Article 11 of the Companies Law, issued by Royal Decree M/132 dated 1/12/1443H, allows founders, partners or shareholders to conclude a family charter “covering the organisation of family ownership in the company, its governance and management, work policy, the policy on employing family members, profit distribution, disposal of shares, and the mechanism for settling disputes”, and provides that the charter “is binding, and may form part of the company's articles of association or bylaws”, provided it does not conflict with the law. The same article allows an agreement organising “how their heirs enter the company, whether in person or through a company they establish for that purpose”, which is the statutory door to the family holding company.
| What the law allows in the charter | The decision the family must actually take |
|---|---|
| Organisation of family ownership, governance and management | A decision-rights matrix: who decides what, up to which limit, by which majority |
| Policy on employing family members | Criteria for joining, evaluation and dismissal, applied to everyone without exception |
| Profit distribution | A known formula, and what suspends it |
| Disposal of shares | Exit terms, right of first refusal, valuation mechanism and payment schedule |
| Dispute settlement mechanism | Mediation then arbitration, instead of going straight to court |
| Entry of heirs | Directly, or through a family holding company |
What the agreement actually settles
A governance agreement is neither a values document nor a statement of intent. It is a set of written decisions taken once so they need not be taken every time: decision rights, entry and exit, family employment, distribution policy, and the path when disputes arise. The hardest and most useful rule in it is that it applies to everyone, because the first exception cancels the whole agreement in the minds of those not excepted.
The statutory clock that makes distribution policy a matter of survival rather than courtesy sits in the law itself. Article 182 provides that when a limited liability company's losses reach half its capital, the manager must call the general assembly within sixty days to consider its continuation or dissolution. A family company that distributes all its profits in good years with no reserve reaches that threshold in its first two bad years, and finds itself facing the continue-or-dissolve decision in a meeting no agreement preceded.
Mediation then arbitration: why the order matters
The dispute settlement mechanism Article 11 allows works when it is graduated rather than direct. The path that works in family companies has three steps: discussion within the family council with a set deadline, then a mediator agreed in advance by name or by role, then binding arbitration. The first step resolves most disputes because it forces both sides to sit before either retains anyone; the second resolves what remains without publicity; the third is rarely used, but its existence is what makes the first and second serious. A company that goes straight to court wins a judgment and loses a family, and the judgment does not run the company afterwards.
A worked example: a partner's exit, figures disguised
The most dangerous moment in a family company without a charter is a partner's request to exit. In a disguised example of a family company worth SAR 60 million in total, owned equally by three siblings, one asks to leave. Without a charter the negotiation starts from two distant numbers: the seller sees a stake of SAR 20 million in cash now, and the others see that withdrawing SAR 20 million would stop the company. A charter written years earlier answers the three questions in advance: how the stake is valued, who has first right to buy it, and over how many years it is paid.
| Item | Without a charter | With a working charter |
|---|---|---|
| Value of the stake | Two distant numbers and a lawyer for each side | Independent valuation: three-year average profit times a multiple agreed in advance |
| Who buys | An outside party who may enter the family | Right of first refusal for the two partners, then the company |
| Payment | Cash now, or a dispute | 25% at signing and the rest over four years |
| Liquidity effect in year one | SAR 20 million in one payment | SAR 5 million, then SAR 3.75 million a year |
| Time to closing | One to three years of dispute | Ninety days |
The arithmetic in the charter column is clear: SAR 20 million is paid as SAR 5 million at signing and SAR 15 million over four years at SAR 3.75 million a year, an amount a company of this size can fund from its profits without new facilities. And the “without a charter” column is no exaggeration: a dispute that runs for years costs the company its clients before it costs it the lawyers' fees.
Family employment: the rule tested first
The policy on employing family members is the item Article 11 lists that is tested before any other in practice. A family company that writes joining criteria into its charter and then exempts the first son who knocks has cancelled the whole charter in everyone else's mind, because a charter is ratified by its first application, not its first signature. The rule that works in most cases: years of experience outside the company before joining, a title and salary at market criteria rather than kinship criteria, an annual evaluation on the same form used for non-family staff, and dismissal by the same procedure. The difficulty is not in writing it but in the first case; if the first case passes through the rule, the charter becomes real.
The meeting that keeps the agreement alive
A governance agreement lives or dies in the meeting calendar, not in its text. An owners' assembly twice a year with a fixed agenda: financial statements, the distribution decision by formula, the board's report, and any entry or exit request. A board every quarter with a limited number of indicators. A minute for every meeting, signed by those present and kept where everyone can find it. A company that holds these meetings on schedule even in quiet years finds, when the hard year comes, that it has a habitual place for the hard decision and a minute to refer to. A company that holds them only in crises finds that the crisis is the first meeting, and that those present have not yet agreed who chairs it and who writes its minute.
The right order
The common mistake in family companies is to start with the legal drafting. The order IAD Business Services Group works in is the reverse: first sessions in which decisions are settled in plain language without lawyers, then the minutes translated into a statutory text under Article 11 by a licensed law firm, then the tools that make the agreement live: a meeting calendar, a minute template, and an authority matrix hung on the wall rather than kept in a drawer.
An agreement not translated into a weekly procedure dies within a year. One that is translated becomes, after two years, the thing nobody remembers how the company worked without. The difference between the two is not the quality of drafting but whether the decisions were actually taken before they were written.
An agreement written during a dispute is written under pressure. One written before it is written with a cool head.
Sources
- Companies Law, Royal Decree M/132 (1443H), Article 11 (partners' agreement and family charter) and Article 182 (company losses).
- Minister of Investment: family companies represent 95% of all companies, Al Riyadh, 29 October 2025.