Saudi Arabia: Companies Law Amendments May Increase Shareholder Derivative Litigation

Last Updated: 23 November 2018
Article by Mahmoud Abdel-Baky and Jonathan Burns

Amendments to Saudi Arabia's Companies Law, which came into effect in April 2018, seemingly return a rudimentary concept of standing for shareholder derivative claims to the statute, while  introducing a new concept of cost-shifting for such claims. This may have the effect of incentivising shareholder litigation practice in Saudi Arabia. Joint stock companies incorporated in Saudi Arabia should ensure that adequate internal policies are in place, in order to confront a potential increase in such claims.


Shareholder derivative claims are generally uncommon and Saudi courts have largely followed the American Rule on litigation costs, whereby litigating parties all bear their own costs (absent a statutory or contractual basis otherwise)1, as opposed to the English Rule, whereby the losing party bears the prevailing party's costs. 

However, the basis for this standard in Saudi Arabia does not stem from common law theories but from Islamic law (Shari'a) financial principles forbidding unjust enrichment and speculation. Put differently, Saudi judges, trained in Shari'a, generally only award actual, proven damages to the prevailing party. Based in part on the general straightforward attitude of the judiciary towards claims and legal professionals, attorneys fees are not generally considered to be within the ambit of actual damages because the aid of legal counsel is not considered to be a necessity. This also means that large payoffs, punitive damages, statutory treble damages and the like are generally unavailable in Saudi Arabia. 

While the lack of cost-shifting in lawsuits, as well as Shari'a financial principles necessarily prohibiting large payoffs in judgments, has allowed Saudi Arabia to remain as a generally non-litigious society, the growth of the Kingdom has resulted in higher stakes and an increased need for a greater number of active legal professionals and judiciary.

The Companies Law

In this regard, Saudi Arabia's legislators have, in recent years, been on an active and intense campaign to solidify the Kingdom's corporate governance culture, including cracking down on corruption, incompetence, nepotism and self-dealing in both the boardroom and the C-Suite.

In particular, legislators adopted a new Companies Law, which came into effect on 2 May 2016 (the 'Companies Law') abrogating and replacing the then-existing Regulations for Companies enacted in 1965 (the 'Regulations for Companies'). A large part of the new Companies Law was aimed at clarifying and strengthening corporate governance rules for companies in Saudi Arabia in an effort to place more accountability on officers and directors, while putting more power in the hands of shareholders.

Continuing in this goal, legislators enacted eleven amendments to the Companies Law on 10 April 2018 (the 'Amendments'). One such amendment seeks to return shareholder derivative claims to the statute, while introducing a new statutory basis for shifting attorneys fees in such claims, which is a largely novel concept in Saudi law.

Re-introducing shareholder derivative claims

The Regulations for Companies (1965) originally provided a rudimentary framework for shareholder derivative claims under Article 78, whereby shareholders were given standing to sue the directors on behalf of the company for their wrongful acts, so long as the company's cause of action against the directors continued to exist and only if a demand/notice was first served on the company. However, shareholders taking on this burden could only recover the actual damage sustained due to the directors' acts.

Similarly, the new Companies Law provides for certain causes of action against the board of directors for their wrongful acts. In particular, under Article 79 the company may sue the directors for their wrongful acts causing harm to all shareholders, whereas under Article 80 an individual shareholder may sue the directors for their wrongful acts causing harm to the individual shareholder itself.

In the former case, the decision to sue the directors must be taken by the shareholders at an ordinary meeting. However, the Companies Law does not describe in particularity the consequences or fallback options in the event that the shareholders fail to resolve to sue the directors at an ordinary meeting.

In that regard, the Amendments include a new provision that seemingly addresses this missing fallback option by re-introducing another rudimentary concept of shareholder derivative claims and including cost shifting, whereby a shareholder may shift derivative litigation costs to the company in this instance.

Some would argue that Article 80 of the new Companies Law has the same net effect, in that individual shareholders still have standing to sue, but under Article 80 shareholders are suing on their own behalf and will not be able to take advantage of statutory cost shifting in this case.

Moving towards the English Rule in shareholder derivative claims?

The Amendment is vaguely drafted with an unclear reference to the fact that the shareholder may only shift its litigation costs to the company if the claim is 'in the interests of the company pursuant to Article 79', which implies that cost-shifting in this instance is only enforceable in shareholder derivative claims particularly, where all shareholders were harmed by the wrongful act of the directors and a resolution by the shareholders to sue the directors at an ordinary meeting was not obtained for some reason.

In addition to the constraints of passing the Article 79 hurdles, a shareholder may only shift its costs of bringing a claim against the company if: 1. the company fails to respond within 30 days to a complaint from the shareholder describing the reasons for the claim; and 2. the claim is made in good faith and on sound legal grounds.


The codification of another cause of action and standing for shareholders to sue the directors on behalf of the company reflects the Kingdom's drive towards creating a more robust, shareholder-friendly corporate governance environment in Saudi Arabia. This may have the effect of encouraging more claims by shareholders and their lawyers – who may be more disposed to file a claim on the basis that the company may be required to bear the cost of doing so according to statute.

However, the application of this provision is difficult to foresee in practice. The hurdles that must be overcome in order for the company to be required to bear a shareholder's costs are numerous, vague and difficult. Assuming the implication of Article 79 is correct, the cases in which cost-shifting may be required will be rare. Furthermore, if the shareholders did not approve a claim against the directors at an ordinary meeting, it may be difficult to convince the court that the claim against the company is indeed in good faith and on sound legal grounds, which is an additional hurdle to overcome. Even so, based on a plain reading of the Amendment, the company can avoid liability for a shareholder-plaintiff's derivative litigation costs by simply replying to the shareholder-plaintiff's initial complaint within 30 days.

The Amendment does not specify the nature of the reply required. However, joint stock companies in Saudi Arabia should ensure that their internal corporate governance manuals and policies for officers and directors are clear and updated to ensure an appropriate response to shareholder complaints in line with the Amendments.


However, note that Saudi courts will not enforce shifting of attorneys fees even if agreed in contract – based on Shari'a principles favoring only actual damages. Additionally, Saudi judges do have discretion to ignore statutory law if it is deemed contradictory to Shari'a in any way – and thus even a statutory mechanism for shifting attorneys fees may be subject to scrutiny under the Shari'a.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions