Adequacy of Saudi Companies Law in protecting minority shareholders’ interests: Critical analysis and comparison with the UK Law

Abstract

In Saudi Arabia, pursuit of ambitious objectives outlined in Vision 2030 has increased the importance of strengthening the rights of minority shareholders. The dissertation aimed to investigate the adequacy of Saudi Companies Law (SCL) in protecting the interests of minority shareholders by comparing the laws on shareholder protection in Saudi Arabia with those in the UK. Three key limitations of SCL are high 5% threshold for bringing a derivative claim, lack of clarity in Saudi Arabia around the remedies for minority shareholders, and absence of ‘fraud against minority’ principle in Saudi Arabia. Difficulty for minority shareholders to bring a derivative claim due to 5% threshold means majority shareholders may be encouraged to act in their own best interests and to the detriment of minority shareholders, knowing they are less likely to experience legal challenges from minority shareholders. Therefore, Saudi Arabia could consider lowering or removing the threshold to encourage more shareholder activism and ensure all minority shareholders feel protected irrespective of the size of their ownership in the business. Limited clarity on remedies available to minority shareholders in Saudi Arabia (such as unfairly prejudicial conduct and just and equitable winding up of the business available in the UK) creates uncertainty which can discourage shareholders from seeking legal redress even in situations they believe they are not being treated fairly. Fraud on minority principle is a strong deterrent for management and board, providing them an incentive to follow the best practices of corporate governance. In its absence, the standards of corporate governance are likely to decline, contributing to a loss of trust among shareholders, reducing the willingness of potential investors to invest because of limited legal protection and poor governance. Thus, Saudi Arabia is likely to benefit from incorporating a similar provision within its legislation to further protect minority interests.