Civil liability of members of the board of directors of a joint-stock company

The civil liability of the members of the board of directors of a joint-stock company. Joint-stock companies contribute directly to supporting the national economy and achieving the Kingdom’s Vision 2030. The board of directors, as the highest administrative body, plays a key role in setting strategic policies and managing the daily affairs of the company.

Given the broad powers vested in board members, the Saudi legislator has established a precise legal framework for accountability, ensuring efficient management of company funds and protecting [the company's interests].Shareholders' rightsAnd others.

In this article, we specifically aim to provide a detailed analysis of the foundations of civil liability for members of the board of directors of a joint-stock company under Saudi law, its pillars, and the procedures for claiming it.

Abdulaziz bin Yasser Al-Anzi Law Firm

Joint-stock company under Saudi law

It is a company that is established with the aim of making a profit, and the partners in it are shareholders who own shares in the form of shares of equal value that can be easily bought and sold. This company is not based on the personality of the partners or their relationship with each other, but rather on the amount of shares that each shareholder owns, meaning that the financial element is the basis for its establishment and continuation.

The joint-stock company under Saudi law is managed by a board of directors of no less than 3 members, who are elected by the ordinary general assembly (by cumulative or ordinary voting), and the term of membership does not exceed 4 years, renewable.

The outgoing council continues for a maximum of 90 days until a new council is elected, and resignation does not take effect until a replacement is elected within a maximum of 120 days.

As statedNew corporate systemThe vacant membership will be filled by a temporary appointment presented to the General Assembly, and the membership of a member who is absent from 3 consecutive meetings or 5 separate meetings without an acceptable excuse may be terminated.

Responsibilities of board members in a joint-stock company

The most important responsibilities of the board members of a joint-stock company, according to Article 26 of the Companies Law, are as follows:

1. Working in good faith to achieve the company's best interests and maximize its value.
2. Objectivity and impartiality in decision-making.
3. The skill of a diligent person (knowledge and experience).
4. Not exploiting the position for personal gain.
5. Avoid and disclose conflicts of interest.
6. Disclosure of any direct or indirect interest in the company's contracts.

The legal basis for the liability of board members in a joint-stock company

The determination of the responsibility of board members under Saudi law is based on the provisions of the Companies Law, the Capital Market Law and the relevant implementing regulations. This responsibility rests on three fundamental pillars that must be present together:

1. An error on the part of the Board of Directors, including breach of duties of care and loyalty, violation of the provisions of the company's articles of incorporation or bylaws, or negligence and dereliction of duty in performing the tasks entrusted to them.
2. Damage may occur to the company as a legal entity, or to the shareholders individually, or to others (creditors and those dealing with the company).
3. There must be a causal relationship, meaning that the damage arose as a direct result of the error committed by the board of directors.

The Companies Law also stipulates that the members of the board of directors of a joint-stock company are jointly liable for compensating damages resulting from mismanagement or violation of regulations, and any condition that exempts them from this is considered invalid. The liability is collective if the decision is issued unanimously, but the majority decisions are not held against the opponents if they prove their objection. The absent are not exempt unless they did not know about the decision or were unable to object. The general assembly’s acquittal does not prevent the filing of a lawsuit, and the liability claim is extinguished after three years from the discovery of the damage.

The pillars of civil liability for members of the board of directors of a joint-stock company

First element: The mistake

The error takes several forms, the most prominent of which is: breach of the duty of care, as a board member must exercise the care of a reasonable person in managing the affairs of the company, and act in good faith and in a way that achieves the interest of the company based on sufficient and reasonable information. Neglecting to attend board meetings without an acceptable excuse is considered evidence of dereliction of duty of supervision and management.

A board member should also be committed to loyalty to the company, which is embodied in avoiding conflicts of interest and not exploiting his position to achieve personal benefits or to harm the interests of the company. This includes not exploiting the company’s internal information for his own benefit or the benefit of his relatives.

Board members are also liable for damages resulting from exceeding the powers granted to them under the Companies Law orArticles of Incorporation or Articles of Association of the Company.

It is worth noting that any act or omission that constitutes an explicit violation of the provisions of the Companies Law or any other related regulations, such as the Financial Market Law, is considered a liability-based offense.

The second element: harm

It can harm three main categories:

1. Damage to the company occurs when decisions or actions of the board of directors cause financial losses to the company, such as entering into unprofitable contracts, mismanaging assets, or causing a deterioration in the company's financial position. In this case, the company itself has the right to file a civil liability lawsuit against the offending board members.
2. The harm to shareholders, directly as a result of the board of directors’ error, such as preventing him from attending or voting in general assembly meetings, or depriving him of due profits, or manipulating the value of his shares, in this case, the shareholder has the right to file an individual lawsuit in his own name and for his own account.
3. Damage to others includes creditors and those dealing with the company whose rights may be harmed due to the company’s mismanagement or bankruptcy as a result of the board of directors’ mistakes. Therefore, it is of utmost importance to determine the civil liability of the board members of a joint-stock company in the event of its bankruptcy in order to protect the rights of creditors.

Third element: The causal relationship

The plaintiff, whether the company, the shareholder, or a third party, must prove that there is a direct causal relationship between the mistake made by the board member and the damage he suffered; in other words, prove that if it weren't for the mistake, the damage would not have occurred.

Types of civil liability claims

Saudi law provides several mechanisms for claiming compensation for damages resulting from the board of directors' errors, according to the nature of the damage and the affected party, as follows:

The liability claim filed by the company

This is the original lawsuit filed by the company as a legal entity against its board members to claim compensation for the damages it has suffered.

In order to file this lawsuit, a decision must be issued by the company's ordinary general assembly, appointing its representative to conduct the lawsuit before the courts. Members of the board of directors concerned with the lawsuit may not vote on the decision to file it due to a conflict of interest.

Individual shareholder claim

A shareholder has the right to file an individual lawsuit in his own name and for his own account if the error issued by the board of directors has caused him specific and direct harm, regardless of the harm caused to the company. The compensation obtained by the shareholder in this lawsuit is his right only and not the company’s right.

Parliamentary lawsuit (derivative)

If the company (represented by its general assembly) fails to file a liability lawsuit against the board members, the regulations allow shareholders who own a certain percentage of the capital (at least 5%) to file a lawsuit on behalf of the company and for its account.

This lawsuit aims to protect the rights of minority shareholders and compel the board of directors to assume its responsibilities. It is required in this lawsuit that the plaintiff be in good faith and that the lawsuit be based on a sound basis.

Procedures for filing a lawsuit against members of the board of directors

The Saudi Companies Law specifies the procedures necessary to file a civil liability lawsuit against members of the board of directors of a joint-stock company, and the most important steps are as follows:

1. Gathering evidence and documents that prove the error, the damage, and the causal relationship.
2. Issuing a formal warning to the board of directors or the company (in some cases) demanding that they rectify the situation before resorting to the courts.
3. Preparing the statement of claim and submitting it to the competent court.

As for the competent judicial authority, jurisdiction lies with the adjudication committees.Securities disputesWith regard to lawsuits related to joint-stock companies listed on the financial market, jurisdiction lies with the general commercial courts for unlisted joint-stock companies.

Cases of exemption from civil liability and its termination

The Saudi legislator has established a list of safeguards that protect board members from civil liability in certain cases, which are:

1. Recording and proving the member’s objection to the decision or action causing harm in the minutes of the council meeting and not participating in it.
2. Administrative decisions must be made in good faith and after due diligence, even if it later turns out that they did not achieve the desired results, unless it is proven that the decision was fraudulent or involved a clear violation of the law.
3. The general assembly of shareholders may issue a resolution to absolve the members of the board of directors of liability for the past fiscal year. However, this absolution does not prevent them from being held accountable if new facts emerge that were not presented to the assembly at the time of the absolution.
4. A civil liability claim against board members shall not be heard after a certain period has elapsed from the date of discovery of the harmful act, in accordance with the periods specified in the system.

Legal protection mechanisms for members of the board of directors of a joint-stock company

The Saudi corporate system is concerned with achieving a balance between protecting the rights of shareholders and the company on the one hand, and not burdening board members with arbitrary responsibilities that may deter them from making administrative decisions necessary for the company’s growth on the other hand.

Therefore, several mechanisms were adopted to achieve the highest levels of legal protection, the most important of which are:

1. The powers and responsibilities of the Chairman of the Board, his deputy, and the Managing Director must be clearly and explicitly defined in the company's articles of association or internal regulations.
2. It is necessary to form specialized committees emanating from the Board of Directors, such as the Audit Committee and the Remuneration and Nominations Committee, to enhance the efficiency of internal control and reduce the likelihood of errors.
3. Companies insure their board members against civil liability to provide them with financial protection in case they face lawsuits due to unintentional errors while performing their duties.

Do you manage a publicly traded company and want to protect your board of directors legally? The civil liability of board members in a publicly traded company is one of the most sensitive issues in Saudi corporate law, as any error or negligence can have serious consequences.

L - unintentionally - joint liability that may threaten the stability of the company and its board members.

Therefore, we offer you inAbdulaziz bin Yasser Al-Anzi Law FirmThe integrated legal solution, through assessing the extent of your board of directors’ exposure to civil liability in accordance with the latest regulatory amendments, drafting and reviewing power-sharing contracts and governance texts, and specialized legal representation in all liability claims before securities dispute resolution committees and commercial courts.

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