Partner withdrawal from the company: legal options and financial implications

The withdrawal of a partner from the company is one of the procedures that can take place in the course of commercial entities. It means the separation of one of the partners from the company contract and the recovery of his share of the capital and profits in accordance with the provisions of the Saudi Companies Law.

This procedure is of great importance as it represents a turning point in the structure of ownership and management, and its motives may arise either from a voluntary desire of the partner himself in an effort to devote himself to other projects, or from necessity as a result of compelling circumstances such as death, bankruptcy, or the impossibility of continuing the partnership due to fundamental disagreements.

Therefore, all concerned parties must be familiar with the available legal options related to the process of a partner withdrawing from the company, as well as know the implications of this decision, which may affect the company’s financial position and continuity.

This article aims to highlight the legal avenues available to ensure a partner's exit with minimal damage, along with a comprehensive analysis of the financial implications of such a move.

Abdulaziz bin Yasser Al-Anzi Law Firm

What is meant by the term "partner's withdrawal from the company"?

In the Saudi legal system, the term "partner's withdrawal from the company" refers to the legal procedure that terminates the partner's relationship with the company and their departure from it. This includes a set of organized financial and legal procedures, and this withdrawal can be done in one of the following three ways:

1. Voluntary withdrawal occurs when a partner voluntarily wishes to leave the company and relinquish their share to other partners or a third party, which results in the termination of their status as a partner.
2. Selling or assigning shares means that a partner transfers ownership of his shares or stocks in the company to the existing partners or to a new investor, in exchange for an agreed price.
3. Judicial or compulsory removal is a procedure taken by the company or other partners to force a partner to leave, either because of his breach of his essential obligations, or his failure to perform his duties, or his conduct that harms the company’s interest. This procedure is carried out based on a ruling issued by the competent judicial authorities.

Procedures for a partner to leave a company in Saudi Arabia

A set of organized legal and administrative steps should be followed to ensure that the procedures for a partner's exit from the company in Saudi Arabia are carried out correctly and to protect the rights of all parties, as follows:

1. Refer to the company's articles of incorporation and bylaws, which usually include the process for withdrawing or removing partners and specify the conditions and mechanisms to be followed.
2. Submitting a formal notice of intent to withdraw, which requires formally notifying the other partners of his intent at least 60 days before the date specified for withdrawal, unless the articles of incorporation stipulate a different period.
3. Assess the fair value of the partner’s share based on the company’s assets and liabilities. Financial experts can be consulted to ensure transparency. Then, agree on a payment mechanism, whether by paying the value in cash or through other assets.
4. A formal resolution is drafted by the general assembly of partners approving the partner's exit, clarifying the amendments to the ownership structure and the distribution of shares, and then the articles of incorporation are amended based on this resolution.
5. Documenting the transfer of ownership of shares to the remaining partners or to a third party, and then registering and publishing this amendment in the Commercial Registry.
6. All financial rights of the withdrawing partner shall be settled in exchange for his share, with the changes recorded in the company’s accounting books. The withdrawing partner shall remain responsible for the company’s debts and obligations that arose before the date of registration and publication of his withdrawal, and shall not be liable for debts that arise after this date.

How to remove a partner from the company

Regarding the process of removing a partner from a company under the Saudi legal system, the Companies Law – issued by Royal Decree No. (M/132) dated June 30, 2022 – provides a precise legal framework, which requires adherence to the following procedures:

There are many cases that justify removing a partner, including breach of contractual obligations such as failure to pay the financial share, or causing significant losses to the company as a result of mismanagement or exploitation of funds for personal interests, in addition to cases of loss of legal capacity such as bankruptcy or mental incapacity.

The output process occurs via one of two main pathways:

Amicable withdrawal by mutual consent begins with reviewing the articles of incorporation to determine if they stipulate a specific withdrawal mechanism, followed by direct negotiation with the partner to reach an amicable agreement regarding the value of their share and the payment mechanism. This is the preferred method of the system to avoid disputes.

The share is evaluated - after the agreement - by a certified accounting expert to determine the fair market value, and then the minutes of the partners’ meeting are prepared and the exit decision is officially documented, with the articles of incorporation being amended electronically via the Ministry of Commerce platform.

As for judicial removal, it occurs in the event that an amicable agreement cannot be reached, where the remaining partners can submit a request to the competent judicial authority to remove the partner, provided that there are legitimate reasons such as serious harm to the company's interests.

In this case, a lawsuit to separate a partner is filed before the Commercial Court, and a statement of claim is prepared by a specialized lawyer that includes all the data and supporting documents necessary to prove the need for removal.

It is worth noting that registering and publishing the withdrawal procedure in the Commercial Registry is a prerequisite for its validity against third parties. The withdrawing partner is released from liability for company debts incurred after this registration, but remains liable for debts incurred prior to it.

Procedures for a partner to withdraw from a partnership in the Saudi legal system

A partnership company under Saudi law can be established between two or more natural persons, in which they are personally and jointly liable without limitation in all their own funds for the company’s debts and obligations, and each partner in it acquires the status of a merchant.

A partnership company is characterized by being based on personal consideration between partners and mutual trust, which makes the partner's personality a fundamental consideration in the continuation of the company.

The procedures for a partner to leave a partnership differ from the procedures for a partner to leave a limited liability company or a joint-stock company for two main reasons. The first is that the liability in a partnership is personal and joint and unlimited, where the partner is personally liable for the company’s debts prior to his departure, and this liability remains in place for a period of no less than one month from the date of registration of his withdrawal in the commercial register, and does not expire simply by leaving.

Secondly, a partnership is based on personal considerations, so a partner may not assign his share to a third party or withdraw unilaterally without the consent of the other partners, unlike limited liability companies in which a partner may sell his shares to a third party without requiring the consent of all partners, or joint-stock companies in which shares are freely tradable.

Furthermore, in a partnership, if the articles of incorporation do not stipulate an exit mechanism, the procedures for exiting require resorting to the competent judicial authority at the request of a majority of the partners to remove the partner or prove their withdrawal, while exit procedures in other companies are often carried out through purely administrative procedures at the Ministry of Commerce without the need for judicial intervention.

Therefore, we note that exit procedures are more complex due to their close connection with the personal and joint liability and personal consideration of the partners.

Based on the above, the procedures for a partner's exit from a partnership are more complex due to their close connection with the personal and joint liability and the personal consideration of the partners.

Procedures for a partner to withdraw from a joint-stock company

A partner may leave a joint-stock company by selling his shares to another partner or a third party in accordance with the Saudi Companies Law, or by voluntary withdrawal by notifying the remaining partners within the period agreed upon in the articles of incorporation.

In the case of forced eviction, resorting to the judiciary is required, provided there are legitimate reasons proving that the partner has harmed the company's interests and that a majority of the partners agree to the eviction.

The procedures include negotiating the valuation of the share according to the fair market value, reviewing the basic partners agreement, and when a partner withdraws from the company, his share of the profits or losses is calculated up to the date of withdrawal, and he does not bear responsibility for the company’s subsequent debts - unlike a partnership - and if the remaining partners are unable to purchase the share, the company may be sold or liquidated and the assets distributed after the obligations have been paid.

Financial implications of a partner's withdrawal from a company in the Saudi legal system

The financial implications of a partner's withdrawal are subject to the provisions of the Saudi Companies Law, and vary according to the legal form of the company, as follows:

1. Profits and losses are distributed according to each partner’s share in the capital. It is not permissible to agree to deprive a partner of profit or exempt him from loss. The share of the withdrawing partner is calculated up to the date of actual withdrawal based on the approved financial statements.
2. If the partners do not agree on the value of the share or if the articles of incorporation do not specify the method of valuation, the value shall be estimated by independent experts in accordance with the provisions of the system, and the valuation shall include all assets, liabilities and goodwill.
3. The liability of the withdrawing partner is limited to debts incurred prior to the withdrawal and to the extent of his share of the capital, in joint-stock and limited liability companies.
4. In partnerships, the partner remains personally and jointly liable with unlimited liability from his own funds for the company's debts prior to his departure, and liability only ends with the statute of limitations, while he does not bear subsequent debts after the registration and publication of his withdrawal in the commercial register.
5. Payment is made in cash or from company assets according to the agreement of the parties, and the remaining partners have the right of pre-emption to purchase the share before it is offered to a third party.
6. If an agreement on withdrawal and settlement of rights cannot be reached, or if withdrawal leads to a substantial disruption in the company's structure, the company may be fully liquidated, its assets inventoried, its liabilities settled, and the remaining net distributed.

In any case, it is highly recommended to useAbdulaziz bin Yasser Al-Anzi Law FirmFor detailed legal advice on a partner's exit from the company, tailored to your situation, to ensure your financial rights are fully protected and the scope of your liability for the company's previous obligations is accurately determined.

Contact usTo book a suitable appointment and best meet your legal requirements in accordance with approved local and international standards.