Share buybacks without statutory approvals: assessing the validity of the transaction

Abstract

The authority of the chair of a joint-stock company to represent it and sign on its behalf does not dispense with compliance with the powers that the legislature has reserved to other corporate bodies. This distinction is particularly important when the company purchases shares it has itself issued, a transaction governed by specific provisions protecting capital, shareholders and creditors. This study concludes that failure to comply with the statutory requirements, including a provision in the articles of association permitting the company to purchase its own shares or approval by the extraordinary general assembly, gives rise to a substantive defect that may require the purchase to be declared void.

Scope and disclosure

This is an abstract, applied study of legal doctrine and statutory law.

1. The research question

May a closed joint-stock company purchase shares it has itself issued under a contract signed solely by its board chair, without establishing an enabling provision in its articles of association or an approving resolution of the extraordinary general assembly? What are the limits of other shareholders’ right to invoke invalidity, and what is the effect of an earlier arbitration award determining entitlement to the share price between the company and the sellers?

The answer requires examination of the validity of the transaction, signing authority, third-party protection and res judicata.

2. The law applicable in time

As a starting point, the legality of a transaction is assessed under the law in force when it was concluded. A contract entered into before the new Companies Law took effect on 19 January 2023 requires initial reference to the Companies Law of 1437 AH and the Regulatory Rules for Unlisted Joint-Stock Companies of 1438 AH, rather than automatic retrospective application of the new law. The Companies Law and the Regulatory Rules are mandatory rules that may not be contracted out of or circumvented. ^{[S1] [S2] [S3]}

3. Buybacks: permission, approval and purpose

Article 112 of the Companies Law of 1437 AH permitted a company to purchase its own shares subject to rules issued by the competent authority. For unlisted joint-stock companies, Article 12 of the Regulatory Rules sets conditions including permission in the articles of association; a purpose of capital reduction or holding the shares as treasury shares; and approval by the extraordinary general assembly specifying the number of shares, purposes and delegation. ^{[S1] [S2]}

Describing the transaction as a “shareholder exit” or the sale as a privately negotiated transaction does not change the identity of the purchaser where the company itself contracts to purchase its own shares. Similarly, a recital in the contract that “statutory approvals” were obtained is a contractual statement and does not replace the record of a resolution issued by the body legally competent to adopt it.

The treasury-share threshold

The 10% limit in Article 12(c) concerns treasury shares. If the purchase is for capital reduction, the statutory capital-reduction procedures must be followed. If the purpose of the purchase is not specified, the contract contravenes the Regulatory Rules and must be declared void. ^[S2]

4. The board and its chair: representation does not replace the general assembly

Under the historical Companies Law, Article 77 addressed acts and transactions carried out by the board of directors. The wording refers to acts carried out by the board; the chair acting alone does not suffice. ^[S1]

Accordingly, the contract is void where it is signed by the board chair acting alone.

Editorial note: Article 77 referred to here is from the 1437 AH law. It must not be confused with Article 77 of the Companies Law issued in 1443 AH, whose subject matter and wording differ.

5. The non-contracting shareholder: standing and interest

A contract does not, as a general principle, impose obligations on non-parties. However, the relative effect of contractual obligations does not negate a third party’s interest in invoking the invalidity of a transaction affecting a legally protected right. Article 81 of the Civil Transactions Law permits any interested person to invoke contractual invalidity, and the court may rule on invalidity of its own motion. ^[S6]

Among shareholders’ specific rights are those in Article 14 of the historical Regulatory Rules concerning adequate information about the company’s share-purchase offer and its duration, and a fair opportunity for shareholders to offer their shares. These rights form the basis of an independent interest, distinct from financial loss affecting share value as a consequence of damage suffered primarily by the company. ^[S2]

6. The earlier arbitration award: what was actually decided?

An award issued in accordance with the Arbitration Law has res judicata effect and is enforceable under Article 52. The scope of that effect nevertheless requires identification of the right decided, the parties and their capacities. Article 86 of the Law of Evidence specifies the requirements for relying on an earlier judgment in terms of identity of parties and of the right in subject matter and cause. ^{[S4] [S5]}

If the arbitration was between the company and the sellers concerning determination of the price, and a shareholder who was not a party to that arbitration then brought an independent claim to protect a personal right under the share-purchase rules, similarity of the underlying contract cannot justify a finding of prior adjudication, particularly where one party acknowledges that the award did not address the contract’s validity or invalidity.

7. Competing views and responses

First view: a non-contracting shareholder cannot seek invalidity

Argument: The direct financial effects of the contract fall on the company, and a shareholder cannot replace its board of directors.

Response: A claim concerning the company’s loss differs from invoking an independent statutory interest arising from a shareholder’s right to information or equal treatment. ^{[S2] [S6]}

Second view: the arbitration award prevents further examination of the contract

Argument: A final award of the share price presupposes treating the contract as the source of the obligation, and its res judicata effect must not be disturbed.

Response: Differences in the parties, their capacities and the right are sufficient to exclude the res judicata effect of the arbitration award. ^{[S4] [S5]}

Third view: exceeding 10% does not lead to invalidity

Argument: The legislature imposed a maximum threshold for treasury shares to protect capital.

Response: The purpose of the company’s purchase of its own shares must be specified (treasury shares, not capital reduction). Failure to specify the purpose breaches mandatory rules that may not be contracted out of or circumvented. ^[S2]

8. The preferred research conclusion

A company’s purchase of its own shares without satisfying the specific conditions upon which the legislature made such purchases permissible, and without approval by the extraordinary general assembly, constitutes a substantive ground for invalidity. These are mandatory rules that may not be contracted out of or circumvented. The board chair’s signature alone does not prevent the share-purchase contract from being void.

And success is granted by Allah.

Researcher - Justice

9. Official references

The statutory sources and the Ministry of Justice are listed below.

^[S1] Companies Law of 1437 AH. Article 75 on board powers, Article 77 on board acts, Article 82 on representation by the chair, and Article 112 on a company’s purchase of its own shares. (Ministry of Commerce)

https://mc.gov.sa/ar/PSC/05.pdf

^[S2] Regulatory Rules for Unlisted Joint-Stock Companies (1438 AH). Article 12 on purchase requirements, Article 14 on information and a fair opportunity, and Article 15 on capital reduction. (Ministry of Commerce)

https://mc.gov.sa/ar/PSC/02.pdf

^[S3] Companies Law effective from 19 January 2023. Article 114 on share purchases and a comparison of legislative developments without automatic retrospective application. (Bureau of Experts at the Council of Ministers)

https://laws.boe.gov.sa/BoeLaws/Laws/LawDetails/a8376aea-1bc3-49d4-9027-aed900b555af/1

^[S4] Arbitration Law. Articles 49–52 on setting aside awards and res judicata, and Article 55 on conditions for an enforcement order. (Bureau of Experts at the Council of Ministers)

https://laws.boe.gov.sa/BoeLaws/Laws/SearchDetails/?Id=5535039e-13da-43f6-8f53-a9a700f26485&Query=+

^[S5] Law of Evidence. Article 86 on res judicata and the requirements of identity of parties, capacities, subject matter and cause. (Bureau of Experts at the Council of Ministers)

https://laws.boe.gov.sa/BoeLaws/Laws/SearchDetails/?Id=2716057c-c097-4bad-8e1e-ae1400c678d5&Query=+

^[S6] Civil Transactions Law. Article 81 on an interested person’s right to invoke invalidity and Article 82 on the consequences of invalidity, with due regard to temporal application. (Bureau of Experts at the Council of Ministers)

https://laws.boe.gov.sa/BoeLaws/Laws/LawDetails/655fdb42-8c96-422b-b8c4-b04f0095c94c/1