Introduction

As Riyadh’s business environment continues to expand and the city consolidates its position as one of the region’s leading economic and investment centres, greater attention must be given to the legal responsibilities of senior management in companies operating in the Saudi market, whether such companies are listed on the Saudi Exchange or privately held.

The role of senior management is not limited to achieving a company’s strategic objectives regardless of the means used. Management powers must be exercised within the boundaries of applicable laws, regulations and internal policies, in a manner that serves the company’s interests and complies with the duties of care, loyalty and independence, as well as the obligation to avoid conflicts of interest.

This discussion applies particularly to company managers and members of boards of directors, each according to their respective capacity and authority. Its implications may also extend to senior executives who possess actual authority to make decisions that materially affect the company’s business.

The following are four key matters that senior management should consider when making managerial and commercial decisions.

I. The Company’s Interests Come First

A company manager or board member must act in the company’s interests, promote its success and exercise their powers independently, without allowing the interests of a shareholder, partner or any other party to take precedence over those of the company.

This obligation is particularly sensitive in family-owned companies, subsidiaries within holding groups, companies controlled by a particular shareholder, and companies in which a shareholder has the power to nominate or influence the appointment of board members or managers.

A person who nominates a board member or contributes to the appointment of a company manager does not have the right to turn that individual into a representative of their private interests at the company’s expense. Similarly, a manager or board member is not relieved of personal responsibility merely because a decision was made at the request of a shareholder or pursuant to an informal direction issued by a controlling shareholder or another entity within the corporate group.

In this context, the duty of loyalty is owed to the company as a separate legal person, independent from its shareholders and partners. Accordingly, the fundamental question that should be asked when making a decision is:

Does this decision serve the interests of the company itself, or does it primarily serve the interests of a particular shareholder, an affiliated company or a related party?

This standard becomes especially important when a company enters into transactions with related parties, provides guarantees for the benefit of another company within the group, or transfers assets or business opportunities without receiving a genuine and direct benefit of its own.

II.Conflicts of Interest Cannot Be Addressed Through Silence

The distinction between the interests of the company and those of a shareholder, manager or board member leads to a central issue: conflicts of interest.

The Saudi Companies Law does not prohibit every form of personal interest in absolute terms. It does, however, prohibit the concealment of such interests and the taking of related decisions without complying with the applicable disclosure and approval procedures.

Where a company manager or board member has a direct or indirect interest in a contract or transaction conducted for the company’s account, that interest must be disclosed. The required approval must also be obtained from the competent corporate body, depending on the company’s legal form and the provisions of its Articles of Association or incorporation documents, together with any other procedures required by law.

An indirect interest is not limited to a situation in which the manager or board member owns shares in the counterparty. It may also arise where the benefit is received by a relative, an entity owned or controlled by the individual, or another party with whom the individual has a material financial or commercial relationship.

This highlights the importance of understanding corporate ownership and control structures, maintaining accurate beneficial ownership information and regularly updating records relating to related parties.

It is not sufficient for a manager or board member to believe that a transaction is fair or beneficial to the company. The economic fairness of a transaction does not replace the duty of disclosure, nor does a potential benefit to the company eliminate the need to obtain the approvals required by law.

Depending on the circumstances, failure to comply with these procedures may expose the transaction to legal challenge and may result in claims for compensation against the responsible person or an obligation to return any profit or benefit obtained, subject to the relevant legal requirements and conditions.

III. Competition and Corporate Opportunities Are Not Personal Benefits

A manager’s or board member’s position may provide access to information, investment opportunities or commercial opportunities that are not available to the public. This creates an important legal responsibility not to use the position to compete with the company or divert its business opportunities for personal benefit.

A company manager or board member may not participate in a business that competes with the company, or engage in an activity that may harm the company’s interests, without first obtaining the approvals required by law.

This restriction is not limited to establishing an entity that carries on the same business as the company. It may also include the use of the company’s assets, confidential information, commercial relationships or investment opportunities presented to the individual by reason of their position or work within the company.

Where an investment opportunity is presented to a manager or senior executive in their professional capacity, that person may not divert it directly to a personal venture or pass it to an entity that they own or control without first presenting the opportunity to the appropriate decision-making body within the company.

The proper course is to present the opportunity to the company, fully disclose any personal interest connected with it, refrain from participating in the relevant decision where required, and obtain all necessary approvals before taking any action for personal benefit or for the benefit of a related party.

IV. Gifts and Benefits May Compromise Independent Decision-Making

The Saudi Companies Law prohibits a company manager or board member from accepting a benefit from a third party where that benefit is connected to their role within the company.

The benefit does not have to consist of a direct financial payment. It may take the form of a service, preferential treatment, hospitality, a commercial opportunity or another tangible or intangible advantage.

The relevant consideration is not limited to the nature or value of the benefit. It also concerns the extent to which the benefit is connected to the person’s position and whether it may actually or potentially influence the independence of their decision-making or create the impression that a managerial decision was made in return for a private benefit.

Companies should therefore adopt clear policies governing gifts, hospitality and other benefits. Such policies should identify prohibited situations, financial thresholds, disclosure requirements, approval procedures and the method for documenting benefits offered to members of senior management.

This demonstrates the importance of sound corporate governance and a complete internal policy framework. Corporate governance is not achieved merely through the existence of written policies. It requires practical procedures that ensure their implementation, the documentation of disclosures and approvals, and the proper review of legally sensitive decisions.

Conclusion

Not every unsuccessful managerial decision, and not every project that fails to produce the expected results, automatically creates personal liability for a company manager or board member. Commercial activity inherently involves risk, and management may make a properly informed decision that ultimately does not achieve the anticipated outcome.

A managerial decision may, however, become a source of personal liability where the responsible person exceeds the limits of their authority, fails to exercise the required standard of care, gives priority to their own interests or those of another party over the company’s interests, conceals a conflict of interest, exploits the company’s assets, information or business opportunities, or accepts a benefit that compromises the independence of their decision-making.

A managerial decision should therefore not be assessed solely by its financial outcome. The decision-making process is equally important. Was the decision based on sufficient information? Was it made by the competent authority? Was it made independently? Were all relevant interests properly disclosed? Were the reasons for the decision and the related approvals adequately documented?

Senior management teams that treat these obligations as an integral part of the decision-making process, rather than as legal formalities to be addressed after the event, are better positioned to protect the company, preserve the confidence of shareholders and investors, and reduce the risk that the consequences of a corporate decision will extend from the company to the personal liability of the individuals involved.

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If you are a director or board member and would like to learn more about your duties, legal rights, and the limits of your liability for management decisions, contact us directly for legal advice tailored to your capacity, powers, and the circumstances of your company.