1. Introduction. – 2. Restrictions on share transfers. – 2.1. FDI and its relationship to restrictions on share transfers in Saudi Arabia. – 2.2. Drag-along and tag-along rights. – 2.2.1 Testing the enforceability of the ‘drag-along’ right in the English and French courts. – 2.3. The right of first refusal (ROFR). – 2.3.1 Judicial challenges to ROFR. – 3. Conclusions
Background: Shareholders' covenants in articles of association or agreements are essential for governing private companies with specific investments. Regulating protective arrangements for smoother share disposal at the investment lifecycle's final stage. Share restrictions in Saudi Arabia are recognised in both regulatory and judicial frameworks, aligning with international corporate law practices and boosting local and foreign direct investment under Vision 2030. This article examines exceptional shareholders' covenants such as drag-along rights and the right of first refusal, which facilitate shareholder exits and enhance a company's appeal to potential purchasers.
Method: This study utilises a qualitative, doctrinal, and comparative legal analysis. It critically examines the provisions of the Saudi New Companies Law (2022) alongside a prominent Saudi case and recent legal precedents from the U.K and France. Specifically, the research examines the landmark cases of Kulkarni v. Gwent Holdings Ltd, Cunningham v. Resourceful Land Ltd, the ruling from the French Supreme Court (Cour de cassation) in case number 23-10.385 (2024), and the Saudi case number 439245241 (2022) to assess the enforceability of exit rights.
Results and Conclusions: The research argues that while the Saudi Companies Law offers a solid foundation for exit rights, uncertainties persist. Key among them is the need for regulatory changes to provide immediate remedies, beyond litigation, in cases of non-compliance by uncooperative shareholders. Additionally, in the event of any contest, Saudi courts strictly enforce exit rights, respecting their specific meanings in the context of contract law. Comparative analysis shows that UK and French courts uphold such restrictions when the terms are clear, precise, and negotiated at arm's length. However, the French precedent underscores that a ‘promise of sale’ (drag-along) must contain a determinable price to be valid. The study concludes that the Saudi legal framework is successfully evolving toward international best practices. To ensure enforceability and enhance access to justice, the article recommends that Saudi companies explicitly incorporate detailed exit clauses, including price valuation methods and the power of majority shareholders to sign transfer forms on behalf of dissenting minorities, directly into their Articles of Association. Such measures are essential for maintaining legal certainty and protecting the interests of both domestic and foreign investors in the Saudi market.