Article 31 of the Saudi Companies Law
المادة 31 من نظام الشركات · الفصل الثالث: إدارة الشركة
Article 31 deems a manager or board member to have performed their duty in good faith in a decision if three conditions are met, and places the burden of proving otherwise on the claimant.
Official text (Arabic)
This article has not been amended since the law was issued.
يعد مدير الشركة أو عضو مجلس إدارتها قد أدى واجبه في القرار الذي اتخذه أو صوت عليه بحسن نية، في حال تحقق الآتي:
أ- إذا لم يكن له مصلحة في موضوع القرار.
ب- إذا أحاط وألم بموضوع القرار إلى الحد المناسب في الظروف المحيطة وفق اعتقاده المعقول.
ج- إذا اعتقد جازمًا وبعقلانية أن القرار يحقق مصالح الشركة.
ويقع عبء إثبات خلاف ذلك على المدعي. ويقصد بالقرار لأغراض هذه المادة التصرف أو عدم التصرف في أمر يتعلق بأعمال الشركة.
This is the official Arabic wording, the only legally binding version. We do not translate the law itself; the explanation below is ours. Official source: Bureau of Experts at the Council of Ministers
Article 31 explained in plain English
This article sets what is known as the business judgment rule, which protects a company's manager or board member when held to account for a decision they took or voted on. The Companies Law deems them to have performed their duty in good faith if the following conditions are all met:
- They had no interest in the subject of the decision.
- They informed themselves about the subject of the decision to the extent appropriate in the surrounding circumstances, according to their reasonable belief.
- They firmly and rationally believed that the decision serves the company's interests.
The important practical effect is that the burden of proving otherwise falls on the claimant; whoever sues the manager or member is the one required to prove that these conditions were not met.
The article broadens the meaning of "decision" for its purposes, so that it includes acting or not acting on a matter relating to the company's business; refraining from taking a step is assessed by the same standard.
The article connects to those around it: Article 30 provides that the approval of the partners, the general assembly, or the shareholders to discharge the manager or board members does not prevent actions from being brought, and that a liability action, except in cases of forgery and fraud, is not heard after 5 years from the end of the financial year in which the harmful act occurred or 3 years from the end of the manager's work or the member's membership, whichever is later. Article 32 allows the competent judicial body to charge the company with the costs of a liability action brought by a partner or shareholder on certain conditions.
To assess your position in a dispute of this kind, it is advisable to consult a lawyer specialized in company and commercial matters.
Practical example
Ahmed, a board member of a joint stock company in Riyadh, voted to buy a new production line after reviewing feasibility studies and suppliers' offers, and he had no connection to the supplier. The deal later did not produce the expected profit, and a shareholder wanted to sue him. Under this article, Ahmed is deemed to have performed his duty in good faith as long as the three conditions are met, and the claimant shareholder must prove otherwise.
Translated from our Arabic explanation with machine assistance. For guidance only; it does not replace advice from a lawyer on your situation.
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Frequently asked questions about Article 31 of the Saudi Companies Law
Is a company manager liable if the company loses money because of their decision?
The article deems the manager to have performed their duty in good faith if they had no interest in the decision, informed themselves of its subject to the appropriate extent, and firmly and rationally believed it served the company's interest; the claimant must prove otherwise.
Who bears the burden of proof in an action over a manager's decision?
The burden of proving that the conditions were not met falls on the claimant, according to the article.
Does a decision include a manager's refraining from acting?
Yes. The article means by a decision acting or not acting on a matter relating to the company's business.
More articles on Company Management and Managers' Liability
- Article 11
The article allows founders, partners and shareholders to conclude agreements regulating their relationship, and a family charter for family companies, and makes them binding provided they do not contravene the Law or the company's founding document.
1- يجوز للمؤسسين أو الشركاء أو المساهمين -سواء خلال مدة تأسيس الشركة أو بعدها- ما يأتي: أ- إبرام اتفاق أو أكثر ينظم العلاقة فيما بينهم أو مع الشركة، بما في ذلك
- Article 16
Article 16 sets a company's financial year at twelve months fixed by the formation contract or bylaws, with the first financial year allowed to run between 6 and 18 months from registration.
تكون السنة المالية للشركة (اثني عشر) شهرًا تُحدد في عقد تأسيسها أو نظامها الأساس. ومع ذلك، يجوز أن تحدد السنة المالية الأولى بما لا يقلّ عن (ستة) أشهر ولا يزيد
- Article 17
Article 17 requires keeping accounting records, preparing annual financial statements and filing them within 6 months of the end of the financial year, and supplying a controlling company with the information it needs.
1- على الشركة الاحتفاظ بالسجلات المحاسبية والمستندات المؤيدة لها لتوضيح أعمالها وعقودها وقوائمها المالية في مركز الشركة الرئيس أو في أي مكان آخر يحدده مدير الشر
- Article 18
Article 18 requires a company to have a licensed auditor appointed by the partners, general assembly, or shareholders, and regulates the auditor's removal, with notice to the competent authority within 5 days, and resignation by reasoned written notice.
1- يكون للشركة مراجع حسابات (أو أكثر) من المراجعين المرخص لهم في المملكة يعينه ويحدد أتعابه ومدة عمله ونطاقه الشركاء أو الجمعية العامة أو المساهمون بحسب الأحوال
- Article 19
The article exempts micro and small companies and the general partnership company from the requirement to appoint an auditor in Article 18, with specified exceptions, and allows holders of 10% of voting rights to request that one be appointed.
1- لا يسري على الشركة متناهية الصغر والصغيرة الحكم المتعلق بإلزامية تعيين مراجع الحسابات الوارد في المادة (الثامنة عشرة) من النظام، عدا الشركة متناهية الصغر وال
- Article 20
The article sets the auditor's obligations: independence and the bar on combining roles or conflicts, his right to inspect company documents, submitting his report to the partners or general assembly, keeping secrets, and liability for his errors.
1- يجب أن يتصف مراجع حسابات الشركة بالاستقلال وفقًا لما تحدده المعايير المهنية المعتمدة في المملكة. 2- لا يجوز الجمع بين عمل مراجع الحسابات والاشتراك في تأسيس ا
The texts are reproduced from the official website of the Bureau of Experts at the Council of Ministers for reference; where they differ, the officially published Arabic text prevails. This content is not legal advice.