Article 40 of the Saudi Companies Law
المادة 40 من نظام الشركات · الفصل الثالث: إدارة شركة التضامن
Article 40 bars a partner in a general partnership company, without the other partners' consent, from competing with a like activity or holding an influential stake in a competitor, and sets the penalty for breach.
Official text (Arabic)
This article has not been amended since the law was issued.
لا يجوز للشريك -دون موافقة باقي الشركاء- أن يمارس لحسابه أو لحساب الغير نشاطًا من نوع نشاط الشركة، ولا أن يكون شريكًا أو مديرًا أو عضو مجلس إدارة في شركة تنافسها أو مالكًا لحصص أو أسهم تمثل نسبة مؤثرة في شركة أخرى تمارس النشاط نفسه. وإذا أخل الشريك بذلك كان للشركة أن تطلب من الجهة القضائية المختصة أن تَعُدَّ التصرفات التي قام بها لحسابه الخاص قد تمت لحساب الشركة، وللشركة -فضلًا عن ذلك- مطالبته بالتعويض.
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 40 explained in plain English
This article imposes on every partner in a general partnership company an obligation not to compete with the company, unless they obtain the consent of the other partners. They may not:
- Carry on for their own account or for others an activity of the type of the company's activity.
- Be a partner, manager, or board member in a company that competes with it.
- Own shares or stock representing an influential percentage in another company carrying on the same activity.
Penalty for breach: if the partner breaches this obligation, the company may ask the competent judicial body to deem the acts they performed for their own account to have been performed for the company's account, so that their fruits return to it. It may also, in addition, claim compensation from them.
The article does not specify the amount of the "influential percentage," so assessing it depends on the circumstances of each case. The consent required is that of all the other partners, on the apparent meaning of the text.
The aim of this rule is to prevent conflicts of interest, since a partner learns of the company's business and its customers. Article 41 follows to regulate the rights of a non-managing partner to inspect the company's business, while preventing them from interfering in its management.
To assess whether a particular activity counts as competition, it is advisable to consult a lawyer specialized in company and commercial matters.
Practical example
Ali is a partner in a general partnership company selling auto parts in Dammam, and without his partners' knowledge he opened his own shop selling the same goods. The company may ask the competent judicial body to deem the transactions of his own shop to have been made for the company's account, and it may also claim compensation from him.
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 40 of the Saudi Companies Law
Can a partner in a general partnership company open an activity similar to the company's?
They may not do so, for their own account or for others, without the consent of the other partners.
What is the penalty for a partner who competes with the company?
The company may ask the competent judicial body to deem their private acts to have been performed for its account, and it may in addition claim compensation from them.
Can a partner own shares in a competing company?
Without the consent of the other partners, they may not own shares or stock representing an influential percentage in another company carrying on the same activity.
More articles on General Partnership
- 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 35
Article 35 defines the general partnership company as one formed by two or more persons, each personally and jointly liable with all their assets for its debts, and in which the partner acquires the status of a merchant.
شركة التضامن: هي شركة يؤسسها شخصان أو أكثر من ذوي الصفة الطبيعية أو الاعتبارية يكونون فيها مسؤولين شخصيًّا في جميع أموالهم وبالتضامن عن ديون الشركة والتزاماتها،
- Article 36
Article 36 sets out the data the formation contract of a general partnership company must contain in particular, from the partners' names and capital to management, profits, and dissolution.
يجب أن يشتمل عقد تأسيس شركة التضامن بصفة خاصة على البيانات الآتية: أ- أسماء الشركاء، وبياناتهم. ب- اسم الشركة. ج- المركز الرئيس للشركة. د- غرض الشركة. هأ- رأس م
- Article 37
Article 37 regulates a general partnership company's management: by the partners or a manager they appoint, with rules on multiple managers, their powers, and the company's commitment to their acts within its purpose.
1- يتولى إدارة شركة التضامن الشركاء فيها، ويحدد الشخص ذو الصفة الاعتبارية ممثله في الإدارة. ويجوز أن يتفق الشركاء في عقد تأسيس الشركة أو في عقد مستقل، على تعيين
- Article 38
Article 38 makes partners' resolutions in a general partnership company by numerical majority and requires their unanimity to amend the formation contract unless the contract provides otherwise.
تصدر قرارات الشركاء بالأغلبية العددية، إلا إذا كان القرار متعلقًا بتعديل عقد تأسيس الشركة فيجب أن يصدر بإجماع الشركاء، ما لم ينصّ في عقد التأسيس على غير ذلك.
- Article 39
Article 39 bars a general partnership's manager from acts beyond the company's purpose unless the partners resolve otherwise or the formation contract expressly allows it, and lists acts to which the bar applies in particular.
يحظر على المدير أن يباشر الأعمال التي تتجاوز غرض الشركة إلا بقرار من الشركاء أو بنصّ صريح في عقد تأسيس الشركة. ويسري هذا الحظر بصفة خاصة على الأعمال الآتية: أ-
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.