The liability of the manager is a significant topic within the Companies Law, given the extensive powers managers possess to manage the company, represent it, and make decisions regarding its business operations. The legislator has sought to regulate these powers by imposing various duties and obligations designed to ensure sound management and protect the interests of the company, the partners or shareholders, and associated stakeholders. Furthermore, the Law does not merely outline these duties; it also prescribes sanctions for actions that constitute a serious breach thereof.
First. The Concept of the Manager under the Companies Law
The Companies Law does not provide a standalone definition of a “manager.” However, its provisions indicate that a manager is the person responsible for managing the company, overseeing its operations, and representing it—acting within the scope of powers granted by law, the memorandum of association, the articles of association, or resolutions passed by the partners or the general assembly.
Management mechanisms vary according to the company’s legal form. In a general partnership, management is undertaken by the partners; however, one or more managers—whether from among the partners or third parties—may be appointed in accordance with the memorandum of association or a separate agreement (Article 37 of the Companies Law).
In a limited partnership, management is the responsibility of the general partners, to the exclusion of the limited partners; a limited partner is prohibited from interfering in external management activities, as doing so would trigger their joint and several liability (Article 53 of the Companies Law). In a limited liability company, management is entrusted to one or more managers—whether partners or third parties; a board of managers may be formed if there are multiple managers, and their appointment is stipulated in the memorandum of association or a separate contract (Article 160 of the Companies Law).
As for a joint-stock company, it is managed by a board of directors comprising at least three members, who may be shareholders or non-shareholders (Article 67 of the Companies Law).
In a simplified joint-stock company, the management method is determined by its bylaws; management may be entrusted to a chairman, one or more managers, or a board of directors, with the management body granted broad powers to manage and represent the company (Article 142 of the Companies Law).
This diversity in corporate management structures influences how powers and responsibilities are distributed and exercised according to each legal form.
Second: Duties of the Manager
- Duty of Care and Loyalty
Article (26) of the Companies Law stipulates that a manager is bound by a duty of care and loyalty when managing the company. This means performing duties with diligence and prudence, within the limits of the powers granted, and consistently striving to serve the company’s interests and foster its success.
Furthermore, the manager must make decisions independently and exercise the care and skill expected of a person holding such a position. The duty of loyalty also entails avoiding conflicts of interest, disclosing any direct or indirect interest in the company’s business or contracts, and refraining from exploiting the position for personal gain or accepting benefits from third parties related to their work for the company.
- Duty of Disclosure and Transparency
Disclosure is a crucial component of the manager’s obligations; the manager is required to provide accurate and clear information regarding the company’s business. This entails disclosing any personal interest in transactions, enabling partners or shareholders to access material information, and preparing financial statements and reports that accurately reflect the company’s true status.
The importance of this lies in its role in building trust and enabling partners or shareholders to make decisions based on accurate and clear information.
Third : Penalties for Violating the Manager’s Duties
The Companies Law does not merely impose duties on the manager; it also prescribes penalties for their breach in order to protect the company and its partners or shareholders against the abuse of authority.
Article (260) of the Companies Law criminalizes several acts classified as serious offenses. Prominent among these is the manager’s recording of false or misleading data or information in financial statements or reports, or the omission of material facts with the intent of misrepresenting the company’s financial position. Such conduct constitutes a clear violation of the duty of disclosure and transparency.
Punishable acts also include the manager’s use of company funds, powers, or voting rights—held by virtue of their position—in a manner known to be detrimental to the company’s interests. This includes actions taken to achieve personal objectives, favor a specific party, or benefit from a transaction in which the manager has a direct or indirect interest; such conduct represents a clear breach of the duty of loyalty stipulated in Article (26) of the Law. The Law prescribes penalties for these acts of up to three years in prison, a fine not exceeding five million Riyals, or both.
In addition to serious offenses, Article (261) of the Law addresses less severe violations—such as failure to disclose infractions, obstruction of access to company documents, or misuse of trade secrets—carrying penalties of up to one year in prison or a fine not exceeding one million Riyals.
Article (262) also mandates fines for certain forms of administrative negligence, such as the failure to properly prepare financial statements, maintain records, or grant partners access to documents.
Article (263) stipulates that the penalty imposed shall be determined based on the gravity of the act, the surrounding circumstances, and the consequences, with the possibility of doubling the penalty in the event of a repeat offense. Meanwhile, Article (264) authorizes the competent authority to impose additional measures, such as issuing a warning, barring the individual from board membership, or requiring the violator to rectify the situation.
The significance of these provisions lies in the fact that they aim not only to punish the violator but also to deter managers from abusing their positions and to foster adherence to principles of integrity and corporate governance.
Conclusion
It is evident that the Companies Law is founded on the principle of balancing powers and responsibilities; it grants the manager broad authority to manage the company while imposing fundamental duties—namely, the duties of care, loyalty, and disclosure.
Concurrently, the Law establishes a clear punitive framework covering both serious offenses and less severe violations, aiming to safeguard company assets, ensure the accuracy of its data, and prevent the abuse of authority.
Thus, the Law contributes to enhancing transparency and governance, creating a legal environment that ensures sound corporate management and the fair, stable realization of the interests of partners or shareholders.
Disclaimer: The above content does not constitute legal advice, and the firm assumes no legal responsibility. For legal advice, please contact us.