Conflicts of Interest and Related Party Transactions

Disclosure, Approvals, and Protection from Abuse

First: Introduction

Conflicts of interest and related party transactions are among the most sensitive areas in governance. Historically, many major corporate scandals arose from this area: managers personally benefiting at company expense, deals with related parties at unfair prices, exploitation of inside information, preferring personal interests. The Regulations precisely organize this area to protect the company and shareholders.

The 2024 amendments raised disclosure and approval requirements, and related party transactions are now under dual oversight from the Board and the Audit Committee. Compliance with these requirements is not only for regulatory compliance, but to build investor confidence and preserve the company’s reputation. This article reviews the complete framework: definitions, disclosures, procedures, and penalties.

💡  Key Insight Conflict of interest does not necessarily mean corruption. Many conflict cases are natural and legal, but require proper disclosure and management. The difference between a well-governed company and a weak one is not in the existence of conflict, but in how it is dealt with: early disclosure, recusal from the decision, and obtaining necessary approvals.

Second: Definition of Conflict of Interest

1. General Definition

Conflict of interest:

• A situation in which a person (board member, executive officer, employee) has a personal interest.
• That may affect his objectivity in a decision related to the company.
• Or contradicts the company’s interest.
• Whether the interest is direct or indirect.

2. Types of Conflicts

2.1 Direct Financial Conflict

• Transactions with a company owned by the member.
• Loans to the member.
• Direct personal benefits.
• Investments in competitors.

2.2 Indirect Financial Conflict

• Transactions with relatives’ companies.
• Previous partnerships.
• Interests in suppliers or customers.
• Joint investments.

2.3 Personal Conflict

• Family relationships with suppliers.
• Friendships with concerned parties.
• External loyalties.
• Personal disputes.

2.4 Functional Conflict

• Membership in competitor company boards.
• Consultations for concerned parties.
• Conflicting parallel jobs.

3. Related Parties

3.1 Definition

The Governance Regulations and Companies Law define:

• Board of Directors members.
• Senior executive management.
• Employees who can make substantive decisions.
• Their first-degree relatives.
• Companies in which they own substantial percentage.
• Major shareholders (5%+).

3.2 Relatives

Expanded definition:

• Spouse.
• Father and mother.
• Children.
• Brothers and sisters.
• Grandparents.
• Grandchildren.

Third: Disclosure of Interests

1. Initial Disclosure

1.1 Upon Appointment

Every new board member submits:

• Comprehensive disclosure of his interests.
• His financial relationships.
• His personal relationships.
• His parallel activities.

1.2 Content

• Other board memberships.
• Company ownership.
• Ownership percentages.
• Relative relationships.
• Existing disputes.

2. Annual Disclosure

2.1 The Requirement

• Annual declaration from each member.
• On current interests.
• On any changes.
• Certified and signed.

2.2 Follow-up

• Nominations Committee reviews.
• Verifying accuracy.
• Reporting to the Board.
• Continuous updating.

3. Immediate Disclosure

3.1 Upon Conflict Emergence

• Before discussing the decision.
• Frankly and in writing.
• In the meeting minutes.
• Without delay.

3.2 Procedures

• Notifying the meeting chair.
• Official registration.
• Withdrawal from discussion.
• Withdrawal from voting.

Fourth: Related Party Transactions

1. Definition

• Transactions between the company and a related party.
• Sale, purchase, services, loans, lease.
• For any amount (even small).
• Requiring special procedures.

2. Procedures

2.1 Early Disclosure

• From the related member.
• With all details.
• Before commencing the transaction.
• To the Audit Committee.

2.2 Audit Committee Review

• Studying the transaction.
• Verifying fairness.
• Comparing with market prices.
• Recommending to the Board.

2.3 Board Approval

• After studying Audit Committee recommendation.
• Without participation of the concerned member.
• By majority of non-concerned members.
• By documented resolution.

2.4 Assembly Approval

For substantive transactions:

• If their value exceeds a certain limit.
• (According to bylaws and amendments).
• Without voting of the concerned shareholder.

3. Market Disclosure

3.1 Immediate Disclosure

In listed companies:

• Disclosure of substantive transactions.
• Through Tadawul.
• At the appropriate time.
• With sufficient content.

3.2 Annual Disclosure

In the annual report:

• Summary of all transactions.
• Parties.
• Values.
• Details.

Fifth: Competition with the Company

1. The Rule

Article (24) of the Regulations:

• Board members may not engage in competing activity.
• Except by special permission.
• From the General Assembly.
• With full disclosure.

2. Exceptions

2.1 Assembly Permission

• Annual.
• With detailed disclosure.
• Renewed each year.
• With specific controls.

2.2 Limits

• Must not harm the company.
• Without exploiting information.
• Without directing opportunities.
• With complete integrity.

3. Opportunity Exploitation

3.1 The Rule

• Opportunities discovered by virtue of membership.
• For the company, not the member.
• The member may not exploit them personally.
• Without company permission.

3.2 Procedures

• Disclosing the opportunity.
• Presenting it to the company first.
• If rejected, may benefit from it.
• With formal permission.

Sixth: Insider Trading

1. Definition

Insider trading:

• Selling or buying securities.
• Based on substantive inside information.
• Not disclosed to the public.
• Criminal offense.

2. Inside Information

2.1 Definition

• Undisclosed information.
• Having substantive effect on share price.
• If a reasonable investor knew, his decision would be affected.

2.2 Examples

• Financial results before announcement.
• Acquisition deals.
• Discoveries.
• Major disputes.
• Changes in senior management.

3. Persons Bound

• Board members.
• Executive management.
• Informed employees.
• External consultants.
• First-degree relatives.

4. Restrictions

4.1 Blackout Periods

• Before announcement of financial results.
• For specified period (usually 30 days).
• Before any substantive disclosure.
• Without trading.

4.2 Disclosure Obligations

• Disclosure of insider deals.
• Within 5 business days.
• To Tadawul.
• For transparency.

5. Penalties

• Large financial fines.
• Imprisonment (for serious cases).
• Ban from work in capital market.
• Return of illicit profits.

⚠️  Caution Insider trading is not a “regulatory error” but a criminal offense. Famous global cases (Martha Stewart, Raj Rajaratnam) demonstrated that no one is above the law. In Saudi Arabia, the Capital Market Authority has become more rigorous in prosecution. Compliance with blackout periods, disclosure of deals, and not leaking information are not options but duties.

Seventh: Conflict of Interest in Decisions

1. Procedures in the Meeting

1.1 Declaration

At the start of discussion:

• “I declare a conflict on this item.”
• Explaining the nature.
• Recording in the minutes.

1.2 Withdrawal

• From the discussion.
• From the voting.
• Leaving the room if necessary.
• Full documentation.

2. What If There Is No Disclosure?

2.1 Legal Effect

• The decision may be challengeable.
• Personal liability.
• Compensation liability.
• Criminal liability in serious cases.

2.2 Effect on the Decision

• Annulment of the decision.
• Reconsideration.
• Recovery of benefits.

3. Disclosure to Shareholders

• In the annual report.
• All conflict cases.
• How they were handled.
• Full transparency.

Eighth: Policies and Procedures

1. Conflict of Interest Policy

1.1 Content

• Definitions.
• Examples.
• Disclosure procedures.
• Approval procedures.
• Penalties.

1.2 Approval

• From the Board.
• Periodic review.
• Updating when needed.
• Circulating to all.

2. Related Party Transactions Policy

2.1 Content

• Definition.
• Procedures.
• Approval limits.
• Disclosures.

2.2 Application

• For all transactions.
• Without exception.
• With flexibility in application.
• Under Audit Committee supervision.

3. Insider Trading Policy

3.1 Content

• Definition.
• Informed persons.
• Blackout periods.
• Disclosure requirements.

3.2 Training

• For members and management.
• For informed employees.
• Regular.
• Documented.

Ninth: Audit Committee’s Role

1. Primary Competency

• Reviewing related party transactions.
• Verifying fairness.
• Recommendations to the Board.
• Continuous oversight.

2. Tools

• Transactions register.
• Financial analyses.
• Market comparisons.
• Independent consultations when needed.

3. Reports

• To the Board periodically.
• Annual summary.
• To the Assembly in annual report.
• To the Authority when needed.

Tenth: Common Challenges

1. “Narrow Definition” Challenge

Some members interpret conflict narrowly:

• Solution: broad and comprehensive definition.
• Training on examples.
• Culture of disclosure.

2. “Family Complexity” Challenge

In family companies:

• Solution: rigorous application of rules.
• Full transparency.
• Legal consultations.

3. “Transactions with Major Shareholder” Challenge

In cases of dominant shareholder:

• Solution: minority protection.
• Strong audit committee.
• Full disclosure.

4. “Proving Fairness” Challenge

How to be sure the price is fair:

• Solution: market comparisons.
• Independent valuation.
• Documenting methodology.

Eleventh: Best Practices

1. At the Culture Level

• Transparency: more than required.
• Early disclosure: without hesitation.
• Culture of integrity: from the top.
• Respect for rules: without exceptions.

2. At the Procedures Level

• Written policies: and clear.
• Rigorous procedures: for approvals.
• Full documentation: of every step.
• Continuous review: from the committee.

3. At the Disclosure Level

• Comprehensive: of all transactions.
• Accurate: in details.
• Timely: without delay.
• To shareholders: clearly.

4. At the Development Level

• Regular training: for everyone.
• Policy updating: as needed.
• Consultations: specialized.
• Following developments: regulatory.

Conclusion

Managing conflicts of interest and related party transactions is among the most important governance areas. The Saudi regulatory framework, especially after the 2024 amendments, has become advanced and rivals international best practices. Effective application of these requirements protects the company from legal risks, builds investor trust, and strengthens the company’s reputation in the market.

Leading Saudi companies exceed the minimum requirements, adopt more rigorous policies, and build a culture of integrity from the top. This trend reflects administrative maturity and distinguishes companies in the eyes of local and international investors. With continued regulatory evolution, the future promises higher standards, and companies prepared from now will be in the best position.

🎯  Essential Points to Remember (1) Conflict of interest is not necessarily corruption, but it requires disclosure and management. (2) Types of conflict: direct financial, indirect financial, personal, functional. (3) Disclosure: initial, annual, immediate — depending on the case. (4) Related party transactions under dual oversight: Audit Committee + Board. (5) Assembly approval for substantive transactions, without voting of the concerned. (6) Immediate market disclosure for substantive transactions. (7) Competition with company needs Assembly permission. (8) Insider trading is criminal offense, blackout periods mandatory. (9) Written policies for conflict of interest, related parties, and insider trading. (10) Culture of transparency and integrity from the top is the real guarantee.

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FAQS

Does a conflict of interest necessarily mean corruption?

No, many conflict of interest cases are natural and legal occurrences. The real difference between a well-governed company and a weak one lies not in the existence of conflict but in how it is managed: early disclosure, recusal from the decision, and obtaining the necessary approvals.

What are the main types of conflict of interest?

Four main types: direct financial conflict (such as transactions with a company owned by the member), indirect financial conflict (such as transactions with relatives' companies), personal conflict (such as family relationships with suppliers), and functional conflict (such as membership on a competitor's board).

Board of Directors members, senior executive management, employees who can make substantive decisions, their first-degree relatives, companies in which they own a substantial percentage, and major shareholders owning 5% or more.

References and Sources

• Corporate Governance Regulations — Conflict of Interest and Related Parties Articles.
• Saudi Companies Law (M/132) — Conflict of Interest Provisions.
• Market Conduct Regulations — Preventing Insider Trading.
• Offer of Securities and Continuing Obligations Rules.
• Capital Market Law (M/30) — Penalties on Insider Trading.
• OECD Guidelines on Conflict of Interest.
• IFC — Related Party Transactions in Emerging Markets.
• ICGN — Conflict of Interest Best Practices.
• PwC — Related Party Transactions Compliance Guide.
• Certified Governance Institute — Conflict of Interest Guide.