Shareholder agreements in the UAE

1.Before you commit

A shareholders’ agreement is most useful while the relationship is working well. Disputes often concern who controls the bank account, provides additional funding, receives financial information or can leave the business. A workable agreement establishes a process for these decisions and fits the company’s constitutional documents and applicable law.

2.Align the agreement with the company structure

This guide concerns agreements between owners of a company, particularly an LLC. It does not address every informal partnership or unincorporated venture. Establish the registration authority and governing regime first. A private agreement does not replace the memorandum, articles or formal registration of changes. Where a right requires inclusion in constitutional documents, approval or registration, signing a side agreement alone is insufficient.

Company-law amendments provide for certain co-sale and compulsory-sale arrangements in the constitutional documents of eligible companies. These are not automatic rights enjoyed by every owner. Their availability and effect depend on the legal requirements, drafting and necessary approvals.

3.Separate ownership from management

Record ownership percentages, but also identify the manager and decisions requiring additional consent. Borrowing, guaranteeing another person’s debt, disposing of a major asset and transactions involving a partner’s relatives are examples worth addressing expressly.

Keep ownership rights, management remuneration, shareholder loans and profit distributions distinct. Agree how distributable profit is calculated and approved, taking account of the accounts, statutory reserves and business cash requirements. Money in the bank is not necessarily profit available for withdrawal.

4.Plan for funding and financial oversight

Explain how additional funding is approved and what each owner has committed to provide. If one owner cannot contribute, define a lawful consequence. Dilution or a forced sale should not be assumed to follow automatically: a valid basis, appropriate procedures and a workable valuation mechanism are needed.

Set a timetable for financial reporting, annual budgets, access to records and bank-signing arrangements. Check that contractual controls match the manager’s formal authority and third-party rights. An internal restriction does not necessarily undo the external effects of a transaction.

5.Make exit and deadlock provisions usable

Address proposed share sales, death or incapacity and disagreements that prevent important decisions. Specify the valuation method, expert appointment, payment timetable and security for deferred consideration. Statutory rights of other owners and transfer-registration requirements still need to be respected.

Negotiation or mediation can be an initial step. Define the final dispute forum, language and location consistently with the company’s other documents. A vague reference to “arbitration or the courts” can create a further dispute about where the original dispute belongs.

6.Hypothetical example

Two owners hold equal stakes, but only one manages the company and controls its bank account. They disagree about taking a loan, and the agreement contains no deadlock procedure. Equal ownership alone does not provide a practical decision-making or exit mechanism.

7.Prepare for a review meeting

• Constitutional documents and the ownership and capital schedule.
• Proposed management, profit and future-funding arrangements.
• Decisions requiring consent and the dispute-resolution process.
• Proposed valuation and exit terms.

8.Your next step

Dr. Bahrami’s office can be contacted to discuss drafting or reviewing these arrangements.