A UAE shareholders' agreement should set out who decides what, how deadlock is broken, how shares can be transferred or bought out, and what happens when a shareholder leaves, and it must be drafted together with the company's constitutional documents, because for a mainland company the registered memorandum of association and the Commercial Companies Law prevail where they conflict with a private agreement.
Why the UAE is different
In most common law countries a shareholders' agreement and a company's articles are both private documents that the shareholders can design almost freely. In the UAE that is true of the DIFC and ADGM, which have common law company regimes, and broadly true of most free zones. It is less true of a mainland limited liability company, where the memorandum of association is notarised and registered, the Commercial Companies Law (Federal Decree-Law No. 32 of 2021) sets mandatory rules, and the authorities and counterparties deal with the company on the basis of the registered documents.
The practical consequence is that a shareholders' agreement which contradicts the memorandum, or the law, may still bind the shareholders to each other as a contract, but it will not change how the company itself is governed. The two documents need to be drafted together and kept consistent, and where a right matters enough, it belongs in the memorandum as well.
The clauses that decide outcomes
Reserved matters
A list of decisions that need the consent of a specified majority or of named shareholders: issuing shares, borrowing above a threshold, approving the budget, appointing senior management, selling the business. This is how a minority investor protects its position. Keep the list to decisions that genuinely matter, or the business cannot operate.
Board composition and appointment rights
Who appoints directors or managers, how many each shareholder gets, quorum, casting votes and what happens when a nominee director is removed. For a mainland LLC, the manager appointment also has to be reflected in the memorandum and the licence.
Deadlock
The clause most agreements leave vague and most disputes turn on. Options include escalation to principals, mediation, an independent expert for technical questions, and, as a last resort, a buy-sell mechanism under which one shareholder can force the other to buy or sell at a stated price. A 50:50 company without a workable deadlock clause is a dispute waiting to happen.
Transfers, pre-emption, drag and tag
Restrictions on transfer, rights of first refusal, drag-along rights that let a majority deliver the whole company to a buyer, and tag-along rights that let a minority sell on the same terms. Onshore, the statutory pre-emption right of LLC partners applies alongside the contractual mechanism, so the agreement should set out how the two interact, including waivers.
Leavers and vesting
What happens to a founder's shares when they stop working in the business: good leaver and bad leaver definitions, the price at which shares are bought back, and any vesting schedule. Without this, a departed founder keeps their full shareholding and their vote.
Valuation
Any buy-out needs a price. The agreement should say who values the shares, on what basis, whether minority discounts apply, and how disputes about valuation are resolved.
Funding and dilution
Whether shareholders must fund the company, what happens if one does not, and how new shares are issued. Pre-emption on new issues protects existing shareholders from dilution.
Restrictive covenants and confidentiality
Non-compete and non-solicit commitments from shareholders, limited to what is reasonable in scope and time so that they are enforceable.
Governing law and disputes
Many UAE shareholders' agreements choose DIFC or English law with arbitration, even for mainland companies. That can work, but the agreement then has to be enforced against a company governed by UAE law, so the forum and the enforcement route need thought. Our guide to governing law and dispute resolution clauses covers the options.
Onshore, free zone, DIFC or ADGM
Where the shareholders want detailed, bespoke governance, a holding company in the DIFC or ADGM, with articles that mirror the shareholders' agreement and common law courts behind them, is often the cleanest structure, with the operating company below it. Free zone companies sit in between, with model articles that can usually be amended. The right answer depends on the activity, the investors and the exit, and is part of our corporate practice.
When to put one in place
Before the first dispute, and ideally before the first outside shareholder. Founders who incorporate together on a handshake usually find the hardest conversations, about leavers, deadlock and valuation, are much easier to have on day one than in year three. If you are bringing in an investor, the investor's term sheet will usually require one anyway; see heads of terms and term sheets.
Frequently asked questions
Is a shareholders' agreement legally binding in the UAE?
Yes, as a contract between the shareholders who sign it. For a mainland company, provisions that conflict with the registered memorandum of association or the Commercial Companies Law may not be enforceable against the company itself, so the agreement and the constitutional documents should be drafted together and kept consistent. Neo Legal drafts the agreement and the constitutional documents together for exactly this reason.
Do I need a shareholders' agreement for a 50:50 company in Dubai?
A 50:50 company is the structure that most needs one, because neither shareholder can outvote the other. Without a deadlock mechanism, a disagreement can stop the company from operating, and the only remedies may be negotiation or court proceedings.
Should a UAE shareholders' agreement be governed by DIFC or English law?
Many are, particularly where the investors are international, and both choices are recognised. The agreement still has to be enforced against shareholders and a company in the UAE, so the forum, usually the DIFC Courts or arbitration, and the enforcement route should be chosen together with the governing law.
What is a good leaver and bad leaver clause?
It sets the price at which a departing founder or employee shareholder must sell their shares back. A good leaver, for example someone who leaves through ill health, usually receives market value; a bad leaver, for example someone dismissed for misconduct or who joins a competitor, usually receives a lower price such as the amount they paid.
This article is general information on the position at the date shown and is not legal advice. The answer for any contract or deal depends on its terms, the parties and the governing law; speak to us before relying on it.
