In the United Arab Emirates, and particularly in Dubai, the number of company formations is increasing exponentially. Companies are established every day, but they are often poorly informed about the importance of having well-organized and properly documented internal governance documents. This internal governance will have a significant impact on the life of the company, as it makes it possible to manage the company and establish rules in the event of disagreement among the shareholders.
Under United Arab Emirates Federal Law No. 5 of 1985 (Civil Code), contracts may be made in writing. To avoid any future disputes concerning the terms agreed between the parties, UAE startups are therefore advised to properly document a shareholders’ agreement in writing.
Mastering corporate governance
To ensure well-organized internal governance, a shareholders’ agreement is an essential tool for any company with several shareholders (at least two) who wish to organize the transfer of shares and the operation of the company. It is an agreement signed by the shareholders outside the company’s articles of association.
This agreement focuses solely on the rights, obligations and powers of the shareholders and does not concern the characteristics or nature of the company.
The parties are free to determine the content of the agreement they will sign, provided that they comply with the general rules governing the validity of contracts and do not violate the public policy applicable to the corporate regime.
A shareholders’ agreement, known as a Shareholder’s Agreement (SHA) in English, may cover various matters such as profit sharing, the allocation of decision-making powers among the shareholders, the shareholders’ financial obligations, conflict resolution procedures, and the conditions for a shareholder’s exit. Shareholders are advised to draft a shareholders’ agreement to avoid future misunderstandings and conflicts, or at the very least, to have a compass to help them find a way out of an impasse in such situations.
In the United Arab Emirates, and therefore in Dubai, the rules relating to shareholders’ rights are governed by the UAE Federal Commercial Companies Law (Federal Decree No. 32/2021).
It is therefore important for shareholders to consult lawyers specializing in Emirati commercial law to draft a shareholders’ agreement that meets Emirati legal and regulatory requirements and protects the interests of each shareholder.
Shareholders’ agreements in Dubai: rules to follow
Among these rules are general rules that must be observed for shareholders’ agreements in the U.A.E.:
-A company may have shareholders who are individuals or legal entities, and they may be nationals or foreigners;
-Shareholders’ agreements must comply with Emirati commercial legislation;
-Shareholders must be free to establish the terms and conditions of their association, provided that these remain compliant with the laws and regulations in force.
The content of a shareholders’ agreement
In addition, when drafting shareholders’ agreements in Dubai and throughout the United Arab Emirates, it is important to:
-Precisely define the responsibilities and duties of each shareholder, as well as the procedures to be followed in the event of non-compliance with these obligations; -Specify the arrangements for managing the company (who manages what, where and how?); -Determine the arrangements for the allocation of profits, costs and losses; -Provide for and draft procedures for the resolution of disputes between shareholders (including the possibility of appointing an arbitrator specializing in resolving disputes between shareholders); -Establish arrangements for the admission and exit of shareholders; -Put in place provisions addressing reserved matters, such as specific circumstances that the shareholders consider sufficiently important to be dealt with exclusively by them (rather than by the company’s directors); -Introduce pre-emption clauses that give existing shareholders the right to purchase shares issued by the company (before they are offered to the general public) and/or sold by other existing shareholders before they are permitted to transfer their shares to a third party. -Introduce deadlock resolution provisions where there is disagreement between the directors or shareholders and they cannot agree on a decision. The resolution clause sets out the procedure to be followed to resolve the deadlock. It should be noted that shareholders may be directors of the company. However, a director (appointed by the shareholders following a general meeting) is not necessarily a shareholder (holder of an ownership interest). -Introduce a clause concerning the transfer of shares. This clause establishes the conditions for the transfer of shares by shareholders and defines the rights and obligations that shareholders must observe to carry out such a transfer.
Shareholders are therefore advised to consult lawyers specializing in commercial law to draft a shareholders’ agreement that complies with the legal and regulatory requirements in force in the United Arab Emirates and also protects the interests of each shareholder. In this regard, the legal team at Merritt Middle East would be delighted to welcome you and help you implement this essential tool when you wish to enter into an association with one or more people.
Consult specialized lawyers
To ensure that everything proceeds as smoothly as possible, shareholders are therefore advised to consult lawyers specializing in commercial law to draft a shareholders’ agreement that complies with the legal and regulatory requirements in force in the United Arab Emirates and also protects the interests of each shareholder.
In this regard, the legal team at Merritt Middle East would be delighted to welcome you and help you implement this essential tool when you wish to enter into an association with one or more people.
