What is a shareholders’ agreement in Dubai?
In the United Arab Emirates and Dubai, the number of company formations is increasing exponentially. Companies are being set up every day, but these companies are often unaware of the importance of having well organized and documented internal governance documents. This internal governance will have a very important impact on the life of the company as it will help in the event of disagreements between partners.
Under the UAE Federal Law No. 5 of 1985 (Civil Code), contracts can be in written form. In order to avoid any future disputes regarding the terms agreed between the parties, it is recommended that UAE startups properly document a partnership agreement in written form.
Managing corporate governance
In order to ensure a well-organised internal governance, the shareholders’ agreement is an essential tool for any company with several shareholders (at least two) who wish to organise the movement of shares and the functioning of the company. It is an agreement signed by the partners outside the articles of association.
This agreement focuses solely on the rights, obligations and powers of the shareholders and does not concern the characteristics and nature of the company.
The parties are free to determine the content of the agreement they are going to sign, provided that they comply with the common law rules on the validity of contracts and do not infringe the public policy of the company system.
The shareholder’s agreement (SHA) can cover a variety of topics such as benefit sharing, the division of decision-making powers between partners, the financial obligations of the partners, procedures for resolving disputes, and the conditions for leaving a partner. It is advisable for partners to draw up a partnership agreement to avoid future misunderstandings and conflicts, or at least, in the worst case, to have a compass to help break the deadlock in such situations.
In the United Arab Emirates and thus in Dubai, the rules on partners’ rights are regulated by the UAE Federal Commercial Law (Federal Decree No. 32/2021).
Shareholder’s agreement in Dubai, the rules to respect
Among these rules, there are general rules that must be respected for partnership agreements in the E.U:
-A company can have partners who may be natural or legal persons, and they can be nationals or foreigners;
-Partnerships must be in accordance with UAE commercial law;
-Partners must be free to set the terms and conditions of their association, as long as it is in accordance with the laws and regulations in force.
The content of the shareholder’s agreement
In addition, when drafting shareholder’s agreements in Dubai and throughout the UAE, it is important to:
-Define precisely the responsibilities and duties of each partner, as well as the procedures to be followed in case of non-compliance with these obligations;
-Specify how the company is managed (who manages? what? where? how?);
-Determine how profits, costs and losses will be shared;
-Provide and draft procedures for the resolution of conflicts between partners (possibility of appointing an arbitrator specialized in the resolution of conflicts between partners);
-Establish procedures for the admission and exit of partners;
-Establish responses to specific matters such as particular circumstances which the shareholders have considered important to be dealt with exclusively by them (rather than by the company’s directors);
-To introduce deadlock resolutions if there is a 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 impasse. It should be noted that the shareholders can be the directors of the company. But a director (appointed by the shareholders following a general meeting) is not necessarily a shareholder (shareholder);
-Introduce a clause concerning the transfer of shares. This clause sets out the conditions for the transfer of shares by shareholders and defines the rights and obligations that shareholders must respect in order to make such a transfer.
It is therefore recommended for the partners to consult lawyers specialized in commercial law in order to draw up a shareholders’ agreement that complies with the normative and regulatory requirements in force in the United Arab Emirates and that also protects the interests of each partner.
Get in touch with specialist lawyers
In order to ensure that everything runs smoothly, it is advisable for partners to consult lawyers specializing in commercial law to draw up a partnership agreement that complies with the regulatory requirements in force in the United Arab Emirates and that also protects the interests of each partner.
Our partner Merritt Legal Consultants team will be happy to assist you in drafting a shareholder’s agreement tool when you wish to enter into a partnership with one or more persons.
