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Starting a business with one or more shareholders often begins with a clear understanding of ownership, investment and management responsibilities.

The real challenges can arise later.

A shareholder may want to sell their interest. A new investor may want to join. Additional funding may be required. Shareholders may disagree over a major business decision. A 50:50 ownership structure may create a deadlock. One shareholder may leave the business while continuing to hold a significant ownership interest.

A well-structured shareholders’ agreement in the UAE can provide a framework for dealing with these situations before they become serious commercial disputes.

This article examines the key provisions businesses should consider when preparing or reviewing a shareholders’ agreement in the UAE.

WHAT IS A SHAREHOLDERS’ AGREEMENT?

A shareholders’ agreement is a private contractual arrangement between shareholders that sets out their respective rights, obligations and agreed rules for dealing with the ownership and management of a company.

It can address matters that may not be fully dealt with in the company’s constitutional documents, including:

• Ownership and investment arrangements
• Decision-making and voting
• Management responsibilities
• Board composition
• Reserved matters
• Funding obligations
• Share transfers
• Pre-emption rights
• Exit arrangements
• Deadlock
• Minority shareholder protections
• Confidentiality
• Dispute resolution

A shareholders’ agreement should, however, be considered together with the company’s applicable constitutional documents and the legal framework governing the relevant entity.

The UAE’s Commercial Companies Law and its subsequent amendments provide the statutory framework for companies operating under the applicable onshore regime, while entities established in jurisdictions such as DIFC and ADGM are subject to their own legal frameworks.

WHY DOES A SHAREHOLDERS’ AGREEMENT MATTER?

Company formation documents establish the legal structure of a business, but shareholders may require additional contractual arrangements to regulate their relationship and establish how important commercial situations will be handled.

A well-drafted agreement can help shareholders establish clear expectations from the beginning.

It can address questions such as:

• Who controls the business?
• Which decisions require shareholder approval?
• Can a shareholder sell their shares to a third party?
• What happens if a shareholder wants to exit?
• What happens if shareholders cannot agree?
• How will additional funding be provided?
• What happens when a new investor joins?
• How are minority shareholders protected?
• What happens if a founder leaves?
• How will disputes be resolved?

The objective is not simply to create another legal document. It is to establish a practical framework for managing the shareholder relationship as the business develops.

1. OWNERSHIP AND SHAREHOLDING STRUCTURE

The agreement should clearly identify the shareholders and their respective ownership interests.

Depending on the structure of the company, the agreement may address:

• Percentage ownership
• Number and class of shares or interests
• Initial capital contributions
• Additional funding obligations
• Future share issues
• Dilution
• Investor rights
• Economic rights
• Voting rights

Where different classes or rights are available under the applicable company structure, these should be clearly documented and aligned with the company’s constitutional documents and registration requirements.

The ownership provisions should leave little room for uncertainty about who owns what and what rights attach to that ownership.

2. CAPITAL CONTRIBUTIONS AND FUTURE FUNDING

Many shareholder disputes arise when the business requires additional funding.

A shareholders’ agreement can establish what happens if additional capital is required.

For example:

• Are shareholders required to contribute additional funds?
• Will additional funding be provided as equity or shareholder loans?
• Must shareholders contribute proportionately?
• What happens if one shareholder does not participate?
• Can the other shareholder provide additional funding?
• Will additional funding result in dilution?
• What approval is required for external financing?

Agreeing these matters before the need arises can reduce uncertainty and prevent disagreements when the business is under financial pressure.

3. MANAGEMENT AND GOVERNANCE

Shareholders should establish how the company will be managed and who has authority to make decisions.

The agreement may address:

• Appointment of directors or managers
• Board composition
• Appointment and removal rights
• Management responsibilities
• Board meetings
• Quorum
• Voting procedures
• Delegation of authority
• Banking authority
• Senior management appointments
• Reporting obligations

For businesses with active founder-shareholders, it is particularly important to distinguish between ownership rights and management responsibilities.

A shareholder may own a particular percentage of the company but may not necessarily have unilateral authority to make every operational decision.

4. RESERVED MATTERS

Reserved matters are decisions that require a higher level of shareholder approval than ordinary business decisions.

Depending on the business, these may include:

• Issuing new shares
• Changing the company’s business
• Taking significant borrowing
• Acquiring or disposing of major assets
• Entering material transactions
• Mergers or acquisitions
• Related-party transactions
• Establishing subsidiaries
• Approving major investments
• Changing senior management
• Declaring dividends
• Changing the company’s constitutional documents
• Selling substantially all of the business

The list should be carefully drafted.

If too many routine decisions require unanimous or special approval, the business may become difficult to operate. If too few decisions require shareholder protection, minority or investor interests may not be adequately protected.

5. VOTING RIGHTS

The agreement should establish how shareholder decisions are made.

This may include:

• Ordinary voting thresholds
• Special approval thresholds
• Unanimous decisions
• Reserved matters
• Board voting
• Shareholder voting
• Casting votes, where legally and commercially appropriate

Voting provisions become particularly important where ownership is divided between two or more shareholders with significant or equal interests.

A well-designed voting structure should balance effective management with appropriate shareholder protection.

6. SHARE TRANSFERS AND PRE-EMPTION

Shareholders should consider what happens if one shareholder wants to sell or transfer their interest.

Transfer provisions may address:

• Transfers to existing shareholders
• Transfers to affiliates
• Transfers to family members, where appropriate
• Transfers to third parties
• Restrictions on transfers
• Pre-emption rights
• Right of first refusal mechanisms
• Required approvals
• Valuation procedures

The transfer provisions should also be reviewed against the applicable statutory requirements and the company’s constitutional documents.

For UAE entities, statutory and constitutional requirements can affect how transfers operate, meaning a shareholders’ agreement should not be drafted in isolation.

7. TAG-ALONG RIGHTS

Tag-along rights can provide protection for minority shareholders where a majority shareholder proposes to sell their interest to a third-party buyer.

The basic commercial concept is that the minority shareholder may have the right to participate in the sale on equivalent terms.

This can help prevent a minority shareholder from being left behind with a new controlling shareholder whom they did not choose.

Where tag-along rights are intended to operate, the drafting should clearly address the circumstances in which the right applies, the percentage that can be sold and the applicable sale terms.

8. DRAG-ALONG RIGHTS

Drag-along provisions address the opposite situation.

Where a majority shareholder has negotiated a sale of the business, a drag-along mechanism may allow the majority to require minority shareholders to participate in the transaction, subject to the applicable legal and constitutional framework.

This can help avoid a situation where a minority shareholder prevents a transaction involving the sale of the entire business.

The mechanism should clearly address:

• Trigger conditions
• Minimum ownership threshold
• Notice requirements
• Sale terms
• Treatment of different share classes
• Completion procedures
• Protections for minority shareholders

Recent amendments to the UAE Commercial Companies Law have expanded the flexibility available for certain shareholder arrangements and constitutional provisions, making it particularly important to ensure that current agreements are aligned with the applicable legal framework.

9. DIVIDEND AND PROFIT DISTRIBUTION

Shareholders should consider how profits will be dealt with.

The agreement may establish principles concerning:

• Dividend distributions
• Reinvestment of profits
• Distribution timing
• Retention of profits
• Shareholder expectations
• Funding requirements

For a growing business, shareholders may agree that profits should initially be reinvested rather than distributed.

For an investment-focused business, shareholders may have different expectations regarding distributions.

Clarity can help avoid disagreements between shareholders with different financial objectives.

10. INFORMATION AND REPORTING RIGHTS

Shareholders should have an appropriate level of access to information about the business, particularly minority shareholders and investors.

The agreement may address:

• Management accounts
• Annual financial statements
• Budgets
• Business plans
• Financial reporting
• Material contracts
• Significant transactions
• Regulatory matters
• Inspection rights

Clear reporting obligations can improve transparency and allow shareholders to identify potential issues at an early stage.

11. DEADLOCK

Deadlock is particularly important where shareholders have equal or substantially equal ownership.

A 50:50 structure can create a situation where neither shareholder can approve a major decision.

A shareholders’ agreement should therefore consider what happens if the parties cannot agree.

Possible mechanisms include:

• Negotiation between shareholders
• Escalation to senior representatives
• Mediation
• Independent expert determination
• Casting mechanisms where appropriate
• Buy-sell arrangements
• Put or call mechanisms where legally appropriate
• Sale of the business
• Other agreed exit mechanisms

A deadlock provision should be practical and capable of operating when the relationship between shareholders has already become difficult.

12. EXIT STRATEGIES

Shareholders should consider how an exit will work before anyone actually wants to leave.

The agreement may establish mechanisms for:

• Voluntary exits
• Sale of shares
• Retirement
• Founder departure
• Investor exit
• Business sale
• Buy-back arrangements, where legally permitted
• Valuation
• Payment terms
• Transfer procedures

A clear exit mechanism can help shareholders avoid negotiating fundamental issues in the middle of a dispute.

13. GOOD LEAVER AND BAD LEAVER PROVISIONS

Where shareholders are also founders, directors or key employees, the agreement may need to address what happens when a key shareholder leaves the business.

Depending on the circumstances, the agreement may distinguish between situations such as:

• Retirement
• Death or incapacity
• Resignation
• Dismissal for cause
• Serious misconduct
• Breach of shareholder obligations
• Sale or transfer of the business

The commercial consequences of leaving may differ depending on the circumstances.

Any such provisions should be carefully drafted and considered in light of the applicable legal framework.

14. CONFIDENTIALITY AND PROTECTION OF BUSINESS INTERESTS

Shareholders frequently have access to sensitive information.

The agreement may include provisions dealing with:

• Confidential information
• Business plans
• Financial information
• Customer information
• Intellectual property
• Trade secrets
• Business opportunities
• Disclosure restrictions

Where restrictive covenants such as non-compete or non-solicitation provisions are used, their scope and enforceability should be considered carefully under the applicable law and circumstances.

15. INTELLECTUAL PROPERTY

Intellectual property can be particularly important for technology businesses, professional services firms, brands and businesses built around proprietary processes.

The shareholders’ arrangements should consider whether relevant intellectual property is owned by:

• The company
• A founder
• Another group entity
• A third-party licensor

Where intellectual property has been developed by founders or shareholders, appropriate arrangements should be considered to ensure that the business has the rights it requires to operate and grow.

16. RELATED-PARTY TRANSACTIONS

Shareholders may also be directors, managers, suppliers, landlords, lenders or service providers to the company.

This creates the potential for conflicts of interest.

The agreement should therefore consider how related-party transactions are approved and disclosed.

Depending on the circumstances, approval may be required for transactions involving:

• Shareholders
• Directors
• Related companies
• Family interests
• Shareholder loans
• Property transactions
• Management agreements
• Consultancy arrangements

Clear procedures can improve governance and reduce the risk of disputes.

17. DISPUTE RESOLUTION

A shareholders’ agreement should clearly establish how disputes between shareholders will be addressed.

Possible mechanisms include:

• Negotiation
• Mediation
• Arbitration
• Court proceedings
• Expert determination for specific technical or valuation matters

The agreement should consider the appropriate governing law, forum and dispute-resolution mechanism for the relevant company structure and transaction.

For UAE businesses involving international shareholders, the dispute-resolution provisions deserve particular attention because the shareholders may be located in different jurisdictions.

18. ALIGN THE SHAREHOLDERS’ AGREEMENT WITH THE CONSTITUTIONAL DOCUMENTS

One of the most important considerations is ensuring consistency between the shareholders’ agreement and the company’s constitutional documents.

A shareholders’ agreement should not be prepared as a standalone document without considering the company’s applicable:

• Memorandum of Association
• Articles of Association
• Licence
• Shareholding records
• Corporate resolutions
• Registration requirements
• Applicable free-zone rules

For UAE entities, the legal framework can differ depending on whether the company is established under the mainland regime, a particular free zone, DIFC, ADGM or another applicable jurisdiction.

The agreement should therefore be tailored to the actual company rather than copied from a generic foreign template.

A PRACTICAL SHAREHOLDERS’ AGREEMENT CHECKLIST

Before signing a shareholders’ agreement in the UAE, consider whether it clearly addresses:

Ownership

• Who owns the company?
• What percentage does each shareholder hold?
• Are there different classes or rights?
• How will dilution operate?

Governance

• Who manages the business?
• Who appoints directors or managers?
• What decisions require shareholder approval?
• What are the reserved matters?

Funding

• How will additional funding be provided?
• What happens if a shareholder does not contribute?
• Can shareholder loans be used?

Transfers

• Can shares be transferred?
• Are pre-emption rights applicable?
• Can shares be transferred to third parties?
• What approvals are required?

Exit

• Can a shareholder require an exit?
• How will shares be valued?
• Are tag-along or drag-along mechanisms appropriate?
• What happens when a founder leaves?

Deadlock

• What happens if shareholders cannot agree?
• Is there a practical escalation mechanism?
• Is there a buy-sell or other exit mechanism?

Protection

• Is confidential information protected?
• Is intellectual property properly dealt with?
• Are related-party transactions controlled?

Disputes

• What law applies?
• Where will disputes be resolved?
• Is arbitration appropriate?
• Is mediation required before formal proceedings?

COMMON SHAREHOLDERS’ AGREEMENT MISTAKES

Some of the most common problems include:

• Using a generic template without adapting it to the UAE structure
• Failing to align the agreement with the MOA or constitutional documents
• Not addressing 50:50 deadlock
• Leaving share-transfer arrangements unclear
• Failing to address future funding
• Ignoring dilution
• Not establishing an appropriate exit mechanism
• Creating excessive reserved matters that prevent normal business operations
• Failing to update the agreement when new shareholders join
• Not considering the applicable jurisdiction and governing law

The agreement should evolve with the business.

A shareholders’ agreement prepared at incorporation may need to be reviewed when the company raises investment, introduces new shareholders, restructures ownership or enters a major transaction.

WHY PROFESSIONAL REVIEW MATTERS

A shareholders’ agreement is not simply a document setting out ownership percentages.

It can determine who controls important decisions, how shareholders can exit, how disputes are handled and what happens when the relationship between shareholders changes.

The agreement should therefore be reviewed from both a legal and commercial perspective.

This is particularly important where the shareholders have different investment levels, management roles, nationality or residency, commercial objectives or exit expectations.

HOW LRP SUPPORTS SHAREHOLDERS AND BUSINESSES

Legal Resource Partners provides strategic and commercially focused support across corporate structuring, shareholder arrangements, joint ventures, investments, business establishment, governance and corporate transactions.

Our support can include:

• Shareholders’ agreement drafting
• Shareholders’ agreement review
• Corporate structuring
• Joint venture arrangements
• Investment documentation
• Share acquisitions and transfers
• Corporate governance
• Shareholder and board resolutions
• Corporate due diligence
• Business restructuring
• Negotiation and transaction support
• Coordination with specialist external counsel where required

LRP combines corporate legal experience with commercial understanding to help businesses structure shareholder relationships, manage risk and establish practical frameworks for growth.

For related support, see our Corporate & Commercial and Contracts & Agreements services.

FREQUENTLY ASKED QUESTIONS

Is a shareholders’ agreement mandatory in the UAE?

A shareholders’ agreement is not simply a substitute for the company’s mandatory constitutional and statutory requirements. Whether one is appropriate depends on the company’s structure, ownership and commercial arrangements.

A shareholders’ agreement can nevertheless provide a useful contractual framework for regulating the relationship between shareholders.

What should a shareholders’ agreement contain?

The agreement should be tailored to the business, but commonly addresses ownership, governance, voting, reserved matters, funding, share transfers, pre-emption, exit rights, deadlock, confidentiality and dispute resolution.

Does a shareholders’ agreement replace the MOA?

No. The shareholders’ agreement and the company’s constitutional documents serve different purposes and should be reviewed together. The agreement should not be drafted on the assumption that it can override mandatory legal requirements or the company’s registered constitutional arrangements.

Should a 50:50 company have a deadlock clause?

Yes, shareholders with equal ownership should carefully consider a practical deadlock mechanism. Without one, disagreement over major decisions can seriously disrupt the company’s operations.

Can shareholders include drag-along and tag-along provisions?

Such mechanisms can be included where appropriate, but the drafting should take account of the applicable company structure, statutory requirements and constitutional documents. Recent UAE legislative amendments have also expanded the flexibility available for certain arrangements, making current legal review particularly important.

Should a shareholders’ agreement be reviewed when a new investor joins?

Yes. A new investor may change the ownership structure, voting arrangements, funding obligations, reserved matters and exit rights. The agreement and related corporate documents should be reviewed and updated accordingly.

CONCLUSION

A well-structured shareholders’ agreement in the UAE can provide shareholders with greater clarity over ownership, governance, investment, decision-making, transfers and exits.

The most effective agreement is not necessarily the longest one. It is the one that reflects the actual business, anticipates realistic scenarios and provides workable mechanisms for dealing with change, disagreement and future growth.

Businesses should consider their shareholders’ agreement as part of a wider corporate governance framework, alongside the company’s constitutional documents and applicable UAE or free-zone requirements.

Corporate Expertise. Commercial Insight. Strategic Legal Support.

If you are establishing a business, bringing in an investor, restructuring ownership or reviewing an existing shareholders’ agreement, Book a Consultation with Legal Resource Partners to discuss your corporate and shareholder requirements.

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