Shareholders’ Agreements in the United Arab Emirates: Key Considerations for Success and Governance

CVML

Published on December 11 , 2024

In the UAE’s fast-growing and diverse corporate environment, a shareholders' agreement is a vital legal document that supplements a company’s shareholding and governance regulations. While the Articles of Association (AOA) are a statutory requirement that outline, in most cases, the basic operational rules of a company, shareholders’ agreements provide for additional specific rights and obligations among shareholders of a company.

Tailored to the company’s unique requirements, shareholders' agreements are increasingly recognized as critical to fostering stability, transparency, and fairness in corporate governance.

This article provides for the importance and objectives of drafting shareholders’ agreements in the UAE, key clauses to include, how they interact with and can prevail over the AOA, and strategies to gain shareholder consensus for signing the agreement.

The importance of shareholders’ agreements in the UAE

A shareholders’ agreement is a private, legally binding document that supplements the company’s AOA by addressing specific concerns and outlining tailored provisions. The significance of shareholders’ agreements is considered to be for the following:

Supplementing the AOA: while the AOA outlines the fundamental governance framework, shareholders’ agreements allow for more detailed and specific provisions, offering flexibility to address scenarios not contemplated in the AOA. The UAE’s Commercial Companies Law under Federal Decree-Law No. 32 of 2021 provides flexibility for shareholders to agree on matters not expressly covered in the AOA, making shareholders’ agreements a complementary tool for comprehensive governance. It is important to note that in case shareholders to have the shareholders’ agreement prevail over the AOA of the company, they may first ensure that the AOA are aligned with the provisions of the shareholders’ agreement to ensure consistency and avoid conflicts between the two documents, and then reference the shareholders’ agreement in the AOA by including a clause in the AOA acknowledging the shareholders’ agreement and its precedence in matters of internal governance and in any other matter that is provided for in such agreement.
Ensuring confidentiality: the AOA is a public document filed with UAE regulatory authorities, meaning its content is accessible to third parties. In contrast, a shareholders’ agreement is private, allowing sensitive arrangements, such as profit-sharing mechanisms or exit strategies, to remain confidential.
Protecting minority and majority shareholders: The shareholders’ agreement can balance power dynamics by safeguarding the rights of minority shareholders while ensuring that majority shareholders retain effective control. By clearly defining roles, responsibilities, and expectations, the agreement helps align shareholder objectives, reducing the likelihood of disputes and fostering cooperation.
Clarifying exit mechanisms and facilitating business continuity: a shareholders’ agreement may provide a structured approach to transferring shares, handling buyouts, and resolving disputes, making it easier to navigate transitions. In addition, such agreement can establish protocols for handling contingencies such as the death, insolvency, or withdrawal of a shareholder, ensuring minimal disruption to business operations.

Key clauses to consider in shareholders’ agreements for UAE companies

A well-drafted shareholders' agreement in the UAE must contain key clauses tailored to the specific needs of the business and aligned with the UAE's mandatory regulations under the Commercial Companies Law. A comprehensive shareholders’ agreement may in most cases address the following areas:

Governance provisions: these provisions may include board composition and proceedings, manager proceedings (i.e., rules for appointing, removing and compensating directors/managers), allocation of voting powers among shareholders and provisions for veto rights, as well as reserved matters requiring special approvals of the board of directors, shareholders or managers.
Shareholder contributions: this shall consist of all provisions pertaining to initial and ongoing financial commitments as well as the allocation of any responsibilities for operation roles or strategic input during the operation by the company of its activity.
Dividend and profit distribution: provisions regarding dividend and profit distribution may consist of policies on declaring and distributing dividends as well as stipulations for reinvestment of profits into the business of the company.
Share transfer provisions: these provisions are one of the main considerations which shareholders consider and may include pre-emption rights protecting existing shareholders by granting them the first option to purchase shares before a contemplated sale to a third party, tag-along rights enabling minority shareholders to sell their shares under the same terms of a contemplated sale of shares by majority shareholders, or even drag-along rights allowing majority shareholders to compel minority shareholders to sell their shares in the event of a third-party buyout.
Exit and deadlock provisions: considering the UAE’s developing market, exit and deadlock provisions in a shareholders’ agreement provide for the possibility of buy-sell agreements between shareholders in case of any shareholder exit, as well as procedures for share valuation, and, if case may be, mediation, arbitration, or escalation to independent experts as a solution to resolve a deadlock (i.e. disagreement on a specific matter preventing the shareholders or board of directors from voting in favor or against such matter).

Approaching shareholders to sign a shareholders’ agreement

Successfully approaching shareholders to sign a shareholders’ agreement requires a strategic, collaborative, and transparent process. Shareholders may have differing interests or levels of understanding regarding the importance of such agreements, so careful preparation and communication are essential. Approaching shareholders may consist of implementing the following means:

Educate shareholders on the benefits of the agreement: many shareholders may not fully understand the purpose of a shareholders’ agreement or its advantages. It is important to explain how the agreement, after being signed by all shareholders and ensuring its enforceability under UAE law, protects investments, reduces risks and facilitates smooth operations by presenting the agreement as a tool for achieving shared goals, such as profitability, stability and business growth, rather than a restrictive document.
Involve legal and financial advisors: this consists of engaging with experienced UAE-based legal professionals to draft the agreement or discussing with financial advisors and counsels on contemplated financial terms of the agreement prior to the drafting. This will allow advisors to address concerns, explain legal and financial compliance and provide reassurance for all shareholders.
Emphasize collaboration and phased implementation: it is important to encourage open discussions during the drafting process to incorporate suggestions and address objections, fostering a sense of ownership among shareholders. In case certain shareholders are hesitant, it may be suggested to adopt key provisions initially, with the option to expand the agreement over time.

A shareholders’ agreement is a critical tool for UAE companies, providing clarity, protecting shareholder interests, and fostering stability. By addressing governance, financial contributions, share transfers, and dispute resolution, it supplements the statutory AOA with tailored provisions that meet the company’s needs and objectives. As the UAE continues to attract global investors, the role of shareholders’ agreements in promoting sustainable and equitable corporate growth remains crucial and considered. However, navigating the complexities of UAE law requires professional expertise. Therefore, it is highly recommended to consult a qualified legal counsel as of today to draft or review shareholders' agreements and to avoid risking costly mistakes or delays. Acting now will not only ensure compliance with local regulations but also strengthens a company’s business foundation in a competitive market and secures its current and future investments.

Amir Fardoun | Senior Associate