Understanding the legality of minors signing shareholder agreements in the UAE

A shareholder agreement is a document that generally sets out the rights, privileges, and obligations of a company’s shareholders and the foundation for how a corporation will be established, managed, and run. As such, shareholder agreements are important to both the shareholders of a corporation and the corporation itself.

In the bustling business landscape of the United Arab Emirates (UAE), shareholder agreements are a cornerstone for companies, dictating the rights, responsibilities, and relationships among shareholders and the company itself. However, the question of whether minors can legally participate in such agreements as shareholders often arises. This topic is particularly relevant in a region known for its family-owned businesses and the desire to involve the next generation in company operations from an early age.

Legal Framework in the UAE

The legal system in the UAE, while sophisticated and modern, adheres to certain principles when it comes to contracts and legal capacity. According to the UAE's Commercial Companies Law and the Civil Code, a person must have full legal capacity to enter into contracts. Legal capacity is generally acquired upon reaching the age of majority, which is 21 years according to the UAE Civil Transactions Law.

Article (85) of the Code of Civil Transactions and articles (171 and 172) of the Federal Code of Personal Status set out the age of majority for a natural person. It is meant the age when a natural person becomes fully qualified to conduct directly all legal actions by himself/herself whether those actions are useful, harmful, revolving between useful and harmful, or any other rights without the need to have a guardian, provided that the natural person is mentally stable and is not forbidden to conduct his/her rights without a guardian for any other reason.

The official ‘age of majority’, according to the UAE’s Civil Transactions Law – Federal Law No. 5 of 1985 (as amended) is 21 years, as per the lunar calendar, which is equivalent to twenty years, four months and twenty days of solar calendar given that the lunar year is shorter than the solar year.

The Role of Minors in Shareholding

While minors under the age of 21 are generally considered to lack the legal capacity to enter into contracts, including shareholder agreements, there are structured pathways that allow their involvement in the business world. This is particularly important in the context of family businesses and inheritance planning.

Guardianship and Representation

Minors can hold shares in a company through a guardian or legal representative. This means that while the minor can technically be a shareholder, the rights associated with the shares, such as voting and decision-making, are exercised by the guardian until the minor reaches the age of majority.

Trust Structures

Families often use trust structures to hold shares on behalf of minors. These trusts can be set up with specific terms that govern how and when the shares will be managed and eventually transferred to the minor upon reaching a certain age.

Corporate Vehicles

Another approach is to use corporate vehicles to hold shares for the benefit of minors. In this arrangement, a corporation holds the shares in trust for the minor, with designated adults managing the corporation

Considerations for Involving Minors in Shareholding

When planning to involve minors in the shareholding of a UAE company, several considerations should be taken into account

• Legal Advice: it is crucial to seek specialized legal advice to navigate the complexities of the UAE's legal system and ensure that any arrangements comply with local laws and regulations.
• Protection of Minor’s Interests: Any arrangement involving minors should prioritize the protection of their interests, ensuring that their rights as future shareholders are preserved without exposing them to undue risk.
• Long-Term Planning: Involving minors in shareholding should be part of a broader strategy for business continuity, succession planning, and wealth management, with clear mechanisms for transferring control and ownership when appropriate.

While direct involvement of minors in shareholder agreements is limited by their legal capacity under UAE law, there are structured and strategic ways to involve the younger generation in the shareholding of family businesses or investment ventures. These methods ensure compliance with legal requirements while also securing the long-term interests of both the minors involved and the business itself. As the UAE continues to thrive as a global business hub, understanding and navigating these legal nuances is essential for families and businesses planning for the future. To explore these alternatives, and to help determine which option is best for you, please reach out to Perla Baaklini or a member of CVML.