Thinking of starting a business or bringing in partners? Before you share equity, it’s critical to have a clear and enforceable shareholders agreement in place.
This document outlines the rights and responsibilities of each shareholder and helps prevent future misunderstandings or disputes.
Many people ask, What is a shareholders’ agreement, and why is it needed when you already have a trade license or Memorandum of Association?
The truth is, those documents don’t define how decisions are made, how profits are shared, or what happens if a shareholder wants to leave. That’s why a well-drafted shareholders agreement contract is essential.
What Is a Shareholders Agreement?
A shareholders’ agreement is a private legal contract signed by all shareholders of a company. It governs the relationship between shareholders, the management of the company, and outlines how key issues like profit sharing, voting, and ownership transfers are handled.
While the company’s official documents (like the MOA) set out its structure, they don’t cover how shareholders should act or resolve issues. A shareholders agreement contract fills in these gaps and gives each shareholder confidence that their rights are protected.
Why You Need a Shareholders Agreement in the UAE
In the UAE, businesses often involve partnerships between local sponsors, foreign investors, or family members. Verbal agreements may work in the early days, but when the business grows or problems arise, disputes can be costly.
For this reason, you don’t only need a shareholder agreement, but you should know how to find the right lawyers in Dubai. A shareholders agreement provides legal clarity. Below are the key questions it answers, with each area explained:
Who Owns How Many Shares?
Ownership is the foundation of any company. A shareholders’ agreement clearly states how many shares each person holds. This is essential because ownership affects everything from voting power to dividend entitlement.
When this is not defined clearly, it can cause serious issues later, especially when new partners or investors join.
What Are Each Shareholder’s Responsibilities?
Not all shareholders play the same role in a business. Some are active managers, while others are financial backers. A proper shareholders agreement contract will outline the duties of each shareholder so that responsibilities don’t overlap, and all parties know what’s expected of them.
How Are Decisions Made?
Running a business involves small and big decisions. A shareholders’ agreement explains how these decisions are made. It defines who has the right to vote, what percentage of agreement is needed for certain actions, and whether any shareholder holds special veto rights.
This prevents conflicts and keeps decision-making smooth and fair.
What Happens if One Shareholder Wants to Sell Their Shares?
Eventually, a shareholder may want to exit the business. The shareholders’ agreement sets the rules for how this happens. It usually includes a “right of first refusal” clause, meaning existing shareholders get the first chance to buy the shares before they’re offered to outsiders.
This helps maintain stability and control within the company.
How Will Profits and Losses Be Distributed?
Money matters can cause tension if not handled properly. A shareholders agreement for startups or established companies will define how profits (and losses) are shared.
This is typically based on shareholding percentages, but the agreement can include different terms if all shareholders agree. Having this in writing avoids confusion and future disagreements.
A shareholders agreement for startups is especially important because early-stage businesses often involve co-founders, silent investors, or mentors contributing different things. A written agreement ensures fairness from the beginning.
What Should Be Included in a Shareholders Agreement?
When you draft a shareholders agreement, it must be tailored to the company’s needs and compliant with UAE law. Working with a shareholders agreement solicitor ensures this. Here are key clauses that should always be included:
Shareholding and Ownership Structure
This section defines the number and type of shares held by each shareholder. It also explains how new shares can be issued or existing shares can be transferred.
Voting Rights and Decision-Making
Every shareholders’ agreement should explain how decisions are made. Some decisions may require a simple majority, while others, such as selling the business or appointing a director, may require unanimous approval.
Dividend Policy
Will profits be reinvested or distributed to shareholders? A clear dividend policy avoids future disagreements and sets realistic expectations for everyone involved.
Exit and Buyout Terms
This clause outlines what happens if a shareholder leaves the company, dies, or becomes unable to continue. Will the remaining shareholders have the right to buy their shares? At what price? These terms help ensure business continuity.
Dispute Resolution
Including a process for resolving conflicts can save time, stress, and money. Many shareholders agreement solicitors in the UAE recommend arbitration in Dubai or the courts of the relevant free zone, depending on where the company is registered.
Restrictions on Share Transfers
To prevent outside parties from gaining control of the company, the agreement should require that any sale of shares be approved by other shareholders or that they have the right of first refusal.
Roles and Responsibilities
Not all shareholders are involved in day-to-day operations. This section sets out each shareholder’s role, if any, in the company’s management.
Why You Shouldn’t Use a Generic Shareholders Agreement Template
A quick online search might show you a shareholders agreement template or sample, but these documents are often written for other jurisdictions and don’t reflect UAE law.
You might come across a free shareholders agreement template online that looks well-structured and comprehensive.
However, these generic documents are usually drafted for use in other countries and often fail to account for the unique legal and business environment in the UAE. For this reason, you should hire commercial lawyers in Dubai to draft shareholders agreement.
Local Sponsor Arrangements
In mainland UAE companies, foreign investors often require a local Emirati partner. A generic shareholders agreement template will not address how control, profit sharing, and decision-making are structured in this kind of setup.
If these terms aren’t customized, disputes with local sponsors can arise later.
Free Zone Authority Requirements
Each free zone in the UAE, like DIFC, DMCC, or ADGM, has its own rules and corporate structures. A standard shareholders agreement contract that isn’t adapted for the specific free zone may not comply with authority guidelines or be recognized in case of disputes.
UAE Legal Enforcement
Templates from foreign jurisdictions often rely on laws that don’t apply in the UAE. For a shareholders agreement to be enforceable here, it must align with UAE civil and commercial law. If the agreement includes unfamiliar legal terms & procedures, local courts may not enforce them.
Arabic and English Language Versions
In the UAE, legal documents submitted to court or government authorities often need an Arabic version. A generic shareholders agreement template usually comes in English only, which can cause issues in official processes.
A properly prepared agreement should include both versions to avoid delays or legal challenges.
While it’s okay to use a template as a starting point, you should always have it reviewed and customized by a qualified shareholders agreement lawyer in the UAE.
Shareholders Agreement for Startups in the UAE
If you’re a startup founder, having a proper shareholders agreement for startups is one of the most important steps you can take. Startups often involve multiple co-founders with shared equity, but over time, roles and expectations shift.
An agreement helps clarify the equity split, founder vesting schedules, and roles in management. It also mentions the rights of investors and what happens if a founder leaves.
A well-drafted agreement makes your startup more attractive to outside investors and helps prevent legal trouble as the business scales.
Conclusion
You don’t need to wait for a problem to hire a lawyer. It’s smart to consult a shareholders agreement lawyer before any equity is distributed.
A legal expert can help you draft a custom agreement based on your business model & ensure compliance with mainland or free zone regulations.
For expert guidance, contact Ayesha Aljaziri Lawyers & Legal Consultants. Our team has extensive experience drafting and reviewing shareholders agreements for UAE-based companies of all sizes.
You can reach us at +971 5594 83605 or email info@aljaziriadvocates.com for a confidential consultation.
