Shareholder Agreements in UAE LLCs: 8 Pitfalls That Lead to Disputes

Most shareholder agreements for UAE LLCs are drafted when the relationship between partners is at its best. That is also when the agreement matters least. The real test comes when a shareholder wants out, a new investor comes in, the business hits a deadlock, or someone dies. At that point, the gaps in the agreement — or the conflict between the agreement and the company's constitutional documents — become expensive problems.

At Kayrouz & Associates, we see these disputes regularly. The pattern is consistent: a shareholder agreement was signed at incorporation, often using a template adapted from another jurisdiction, and nobody revisited it until something went wrong. By then, the clauses that should have provided a clear resolution either don't apply, conflict with the Memorandum of Association, or are unenforceable under UAE law.

This article identifies the eight most common pitfalls we encounter in LLC shareholder agreements and explains what to do about each of them. If you're forming a new company or reviewing an existing arrangement, these are the issues that cost shareholders the most time, money, and goodwill when they're left unaddressed.

1. The shareholder agreement says one thing, the MOA says another

This is the single most common — and most damaging — pitfall in UAE LLC structures.

Under Federal Decree-Law No. 32 of 2021 on Commercial Companies (the CCL), the Memorandum of Association is the registered constitutional document of an LLC. It is filed with the Department of Economic Development, notarised, and accessible to regulators and third parties. The shareholder agreement, by contrast, is a private contract. It binds the signatories, but it does not bind the company itself unless the company is also a party.

When these two documents conflict, UAE courts consistently give precedence to the MOA. The UAE Supreme Court confirmed this principle in a widely cited 2013 judgment, ruling that only the notarised and registered MOA determines the parties' legal shareholding. An unregistered side agreement was held to be unenforceable.

What this looks like in practice: Your shareholder agreement gives you a veto over capital increases. The MOA says capital increases require a 75% vote. Your partners hold 76% and proceed without you. The capital increase is valid as far as the company and the registry are concerned. You may have a breach of contract claim against your co-shareholders personally, but you cannot unwind the corporate decision.

How to fix it: Every material right in the shareholder agreement — veto rights, board appointment rights, transfer restrictions, dividend policies, drag-along and tag-along mechanisms — must be mirrored in the MOA. Include an alignment clause obligating all parties to vote in favour of MOA amendments necessary to reflect the shareholder agreement. This doesn't eliminate the risk entirely, but it gives you a contractual remedy if a shareholder refuses to align.

2. Using a foreign template without adapting it to UAE law

We regularly see shareholder agreements drafted on English, American, or Indian templates and applied directly to UAE mainland LLCs. The assumption is that a well-drafted contract is universally enforceable. Under UAE civil law, that assumption is wrong in several material ways.

Pre-emption rights are statutory, not optional. Article 80 of the CCL gives existing LLC shareholders a mandatory 30-day right to acquire shares being transferred to a non-shareholder. You cannot contract out of this. English-law agreements that include clean exit mechanisms without accounting for statutory pre-emption create a procedural conflict that delays transactions and, in some cases, renders the transfer vulnerable to challenge.

Specific performance works differently. Common law jurisdictions treat specific performance as exceptional; damages are the default remedy. UAE civil law takes a different approach — Article 386 of the Civil Code allows courts to order specific performance where damages are inadequate. But obtaining it in practice requires precise contractual language and a clear obligation, not aspirational wording.

Penalty clauses are subject to judicial review. UAE courts can reduce liquidated damages if they find the amount disproportionate to the actual loss suffered (Article 390 of the Civil Code). Penalty clauses that look like a deterrent in a London-drafted agreement may be reduced to a fraction of their stated amount by a Dubai court.

Share transfers require notarisation. The English-language shareholder agreement creates the obligation, but the Arabic notarised transfer deed is what actually effects the transfer. A share transfer that satisfies the contract but isn't notarised has not been completed as a matter of UAE law.

How to fix it: Have any foreign-template agreement reviewed by a UAE-qualified lawyer before signing. At minimum, check that pre-emption procedures, transfer mechanics, penalty clauses, and dispute resolution provisions are compatible with Federal Decree-Law No. 32 of 2021 and the UAE Civil Code. If you're structuring a multi-jurisdictional joint venture, our corporate and commercial team can advise on which provisions need localisation.

3. No deadlock resolution mechanism in a 50:50 structure

Equal ownership splits are common in UAE LLCs, particularly in joint ventures between a foreign investor and a local partner, or between two co-founders. The appeal is understandable — equal ownership signals equal commitment. But without a deadlock mechanism, a 50:50 structure is a dispute waiting to happen.

When partners disagree on a material decision — a new capital call, a change in strategy, the appointment of a manager — neither has the votes to break the impasse. The company is paralysed. Operations stall. Employees and counterparties lose confidence. And the only exit is court intervention or a voluntary dissolution that neither side wants.

What we see go wrong: The shareholder agreement either has no deadlock provision at all, or includes a vague clause requiring the parties to "negotiate in good faith" — which, in the absence of a defined escalation path, means nothing.

Options that actually work:

• Russian roulette (or shoot-out) clause: One shareholder names a price. The other must either buy at that price or sell at that price. This forces fairness in pricing because the proposer doesn't know which side they'll end up on.
• Texas shoot-out: Both parties submit sealed bids. The higher bidder buys out the lower bidder at the higher bid price.
• Expert determination: An independent third party — usually a Big Four firm or a DIFC-registered valuation expert — determines fair value, and one side buys the other out at that price.
• Escalation to mediation, then arbitration: Deadlocked decisions are escalated to mediation at a recognised institution (DIAC or DIFC-LCIA), followed by binding arbitration if mediation fails.

The right mechanism depends on the relationship, the value of the company, and whether the parties want to preserve the option of continuing together. But having no mechanism at all is not an option if you want to avoid costly litigation.

4. Ignoring what happens when a shareholder dies

Shareholder death is one of the most disruptive events in a UAE LLC — and one of the least planned for. Without clear provisions, the deceased shareholder's interest passes to their heirs under Sharia inheritance rules (for Muslim shareholders) or the applicable personal status law (for non-Muslim shareholders who have registered a will). In either case, the surviving shareholders may find themselves in business with people they did not choose and who may have no interest in, or capacity for, running the company.

Before the 2025 amendments, structuring succession mechanisms in the MOA was legally uncertain. Shareholders relied on private agreements, which — as discussed above — are subordinate to the MOA and may not bind heirs who were not parties to the agreement.

Federal Decree-Law No. 20 of 2025 changed this significantly. The amended CCL now expressly permits LLCs to include succession mechanisms in their constitutional documents, including a right of first refusal for surviving shareholders or the company itself to acquire the deceased's shares. If the parties cannot agree on price, the competent court appoints one or more experts to determine fair value.

This is a material improvement. Embedding these rights in the MOA means they bind heirs and successors automatically, without relying on a separate private agreement.

What to do now: If your LLC's MOA was drafted before the 2025 amendments came into effect, review it. If it does not include a succession mechanism, amend it. The shareholder agreement should provide the detailed valuation methodology, the timeline for exercising the right of first refusal, and the funding arrangements for a buyout. The MOA should contain the core right itself.

5. Drag-along and tag-along rights that don't actually work

Drag-along rights allow a majority shareholder to force minority shareholders to sell alongside them. Tag-along rights allow a minority shareholder to join a sale initiated by the majority on the same terms. Both are standard in any reasonably sophisticated shareholder agreement. Both regularly fail in UAE LLCs.

Why they fail:

Pre-emption rights collide with drag-along. Even where a drag-along clause is triggered, other LLC shareholders still have a statutory 30-day pre-emption right under Article 80 of the CCL. If the drag-along doesn't explicitly address this — including a waiver mechanism or a structured process that satisfies the statutory requirement before proceeding — the minority shareholder can use pre-emption to delay or obstruct the sale.

Minority shareholders refuse to sign transfer documents. A drag-along clause creates a contractual obligation to sell. But the actual transfer of LLC shares requires the selling shareholder to attend notarisation and sign the Arabic transfer deed. A minority shareholder who refuses to appear creates a practical problem that contractual remedies — damages, specific performance orders — take months to resolve. By then, the buyer may have walked away.

Valuation disputes stall the process. If the drag-along price is below what the minority considers fair value, they will challenge it. Without a clear valuation mechanism in the shareholder agreement — a formula, a reference to a specific valuation methodology, or a minimum price floor — this becomes an open-ended dispute.

The 2025 amendments help, but don't solve everything. Federal Decree-Law No. 20 of 2025 now expressly recognises drag-along and tag-along rights in the MOA of LLCs. This is a significant step — it means these rights can bind the company and all current and future shareholders, not just the signatories of a private agreement. But the exercise of these rights in an LLC remains subject to the statutory pre-emption regime. Careful drafting is still essential.

How to fix it: Mirror drag-along and tag-along rights in the MOA (now that the law expressly permits it). Include a clear valuation mechanism — a formula, a floor price, or a reference to independent expert determination. Address the interaction with pre-emption rights explicitly. And include a power of attorney clause authorising a designated person to execute transfer documents on behalf of a dragged-along shareholder, reducing the risk of refusal to sign.

If you're negotiating a share purchase or exit, these mechanics need to be settled before signing, not left to the post-closing handshake.

6. No clarity on profit distribution and capital calls

UAE law defaults to profit sharing in proportion to shareholding (Article 26 of the CCL). If you want a different arrangement — a preferred return to an investor, reinvestment of profits until a threshold is reached, or a waterfall structure — it must be explicitly stated in the shareholder agreement and, ideally, in the MOA.

Where disputes arise:

Retained earnings vs. distribution. One shareholder wants dividends; the other wants to reinvest. Without a dividend policy in the shareholder agreement, there is no mechanism to force distribution. The managing partner simply retains profits in the company, and the minority shareholder has limited recourse unless they can demonstrate bad faith or oppression.

Capital calls without consent. The managing partner decides the company needs additional capital and calls for further contributions. The shareholder agreement doesn't specify whether capital calls require unanimous consent, what happens if a shareholder can't or won't contribute, and whether non-contributing shareholders face dilution. The result is a dispute over obligations that were never agreed.

Unequal economic rights. Two shareholders hold 50% each but one contributed more capital, or one is a working shareholder contributing time and expertise. The agreement doesn't differentiate between economic rights and voting rights. Following the 2025 CCL amendments, LLCs can now issue multiple classes of shares with different rights — including preferential economic rights. This tool was previously available only in free zone common-law jurisdictions, and it resolves many of these disputes at the structural level.

How to fix it: Define a dividend policy — minimum distribution levels, conditions for reinvestment, approval thresholds for retention. Specify capital call mechanics: who can initiate, what approval is required, what dilution consequences apply. If economic contributions are unequal, consider multiple share classes now that the CCL expressly permits them for LLCs.

7. Choosing the wrong dispute resolution forum

Many UAE LLC shareholder agreements default to "the courts of Dubai" for dispute resolution. That is often the worst option available.

Why mainland courts are problematic for shareholder disputes:

• Proceedings are conducted in Arabic. All English-language documents — shareholder agreements, board minutes, financial statements, emails — require certified translation, adding cost and delay.
• Cases proceed through first instance, appeal, and cassation. A fully litigated shareholder dispute can take two to three years to reach final judgment.
• Court hearings are primarily document-based. Oral testimony is limited. Complex commercial disputes involving valuation, governance, and fiduciary obligations are difficult to present through written submissions alone.
• Judgments are public. For private companies, public disclosure of internal disputes, financial details, and governance failures is commercially damaging.

Better alternatives:

DIAC arbitration (Dubai International Arbitration Centre) allows English-language proceedings, procedural flexibility, confidentiality, and awards that are enforceable in the UAE and internationally under the New York Convention. Emergency arbitrator procedures can provide interim relief faster than courts.

DIFC-LCIA arbitration is available even to non-DIFC entities if the arbitration clause specifies it. DIFC-LCIA applies common law procedural standards and has a strong reputation with international parties.

DIFC Courts can be chosen as the exclusive jurisdiction even for disputes involving mainland companies, provided the shareholder agreement contains a valid DIFC Courts jurisdiction clause and meets the gateway conditions.

How to fix it: Replace generic court jurisdiction clauses with a tiered dispute resolution mechanism: negotiation (14 days), mediation (30 days), then binding arbitration at DIAC or DIFC-LCIA. Specify the language, the seat, the number of arbitrators, and the governing law. If the dispute involves urgent relief — freezing assets, restraining share transfers — include a carve-out allowing either party to seek interim measures from any court of competent jurisdiction.

8. Not updating the agreement after the business changes

The shareholder agreement drafted at incorporation reflects the company's structure, ownership, and commercial arrangements at a single point in time. Businesses change. Shareholders change. Regulations change. But the agreement rarely does.

Common triggers that should prompt a review:

• A new shareholder joins through investment or share transfer
• The company's activities expand into a new sector requiring additional licensing
• The UAE corporate tax regime changes the economics of profit distribution and capital structure
• A shareholder becomes a manager or director, or stops being one
• The company restructures — setting up subsidiaries, moving to a free zone, or converting to a different entity type
• Legislative amendments (such as Federal Decree-Law No. 20 of 2025) create new tools — multiple share classes, statutory drag-along/tag-along, structured succession — that weren't available when the agreement was signed

What happens when the agreement is stale: The provisions don't match reality. A shareholder who joined after the agreement was signed may not be bound by it. Transfer restrictions may reference a valuation date or formula that no longer makes sense. Reserved matters may not cover decisions that are now material to the business. The deadlock mechanism assumes two shareholders, but there are now four.

How to fix it: Treat the shareholder agreement as a living document. Review it annually, or at every material event. If the CCL amendments introduced since 2025 offer tools that your agreement doesn't currently use — put them in. If you've brought in new shareholders who never signed the agreement — execute a deed of adherence binding them to the terms. If the company's structure has changed — update the reserved matters, the valuation methodology, and the exit mechanics.

What the 2025 CCL amendments mean for existing shareholder agreements

Federal Decree-Law No. 20 of 2025 introduced several reforms that directly affect how shareholder agreements are drafted and enforced for UAE LLCs:

If your LLC was incorporated before these amendments, your shareholder agreement and MOA almost certainly don't take advantage of them. That is a missed opportunity — and, in some cases, a risk. The new provisions solve problems that previously required workaround structures or offshore holding companies.

When to get the agreement reviewed

Not every LLC needs a 60-page shareholder agreement. A two-person company with equal ownership and aligned interests may need only a short-form agreement covering exits, deadlock, and death. A multi-party joint venture with international investors, preferred return structures, and complex governance needs something more detailed.

But every LLC with more than one shareholder needs something — and whatever it has needs to be reviewed when circumstances change.

If you're forming a new UAE LLC, negotiating a joint venture, bringing in a new investor, or dealing with a partner dispute, our corporate and commercial law team can review your existing arrangements, identify the gaps, and fix them before they become disputes.

FAQ

Can a shareholder agreement override the MOA in a UAE LLC? No. UAE courts give precedence to the registered MOA over a private shareholder agreement when the two conflict. Rights in the shareholder agreement should be mirrored in the MOA to be enforceable against the company and all shareholders, including future ones.

Are drag-along and tag-along rights enforceable in UAE LLCs? Yes, and enforceability has improved significantly since Federal Decree-Law No. 20 of 2025 expressly recognised these rights in LLC constitutional documents. However, their exercise remains subject to statutory pre-emption rights under Article 80 of the CCL, so careful drafting is essential.

What happens to LLC shares when a shareholder dies in the UAE? Without a succession mechanism, the shares pass to heirs under applicable inheritance law. The 2025 CCL amendments now allow LLCs to include a right of first refusal for surviving shareholders directly in the MOA, with disputed valuations determined by court-appointed experts.

Can a 50:50 LLC deadlock be resolved without going to court? Yes, if the shareholder agreement includes a deadlock resolution mechanism — such as a shoot-out clause, expert determination, or escalation to arbitration. Without such a mechanism, deadlocked decisions typically require court intervention or voluntary dissolution.

Should a UAE LLC shareholder agreement use arbitration or court litigation? Arbitration is generally preferable for shareholder disputes. It offers English-language proceedings, confidentiality, faster resolution, and international enforceability. DIAC and DIFC-LCIA are the most commonly used arbitration institutions in the UAE for commercial disputes.

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