Shareholder Agreements in UAE: Key Clauses and Enforcement

Every business partnership begins with optimism. Shareholders join forces with aligned goals, complementary skills, and a shared vision for growth. But as companies evolve - through market shifts, new opportunities, or changing personal circumstances - the assumptions that shaped the original partnership often prove insufficient for the challenges ahead.

The questions we hear most often from foreign shareholders and investors are straightforward: Is my shareholder agreement actually enforceable in the UAE? Does it override the Companies Law or the articles of association? What happens if my partner breaches it? Which clauses fail in UAE courts?

This guide answers those questions directly. At Kayrouz & Associates, our corporate and commercial law team has spent over 20 years drafting, negotiating, and enforcing shareholder agreements across the UAE. We explain what works, what does not, and how to structure agreements that actually protect your interests when relationships break down.

What a Shareholder Agreement Does (and Does Not Do)

A shareholder agreement is a private contract between shareholders governing their relationship with each other and the company. It sits alongside - but separate from - the company's constitutional documents.

Unlike the Memorandum of Association (MOA), which is filed with licensing authorities and publicly accessible, a shareholder agreement remains confidential between the parties. This allows shareholders to agree on sensitive arrangements around profit sharing, exit mechanisms, and governance rights without public disclosure.

In this article, references to the MOA include the Articles of Association where applicable, as these are often combined in a single document for UAE LLCs.

A well-drafted shareholder agreement addresses:

• Decision-making authority and voting thresholds beyond statutory requirements
• Transfer restrictions controlling who can become a shareholder
• Minority protections that statutory law does not provide
• Valuation mechanisms for share transfers and exits
• Deadlock resolution when shareholders cannot agree
• Confidentiality and non-compete obligations

What a shareholder agreement cannot do:

• Override mandatory provisions of the Commercial Companies Law
• Bind the company itself unless the company is a party
• Prevail over the MOA in disputes before UAE courts if the two conflict
• Create rights against third parties who are not signatories

Understanding these limitations is essential. Many disputes arise because shareholders assume their private agreement automatically trumps everything else. It does not.

Jurisdictional Scope: Mainland, Free Zones, and Common Law Options

The enforceability of shareholder agreement clauses depends significantly on where your company is registered and where disputes will be heard. The UAE has three distinct legal environments, and they treat shareholder agreements differently.

Mainland UAE (Federal Law)

Companies registered onshore - including LLCs, joint stock companies, and branches - are governed by Federal Decree-Law No. 32 of 2021 on Commercial Companies and its subsequent amendments.

UAE courts apply civil law principles. They place significant weight on registered constitutional documents and may disregard shareholder agreement provisions that conflict with the MOA or mandatory statutory rules.

Key limitations onshore:

• Pre-emption rights on LLC share transfers are statutory (30-day period under Article 80) and cannot be contracted out of entirely
• Share transfers require notarised documentation and Commercial Register entry to be valid against third parties
• Courts may view certain reserved matters as interfering with directors' statutory powers
• Specific performance is available but courts sometimes prefer damages
• Proceedings are conducted in Arabic with certified translations required

Recent legislative developments and regulatory practice have increasingly accommodated mechanisms like drag-along and tag-along rights, particularly where reflected in the constitutional documents of the company and supported by clear valuation provisions. However, enforcement in onshore LLCs may still be affected by statutory transfer procedures and shareholder cooperation, making drafting precision and procedural planning essential.

Free Zones (Non-Financial)

Most UAE free zones - DMCC, JAFZA, DAFZA, and others - apply mainland UAE federal law to company matters, with some variations in licensing and operational requirements. Shareholder agreements for free zone companies face similar enforceability considerations as mainland entities.

Disputes typically go to UAE courts or arbitration, depending on the agreement. Free zone authorities generally do not adjudicate shareholder disputes themselves.

DIFC and ADGM (Common Law Jurisdictions)

The Dubai International Financial Centre and Abu Dhabi Global Market operate as independent common law jurisdictions with their own company laws, court systems, and regulatory frameworks.

Advantages for shareholder agreements:

• Courts apply English common law principles, giving greater weight to contractual arrangements between sophisticated parties
• Pre-emption rights are purely contractual rather than statutory - parties have more flexibility
• Share classes with different rights can be created without regulatory approval
• Unfair prejudice remedies (similar to English law) are available to minority shareholders
• Binding precedent creates more predictable outcomes
• Proceedings in English

When DIFC or ADGM structures make sense:

• Complex multi-party investments requiring flexible exit mechanisms
• Private equity and venture capital transactions
• Joint ventures where governance arrangements need to operate smoothly
• Situations where international enforceability matters (DIFC judgments are more readily recognised abroad)

The trade-off is cost. DIFC and ADGM entities have higher incorporation and annual fees, and maintaining them requires ongoing compliance. For straightforward arrangements, an onshore structure with a well-drafted shareholder agreement and arbitration clause may be more practical.

The Relationship Between Shareholder Agreements and Constitutional Documents

This is where many shareholders get caught out.

A shareholder agreement binds the parties who sign it. The MOA binds the company and all shareholders - including future shareholders who acquire shares after the agreement was signed.

In case of conflict, UAE courts generally give precedence to the MOA. This is because the MOA is the registered document that third parties and regulators rely upon. A private agreement between some shareholders cannot override the company's constitutional framework.

Why This Matters

Suppose your shareholder agreement gives you veto rights over certain decisions, but the MOA allows those decisions by simple majority. If the other shareholders proceed without your consent, you may have a breach of contract claim against them personally - but the company's decision may still be valid.

Similarly, if your shareholder agreement restricts share transfers but the MOA does not, a transfer that breaches your agreement might still be registered and effective against the company.

The Solution: Mirror Key Rights in the MOA

Critical provisions should appear in both documents:

• Transfer restrictions and pre-emption procedures
• Reserved matters requiring supermajority or unanimous consent
• Board appointment rights
• Dividend policies
• Drag-along and tag-along mechanisms

The shareholder agreement can then provide additional detail, enforcement mechanisms, and confidential commercial terms that supplement the MOA framework.

Common mistake: Relying solely on the shareholder agreement for veto rights or transfer restrictions without updating the MOA. This creates a gap that sophisticated counterparties can exploit.

Alignment Clause

Include a provision requiring all parties to vote their shares and take all necessary steps to align the MOA with the shareholder agreement. This creates a contractual obligation to amend constitutional documents, giving you a remedy if other shareholders refuse.

Key Clauses: Purpose, Enforceability, and Drafting Tips

1. Share Transfer Restrictions

Purpose: Control who can become a shareholder and under what conditions existing shareholders can exit.

UAE enforceability:

For LLCs, statutory pre-emption rights under Article 80 of the Commercial Companies Law cannot be entirely excluded. Other shareholders have 30 days to exercise pre-emption after being notified of a proposed transfer to a non-shareholder. Shareholder agreements can supplement this with additional restrictions but cannot eliminate the statutory right.

Transfer restrictions must be reflected in the MOA and complied with at the registry level. A transfer that violates only the shareholder agreement (but complies with the MOA and registration requirements) may still be effective against the company, leaving the aggrieved party with only a damages claim.

Drafting tips:

• Align pre-emption procedures with statutory requirements rather than creating parallel processes
• Specify valuation methodology clearly - disputes often arise from vague "fair market value" language
• Include permitted transfer carve-outs (to affiliates, family trusts, holding companies) with conditions
• Define what happens if multiple shareholders want to exercise pre-emption (pro-rata allocation is standard)
• Consider lock-up periods preventing any transfers during initial years

2. Drag-Along and Tag-Along Rights

Purpose: Drag-along allows majority shareholders to compel minorities to sell to a third-party buyer. Tag-along allows minorities to participate in any sale by the majority on the same terms.

UAE enforceability:

These mechanisms are widely used in UAE shareholder agreements and are generally enforceable as contractual arrangements between the parties. Enforceability is stronger when mirrored in the MOA, which ensures the company and future shareholders are also bound.

Even where drag-along provisions are reflected in constitutional documents, enforcement in onshore LLCs may still be affected by statutory transfer procedures and shareholder cooperation. A minority shareholder who refuses to sign transfer documents creates practical difficulties, even if they are in breach of contract.

Disputes commonly arise over valuation. If the drag-along price is below what the minority believes is fair value, they may challenge the mechanism. Clear valuation provisions or minimum price thresholds reduce this risk.

Drafting tips:

• Set the triggering threshold (75% is common for drag-along)
• Specify whether consideration must be cash or can include shares/earn-outs
• Include minimum price floors or valuation mechanisms
• Address interaction with pre-emption rights (drag-along typically overrides pre-emption, but state this explicitly)
• Define notice periods and completion timelines
• Include power of attorney clauses allowing other shareholders to execute transfers on behalf of a defaulting party
• Consider whether drag-along applies to all sales or only sales of 100%

3. Reserved Matters and Veto Rights

Purpose: Require approval beyond standard majority for significant decisions, protecting minorities from being steamrolled.

UAE enforceability:

This is where onshore UAE courts can be unpredictable. Veto rights that effectively allow a minority to control the company or prevent directors from exercising their statutory duties may be viewed as unenforceable.

Courts distinguish between legitimate minority protection and obstruction of corporate governance. A veto over fundamental changes (share capital, constitutional amendments, winding up) is more likely to be upheld than a veto over routine operational matters.

Drafting tips:

• Be selective - too many reserved matters creates deadlock risk and enforceability concerns
• Focus on genuinely significant decisions: changes to share capital, amendments to constitutional documents, related party transactions above thresholds, disposal of material assets, changes to business activities
• Avoid veto rights over matters that are clearly within directors' statutory authority
• Mirror key reserved matters in the MOA where possible
• Include deadlock resolution mechanisms if reserved matters create impasse

Typical reserved matters list:

4. Dividend and Profit Distribution

Purpose: Establish how and when profits are distributed, managing expectations between shareholders with different liquidity needs.

UAE enforceability:

Generally enforceable, but must comply with capital maintenance rules. Dividends can only be paid from distributable profits after statutory reserves are maintained. The Commercial Companies Law requires allocation of 5% of net profits to a statutory reserve until it reaches 50% of share capital.

Drafting tips:

• Specify minimum distribution requirements (percentage of distributable profits)
• Address reinvestment obligations and retained earnings policies
• Consider preferential dividends for certain shareholders (if share classes permit)
• Align with MOA dividend provisions

5. Deadlock Resolution Mechanisms

Purpose: Break impasse when shareholders cannot agree on reserved matters or fundamental issues.

UAE enforceability:

Escalation and mediation provisions are routinely enforceable. Buyout mechanisms (Russian roulette, Texas shootout) are enforceable in principle, but courts and arbitrators are more comfortable with mechanisms that produce objectively fair outcomes.

Russian roulette provisions - where one party names a price and the other must buy or sell at that price - work well when parties have comparable financial resources. They become problematic when one party can manipulate the process by naming a low price, knowing the other cannot afford to buy.

Drafting tips:

• Structure escalation steps: senior management negotiation, then mediation, then buyout or arbitration
• Specify timelines for each step
• For buyout mechanisms, consider whether parties have comparable financial capacity
• Include independent valuation as an alternative to party-driven pricing
• Define what constitutes deadlock precisely - avoid triggering buyout mechanisms for routine disagreements

Comparison of deadlock mechanisms:

6. Exit Provisions

Purpose: Define how shareholders can exit and what happens on sale, IPO, or other liquidity events.

UAE enforceability:

Put and call options are generally enforceable if the trigger conditions and pricing mechanisms are clear. Vague provisions like "fair market value to be agreed" invite disputes.

IPO provisions (requiring cooperation, lock-up commitments, orderly sell-down) are standard and enforceable as contractual commitments between shareholders.

Drafting tips:

• Define triggering events precisely (time-based, performance-based, change of control)
• Specify valuation methodology in detail - formula, independent valuation, or reference to comparable transactions
• Address what happens if parties cannot agree on value (expert determination as fallback)
• Include mechanics for completion (notice periods, payment terms, conditions)
• Consider good leaver/bad leaver distinctions for founder shareholders

7. Good Leaver and Bad Leaver Provisions

Purpose: Differentiate exit treatment based on circumstances, particularly for shareholders who are also employees or founders.

UAE enforceability:

Generally enforceable as contractual arrangements between parties. However, provisions that amount to penalties (rather than genuine pre-estimates of loss) may be reduced by courts. Bad leaver discounts must be commercially justifiable.

Drafting tips:

• Define good leaver events clearly: death, permanent incapacity, retirement, termination without cause, constructive dismissal
• Define bad leaver events narrowly: termination for cause, material breach of agreement, competing with company, voluntary resignation within lock-up period
• Specify valuation for each category - good leavers typically receive fair value; bad leavers receive discounted value or cost
• Include catch-all: any event not listed as bad leaver is treated as good leaver
• Consider vesting schedules for founder shares

8. Succession and Continuity

Purpose: Address what happens when shares pass to heirs or successors following death or incapacity.

UAE enforceability:

UAE company law and market practice increasingly allow shareholders to address succession and continuity issues contractually, including arrangements following the death or incapacity of a shareholder. However, such provisions must comply with mandatory inheritance rules and public order requirements.

For Muslim shareholders, Sharia inheritance principles may apply unless the shareholder has registered a will with a relevant authority (such as the DIFC Wills Service for non-Muslim expatriates). Shareholder agreements should be drafted with awareness of these constraints.

Drafting tips:

• Include call options allowing surviving shareholders to acquire deceased shareholder's shares
• Specify valuation mechanisms that apply on death
• Address timing - heirs may need liquidity quickly
• Consider interaction with personal estate planning
• For family businesses, coordinate with succession planning more broadly

9. Non-Compete and Confidentiality

Purpose: Prevent shareholders from competing with the company or misusing confidential information.

UAE enforceability:

Non-compete provisions face significant limitations under UAE law. The UAE Civil Code recognises non-compete obligations but requires they be limited in time, place, and scope. Courts may reduce or refuse to enforce provisions they consider excessive.

Injunctions are difficult to obtain for non-compete breaches. Damages are the more realistic remedy, which requires proving actual loss.

Confidentiality provisions are more readily enforceable, particularly where information is clearly identified and obligations are reasonable.

Drafting tips:

• Limit non-compete duration to 1-2 years maximum
• Define geographic scope narrowly (UAE, or specific emirates where the company operates)
• Restrict only to directly competing activities, not all business
• Include liquidated damages clause with reasonable pre-estimate of loss
• For confidentiality, define what constitutes confidential information and include standard carve-outs (public information, independently developed, required by law)

Governing Law and Dispute Resolution

The choice of governing law and dispute forum significantly affects enforcement outcomes. This decision should be made deliberately, not defaulted.

Governing Law Options

UAE federal law: Appropriate for onshore companies. Provides certainty that the agreement will be interpreted consistently with the Commercial Companies Law.

DIFC law: Can be chosen even for agreements relating to non-DIFC companies, though the practical benefit is limited if disputes will be heard in UAE courts applying UAE law anyway. Most useful when combined with DIFC court jurisdiction or DIFC-seated arbitration.

ADGM law: Similar considerations to DIFC law.

Foreign law (English law, etc.): Sometimes chosen for international joint ventures. However, UAE courts may still apply mandatory provisions of UAE law to UAE-incorporated companies regardless of the governing law clause.

Dispute Resolution Options

UAE courts: Direct jurisdiction over onshore companies and assets. Proceedings in Arabic. Limited precedent system means outcomes can be less predictable. Specific performance is available but courts sometimes prefer damages. Timeline typically 2-3 years through all levels.

Arbitration (DIAC, ICC, or ad hoc): Parties choose language, arbitrators, and procedural rules. Confidential proceedings. Awards enforceable in 160+ countries under the New York Convention. DIAC with DIFC seat is increasingly popular - combines arbitration flexibility with DIFC Court supervision and enforcement mechanisms.

DIFC Courts: Common law approach with English-language proceedings. Can accept jurisdiction over non-DIFC parties who agree to it. More predictable outcomes for common law concepts. Enforcement linkages to onshore UAE through established protocols.

Practical recommendation: For substantial shareholder arrangements, arbitration seated in the DIFC offers the best combination of flexibility, expertise, confidentiality, and enforceability. Include emergency arbitrator provisions for urgent interim relief.

Enforcement Reality

A shareholder agreement is only valuable if it can be enforced. Understanding what enforcement actually looks like helps set realistic expectations.

Specific Performance

UAE courts and arbitral tribunals can order specific performance - compelling a party to do what they contractually agreed to do. This is relevant for:

• Forcing share transfers under drag-along or buyout provisions
• Requiring compliance with pre-emption procedures
• Compelling participation in governance processes

However, specific performance is discretionary. Courts may refuse it where damages would be an adequate remedy, where enforcement would require ongoing supervision, or where the order would be disproportionate.

Practical tip: Include power of attorney clauses authorising the company or other shareholders to execute transfer documents on behalf of a defaulting party. This provides a self-help mechanism when a party refuses to sign.

Interim Relief

Injunctions and freezing orders can prevent irreparable harm before a final decision. However:

• UAE onshore courts are often reluctant to grant interim relief without strong evidence
• Applicants typically must provide security for the respondent's potential losses
• Emergency arbitrator procedures under DIAC rules can provide faster relief for arbitration-bound disputes

Damages

Monetary compensation for breach requires proving actual loss caused by the breach. UAE law generally does not award punitive damages.

Liquidated damages clauses - specifying predetermined compensation amounts - are enforceable if the amount is a reasonable pre-estimate of loss. Amounts that are clearly punitive may be reduced by courts.

Common Mistakes to Avoid

Using foreign templates without UAE adaptation. Shareholder agreements drafted for English or US companies often include provisions that do not work the same way under UAE law. Statutory pre-emption rights, restrictions on share pledges, and the relationship between shareholder agreements and constitutional documents all differ.

Not updating the MOA after signing the shareholder agreement. The shareholder agreement may give you rights, but if they are not reflected in the MOA, enforcement becomes complicated. Align both documents from the outset.

Vague valuation formulas. "Fair market value" without further definition guarantees a dispute. Specify methodology: earnings multiple, net asset value, independent valuation, or specific formula. Define the valuation date. Address whether minority discounts apply.

Ignoring shareholder insolvency or death. What happens if a shareholder becomes bankrupt and their shares vest in a trustee? What happens on death - do shares pass to heirs automatically, or do other shareholders have rights? Address these scenarios explicitly.

Assuming arbitration clauses are self-executing. An arbitration clause does not prevent a party from going to court first. Include clear wording that any court proceedings must be stayed pending arbitration, and consider anti-suit provisions.

Over-engineering reserved matters. Too many veto rights creates operational paralysis and increases enforceability risk. Focus on genuinely material decisions.

Failing to review periodically. Business circumstances change. Shareholder agreements should be reviewed regularly - ideally annually - and updated as needed.

Comparison: Onshore UAE vs DIFC/ADGM for Shareholder Agreements

How Kayrouz & Associates Can Help

Properly drafted shareholder agreements reduce disputes and protect long-term value. Our corporate and commercial team advises shareholders, investors, and businesses across the UAE on structuring, reviewing, and enforcing shareholder agreements.

Drafting and negotiation - We prepare shareholder agreements tailored to your commercial objectives, ensuring compliance with UAE law while protecting your interests. We align shareholder agreements with constitutional documents to maximise enforceability.

Review and amendment - We review existing agreements to identify gaps, conflicts with constitutional documents, or provisions requiring updates following legal or commercial changes.

Dispute resolution - When shareholder relationships break down, we represent clients in arbitration and litigation, enforcing agreement provisions or defending against unfounded claims.

Transaction support - For M&A, joint ventures, and investment rounds, we advise on shareholder arrangements that facilitate the deal while protecting your position.

Contact us to discuss your shareholder agreement requirements.

Disclaimer: This article provides general information about shareholder agreements under UAE law and does not constitute legal advice. Laws and regulations change, and the application of legal principles depends on specific circumstances. For advice on your particular situation, please consult qualified legal counsel.