A Shareholders Agreement is a set of rules agreed upon by two or more shareholders of the same company. They can write this agreement together or set it verbally or even by phone (as per Federal Law No. 5 of 1985).

 It can take many shapes or forms. It also can be set just to clarify the day-to-day obligations. Or in some cases, it can be used to give certain privileges to one party over another. Or to preserve the rights of certain individuals. So what are they exactly? And how does a company come to such an agreement?

Shareholders Agreements, what are they?

Shareholders Agreements are legal documents that dictate the rights and obligations of two or more shareholders in a certain company. It also might mention additional terms and conditions about the management of the company.

It’s not necessary for every company to have such an agreement as having a Memorandum of Association is enough from a legal point of view. However, it’s a standard way of good Commercial practice to have written Shareholders Agreements to fall back on whenever a dispute

The difference between Memorandum and Shareholders Agreement

 As the Memorandum of Association is a contract that is signed by all founder members to affirm their consent to the company’s incorporation in accordance with UAE regulations.

It’s a root document of the company, containing all the basic details about the company and the information about the objects and powers of the company.

It’s Obligatory to be register the Memorandum with the registrar of company unlike the Shareholders Agreements which is just a good business practice to have. And they just organize the type of relationship between different shareholders.

You just need to make sure your Shareholders Agreements revolve around your Memorandum and completes it. As whenever there is a contradiction between your agreement and the company’s Memorandum, the Memorandum shall prevail.

The main reason to have a Shareholder’s Agreement

Having a share or stock in a certain company means having partial ownership of this company. The amount of shares you have in relation to the total amount of shares determines the percentage of your ownership of the company.

This gap between owners obligates the presence of an agreement that can help arbitrate such disputes. Preemption law in the UAE helps a little by giving priority to the partner to buy their partner’s share of the business within 30 days in case they wish to sell.

However, Shareholders Agreement can help even further preserve the partners’ rights. Either by protecting minority holders in the company from being driven out of the decision-making process. Otherwise, it could help the majority shareholder to take charge of the creative process regarding management or share sale process.

Why is it necessary to preserve the rights of minority shareholders?

In UAE, it’s by law that all -except for certain types of businesses- locally formed limited liability companies must be locally owned with at least 51% of the company’s issued shares by a UAE national or a company entirely owned by one or more UAE nationals (exceptions made for ownership by nationals of the Gulf Cooperation Council (GCC) states).

Making the shares available for foreign investors limited by 49%. With a huge international business market like Dubai or UAE in general, it seems necessary to set some ground rules to help protect minority shareholders.

The legislators in UAE has issued (Federal Law No. 2 of 2015) to further protect minority shareholders (you can earn all about UAE commercial law here ). in which it assures the right for minority shareholders to review the annual audited accounts of the company and to inspect the company’s records”.

Also, they stated in Federal Law Decree No.26 of 2020 (the Amended Companies Law) “lowering the share ownership threshold which enables shareholders to request a general meeting to be held to 10% and permitting shareholders owning at least 5% of the shares in a company to add items to the agenda of an Annual General Meeting”.

However, we can even insure more protection for minority shareholders with the virtue of a ‘tag along’ provision. These provisions can state the right assures a minority shareholder to participate in a sale by the majority shareholder at the same time and the same price being attained by the majority shareholder.

Why is it necessary to preserve the rights of majority shareholders?

In some businesses, it’s essential to keep creative thinking, planning, and the entire decision-making process in the hand of the majority capable of such responsibilities.  

A Shareholders’ Agreement can be reached to insure such a thing. In addition to giving them such duties, they can be further assisted -if needed- by a “drag along” provision.

Which is a right entitling the majority shareholder to force the minority shareholders to participate in the sale of all the company’s shares to a third party on the terms negotiated by the majority.

What can you include in Shareholder’s Agreement

in addition to “tag along” or “drag along’ provisions, many terms can be agreed upon in advance by using a Shareholders Agreement.

After assigning the names of the parties included in the agreement and the date to commence this agreement, you can add all sorts of deals and provisions. You can specify the number of shares each party has ownership of, and the company’s name and main business.

You can use it to choose in advance the board of directors responsible for managing the entire operation of the business.

It can assure the Right of first refusal specified earlier in the Preemption law or add certain details regarding the sale process. You can add a deadlock, which is basically a “buy-out” offer that a party can hold the others to in case of a lack of consensus regarding the running of the company.

You could add any additional terms regarding company management such as confidentiality, financial information, meeting, and termination of the agreement.

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