How Proper Shareholders Agreement Structuring Saves Millions
A shareholders agreement pays for itself only where it already answers who is obliged to buy and at what price, by a mechanism that does not need the co-operation of the person you are in dispute with.
A right that lives only in the shareholders agreement gives you a damages claim against the holder who broke it; it will not necessarily stop the transfer being recorded. From that split between private contract and filed constitution, the article works through price mechanisms, deadlock routes one side can operate alone, transfer machinery, minority protections and the forum clause.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
A shareholders agreement rarely earns its fee on the day it is signed. It earns it later, at three moments: when one holder wants out, when two equal holders stop agreeing, and when a buyer wants the whole company and one holder refuses to sell. What the money turns on at those moments is not how elegantly the agreement is written but whether it answers, in advance, two questions — who is obliged to buy, and at what price. Agreements that answer both settle in weeks. Agreements that leave price to be argued about later produce a valuation fight, and a valuation fight in a company that is still trading is expensive in a way that has nothing to do with legal fees: management stops managing, banks get nervous, and the asset being fought over loses value while the fight runs.
This is a practical note on the provisions that carry the money in a UAE shareholders agreement, and on the difference between what a private contract between holders can achieve and what has to sit in the company's constitutional documents to work at all. Our shareholders agreement drafting work in Dubai deals with all three of the moments above.
The agreement and the constitution are two different instruments
A shareholders agreement binds the people who sign it. The company's constitutional documents — the memorandum and articles of association filed with the licensing authority for a mainland company, the articles filed with the Registrar in DIFC or ADGM — bind the company and are what a registrar, a bank or an incoming buyer will read.
The practical consequence is blunt. A pre-emption right or a transfer restriction that exists only in the shareholders agreement gives you a claim in damages against the shareholder who broke it. It does not necessarily stop the transfer being recorded. If a restriction is meant to be effective against the world rather than against one signatory, it belongs in the constitutional documents as well, and the two documents have to say the same thing.
For mainland companies the Commercial Companies Law, Federal Decree-Law No. 32 of 2021, sets the outer limits: some matters are fixed by the statute and cannot be contracted around, and the form of the company determines which. DIFC and ADGM are common law jurisdictions with their own companies legislation and a wider margin for contractual arrangement, which is one reason holding structures are often placed there. The wider margin does not remove the discipline — whatever must bind the company still needs to appear in the articles. A review of the agreement against the filed constitution before signature is the cheapest step in the whole exercise.
Valuation: the clause that saves the most
Most shareholders agreements that end badly contain a price mechanism reading, in substance, "at fair market value". That is not a mechanism. It is an agreement to have an argument.
A price clause that works specifies, at minimum: who the valuer is or how one is appointed if the parties cannot agree; whether the valuer acts as expert or as arbitrator, which determines how far the result can be challenged; the basis of valuation, including whether a minority holding is discounted for lack of control; the accounts the valuer works from; and who pays. A discount for a minority stake can move the price substantially, so leaving it unstated leaves the largest single number in the transaction undefined.
Where the parties want certainty over accuracy, a formula tied to audited figures does the job. Where they want accuracy, a named appointment process does. What does not work is leaving both open.
Deadlock: decide now who buys whom
Fifty-fifty companies deadlock. It is worth accepting that at the outset and choosing a mechanism rather than hoping the relationship holds.
- Escalation. A defined step in which named individuals on each side, senior to the people arguing, are required to meet before anything else is triggered. It resolves more disputes than lawyers like to admit.
- Casting vote or independent chair. Simple, and acceptable where one side is willing to accept the other's tiebreak on operational matters while keeping fundamental matters at unanimity.
- Buy-sell. One side names a price and the other chooses whether to buy or sell at it. Fast and self-policing on price, but it favours the holder with cash, which makes it the wrong choice where the parties are unequal in liquidity.
- Sale of the whole company. Honest, and sometimes the only answer, but it destroys the enterprise the parties built. Put it last in the sequence, not first.
Whichever is chosen, the clause has to be capable of being performed by one party alone. A deadlock provision that requires the co-operation of the person who is deadlocking you is decoration.
Transfer machinery, tag and drag
Pre-emption, tag-along and drag-along rights are standard, and they are also where drafting errors concentrate, because they run on time periods and notices. Every offer notice needs a stated period for acceptance, a stated consequence if no answer comes, and a rule on what happens to shares nobody takes up. Drag-along thresholds should be tested against the actual cap table rather than a percentage borrowed from a precedent: a threshold that no realistic coalition can reach is a right that will never be exercised.
Where a founder's continued involvement is part of the bargain, the transfer machinery has to reach their departure as well. A stake that can only move by agreement will not move at all once the relationship has broken down, so the trigger, the buyer and the basis of price all need to be settled while everyone is still on good terms. Related arrangements sometimes carry equivalent terms; a group operating under a franchise agreement in the UAE, for instance, may have change-of-control restrictions in the franchise documents that override what the shareholders have agreed among themselves, and the two need to be read together.
Reserved matters, and what a minority holder actually needs
A minority holder is protected by two things: a veto over decisions that would change the nature of the investment, and enough information to know when one is being taken. Reserved-matter lists that stretch to fifty items paralyse the business and get ignored; short lists covering share issues, borrowing above a set level, related-party transactions, disposal of the main asset and changes to the constitutional documents do the work.
Information rights matter as much and cost nothing to grant: management accounts at a stated frequency, the annual audited accounts, notice of board meetings and access to the books. Most minority disputes begin as an information problem and become a valuation problem only afterwards.
Choosing the forum before you need it
The forum clause should be chosen against where enforcement would actually happen — where the shares are registered, where the assets sit, where the counterparty's money is. Arbitration suits shareholder disputes because the proceedings are private and the arbitrator can be chosen for commercial experience; court suits parties who may need urgent injunctive relief and want an appeal route. DIFC and ADGM each have their own courts, and parties commonly select them for holding companies established there.
Two practical points. First, a forum chosen for the shareholders agreement alone is only half a choice: the constitutional documents and any loan or service contract signed alongside it will be read together once the argument starts, and where they nominate different forums the parties spend the opening phase of the dispute deciding where they are. Second, the clause should name a body that is actually administering cases at the time the dispute arises, with the seat and the language stated.
Before signature
- Read the price clause as if you were the seller, then as if you were the buyer. If the two readings differ, it is not finished.
- Mark each right in the agreement as constitutional or contractual, and confirm you can live with the answer in every case.
- Confirm each mechanism can be operated unilaterally.
- Check the forum clause against the other documents in the deal.
- Deal with death, incapacity, insolvency and departure of a working shareholder explicitly. These events arrive without warning and the agreement is the only thing in the room when they do.
Related Services: Explore our shareholders agreement services in Dubai and our wider contract drafting practice for practical legal support in this area.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice tailored to their specific circumstances before making any decisions or taking any action based on the content of this article.
Nour Attorneys Team
