Common Shareholders Agreement Mistakes to Avoid in Dubai
Most of these are not points of law. They are the marks of a document written for somewhere else.
A clause-by-clause walk through the defects we find most often when reviewing shareholders agreements for Dubai companies, each set out with the error first and the correction after it. It covers foreign precedents adopted with only the names changed, voting thresholds that conflict with the Commercial Companies Law, arbitration clauses still naming DIFC-LCIA or ADCCAC, silence on death, divorce and insolvency, the confusion of a founder's shares with the founder's job, and buy-out obligations with no money behind them.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
A shareholders agreement is normally read closely twice: once when it is drafted, and once when somebody wants out. The years in between are a drawer. That gap is why the same defects survive in so many of the documents we are handed — nobody looks at the machinery until the day it has to work, and by then the terms are fixed.
The defects themselves are seldom points of law. They are the marks of an agreement written somewhere else, or written for a different corporate form, and adopted here without being tested against how the company is actually licensed, how its shares actually transfer, and where a dispute would actually be heard. Each clause below is set out with the error first and the correction after it, in the order we open them when reviewing a shareholders agreement in Dubai.
Using a foreign precedent without adapting it
English and US shareholders agreements circulate widely and are often adopted with the names changed. They arrive carrying statutory references, remedies and assumptions that have no counterpart here: unfair prejudice petitions, derivative claims in a specific form, section-numbered warranties, and definitions of "insolvency" drawn from another country's insolvency legislation.
The clauses do not become illegal. They become inert — machinery that points at a statute the local forum will not apply. What to do instead: keep the commercial bargain from the precedent and rewrite the machinery against the law that will govern the company, which for a mainland company is the Commercial Companies Law, Federal Decree-Law No. 32 of 2021, and for a DIFC or ADGM company is that centre's own companies legislation.
Setting thresholds the statute does not allow
Voting percentages copied from a precedent are a frequent source of surprise. Certain decisions of a mainland company are subject to majorities fixed by the Commercial Companies Law and by the company's constitutional documents. A shareholders agreement that sets a lower threshold does not lower the statutory one; it simply creates a contractual promise that cannot be performed as drafted.
What to do instead: check each threshold in the agreement against both the statute and the filed constitutional documents. Where the parties want a higher bar than the default, that higher bar has to be written into the constitution itself — an undertaking among shareholders about how they will vote does not change the majority the company is required to obtain before it acts.
An arbitration clause naming a body that no longer takes the case
This is the most avoidable failure of all, and it is still common in documents drafted in the last few years. The DIFC-LCIA Arbitration Centre was abolished by Dubai Decree No. 34 of 2021 and its caseload moved to the Dubai International Arbitration Centre. ADCCAC was restructured and now operates as arbitrateAD. An agreement pointing at an institution in its former form starts the dispute with a fight about the clause itself, before anyone reaches the merits.
A second, related error is confusing the seat with the hearing venue. The seat determines which court supervises the arbitration and hears any challenge to the award; the DIFC remains available as a seat whichever institution administers the case. Arbitration in the UAE is governed by Federal Law No. 6 of 2018, as amended in 2023.
What to do instead: name the institution as it exists now, state the seat, state the language, state the number of arbitrators, and check the clause against the institution's current recommended wording rather than against the last deal you did.
Leaving death, divorce and insolvency out of the document
Most agreements deal thoroughly with a shareholder who wants to sell and say nothing about a shareholder who dies, becomes incapable, divorces or goes insolvent. Those events are not rare over the life of a company, and they hand the surviving shareholders a co-owner they did not choose — an estate, a trustee, a former spouse.
What to do instead: give the company or the continuing shareholders a right to acquire the affected stake, with a price mechanism and a timetable, and make sure the mechanism is one that an estate representative or an insolvency officeholder can actually perform. Consider how the shares are held in the first place, since a holding structure can make succession far simpler than a personal shareholding.
Confusing the shareholding with the job
Founders are usually both shareholders and employees, and the two roles get treated as one. They are separate. Termination of employment, under Federal Decree-Law No. 33 of 2021 for mainland and most free zone staff, or under the DIFC or ADGM employment legislation in those centres, does not by itself affect anyone's shares. Nor does a dispute about shares suspend an employment entitlement.
What to do instead: say expressly, in the shareholders agreement, what the end of the employment does and does not do to the equity: whether anything is triggered at all, who may acquire the stake if it is, and on what basis. Then read the employment contract against it, so that notice, restrictive covenants and confidentiality say the same thing in both documents rather than two versions of it. The absence of that link causes more acrimony in founder splits than any other omission.
Buy-out rights with no money behind them
An exit clause that obliges a shareholder to buy is only as good as that shareholder's ability to pay. Agreements routinely create a purchase obligation without saying whether the price can be paid in instalments, whether security is given, what happens if the buyer cannot fund it, and whether the company itself is permitted to acquire the shares under the applicable companies law.
What to do instead: pair every purchase obligation with a funding route and a default consequence. Where instalments are contemplated, secure them.
Restrictive covenants drafted as widely as possible
Non-compete and non-solicitation clauses that cover every activity, everywhere, for as long as the drafter thought they could get away with are a poor investment. A restraint is assessed against what is reasonable to protect the legitimate interest behind it, and an overbroad clause invites the whole restraint to be read down or disregarded.
What to do instead: define the protected interest first — customers, a territory, a product line — and draft to that. A narrow covenant that holds is worth more than a wide one that does not.
Formalities and notices treated as boilerplate
Two mechanical points end more arguments than they should. First, execution: the agreement should be signed by people who hold documented authority to sign, and where a corporate shareholder is signing through an attorney, the power of attorney should be in the file. Onshore share transfers carry their own formality and language requirements, and an agreement in English alone does not complete a transfer that has to be recorded in Arabic before a notary.
Second, notices. Deadlock and transfer machinery runs on notices, so the notice clause has to specify addresses that will still exist, a method that produces proof of delivery, and when delivery is deemed to occur. Where shareholders sit in different countries, this is the clause that decides whether a right was validly exercised.
Where a shareholder arrangement sits alongside another contract — a joint venture agreement in Dubai, a management contract, a lease of the premises the business operates from — the dispute clause in each of them is worth reading side by side with the one in the shareholders agreement before anything is signed. Where they disagree, the first argument is about which document governs the argument, which is an expensive way to begin. Reviewing the group of documents together, as our contract drafting and review team does, catches most of this before signature.
Related Services: Explore our shareholders agreement services in Dubai and our agreement 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
