How Proper Joint Venture Agreement Structuring Saves Millions
A joint venture agreement earns its cost in the year it is tested, and the provisions it is tested on are the ones drafted quickly while the partners were still getting on.
A large number of UAE joint venture agreements were written to solve an ownership problem that no longer exists, and many still name an arbitration institution that has been abolished. The choice of vehicle, the split between the notarised constitution and the private shareholders' agreement, and the reserved matters, deadlock, contribution and exit clauses are each taken in turn.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
A large number of joint venture agreements in circulation in the UAE were written to solve a problem that no longer exists. Until Federal Decree-Law No. 26 of 2020 took effect on 1 June 2021, a mainland company generally needed 51% UAE-national ownership, and foreign investors managed that requirement with a local partner on the register plus a stack of side documents — nominee declarations, undated share transfers, powers of attorney, profit-waiver letters — designed to make the registered position mean something other than what it said. Most mainland activities can now be carried on through a wholly foreign-owned company incorporated under Federal Decree-Law No. 32 of 2021, subject to a list of activities of strategic impact. The side documents remain in the file, and they are the first thing to look at when a legacy joint venture starts to go wrong.
(The local service agent appointed by a foreign company's branch is a separate arrangement and remains lawful. It is not a joint venture and should not be documented as one.)
Related: Our joint venture agreement dubai practice covers vehicle selection, drafting and restructuring of existing arrangements.
Decide what the venture is before drafting how it works
Three forms are in common use, and they produce different documents.
- A contractual joint venture with no separate entity. The parties keep their own balance sheets and share a defined project — a construction consortium, a bid, a distribution arrangement. Cheap and quick, but there is no company to hold assets, obtain a licence, employ staff or sign a lease, and each party is exposed directly on the obligations it takes on.
- An onshore company, usually a limited liability company under the Commercial Companies Law. It can hold a mainland trade licence and trade freely in the local market. Its constitution is notarised and filed, and changes to it require a return to the notary and the licensing authority.
- A company in the Dubai International Financial Centre or Abu Dhabi Global Market. Both are common-law jurisdictions with their own courts and companies registries. This suits ventures whose purpose is to hold and finance an asset, or whose investors want familiar shareholder remedies and documents in English. It does not by itself give the venture the right to trade in the mainland market.
Choosing the wrong container is expensive to undo. Migrating a venture from one of these forms to another means re-licensing, re-papering employment, novating contracts and, where property is involved, re-registering title.
Related: Where the collaboration is a brand and system licence rather than a shared entity, see our franchise agreement uae services.
The constitution and the shareholders' agreement are not interchangeable
For an onshore LLC there are two documents, and partners regularly confuse their functions. The memorandum of association is notarised, filed and visible to the authorities; it is what the licensing authority and, in practice, a court will work from. The shareholders' or joint venture agreement sits alongside it and records the commercial bargain in detail.
The practical consequence: an entitlement that appears only in the private agreement may bind the people who signed it as a matter of contract, but that is a different thing from binding the company or being recognised by a registrar asked to record a transfer. Anything that has to work against the company — the composition of the management, restrictions on transfer, the quorum for a decision — belongs in the constitutional documents as well as the private agreement, drafted so that the two say the same thing.
Related: For the underlying contract work, see our shareholders agreement dubai services.
The clauses that actually get litigated
Joint venture disputes rarely turn on the recitals. They turn on a short list of provisions that were drafted quickly because the parties were still getting on well.
Reserved matters
A list of decisions that cannot be taken without the agreement of both sides: changing the business, borrowing, issuing shares, related-party contracts, capital expenditure above an agreed figure, appointing auditors, starting litigation. A short list gives the majority partner effective control of everything omitted from it. A very long list guarantees deadlock. The list should be written by someone who has read the business plan.
Deadlock
Every 50/50 venture needs a way out of a stalemate, and the mechanism has to be one the parties would actually use. Escalation to the chief executives, then a fixed cooling-off period, then a defined outcome — a buy-out at a valuation, or an orderly wind-down. Shoot-out clauses in which either party may offer to buy or be bought favour whichever side has readier access to cash, which in an unequal partnership is not a neutral mechanism at all.
Contributions that are not cash
Where one partner contributes technology, a brand, a customer list or seconded staff rather than money, the agreement has to say three things: what is being contributed, whether it is transferred or merely licensed for the life of the venture, and what happens to it on exit. A licence granted informally and never documented is the most common way a venture ends up owning nothing it can sell. Contributions in kind to a company also have to be valued and recorded properly rather than asserted in a schedule.
Transfers and exit
In an onshore LLC the other partners generally have a right of first refusal on a transfer of shares under the Commercial Companies Law, so drafting has to work with that rather than around it. Beyond it, the usual machinery applies: pre-emption, tag-along rights so a minority is not stranded with a new majority owner it did not choose, drag-along rights so a buyer can be offered the whole company, and put or call options priced by a method agreed in advance. "Fair market value as agreed between the parties" is not a valuation mechanism; it is a second dispute.
Where the dispute will be heard, and a clause worth checking today
Arbitration seated in the UAE is governed by Federal Law No. 6 of 2018, as amended in 2023. The institutional position has changed materially in recent years, and old agreements have not kept up.
Dubai Decree No. 34 of 2021 abolished the DIFC-LCIA Arbitration Centre and transferred its caseload to the Dubai International Arbitration Centre. Agreements signed before that decree — and there are many joint venture agreements among them — still name an institution that no longer exists. The DIFC remains available as a seat, which is a separate choice from the administering institution and is often the point the parties actually cared about. In Abu Dhabi, the ADCCAC arbitration centre was restructured as arbitrateAD from 2024.
If your joint venture agreement has been sitting in a drawer since before these changes, the dispute resolution clause is worth reading now rather than on the day you need it. Fixing it while relations are good takes an afternoon. Arguing about what a defunct institution's clause means, after a deadlock, takes considerably longer.
The alternative is the local courts of the emirate, which will apply UAE law and conduct proceedings in Arabic, or the DIFC or ADGM courts where the venture is established there. Each is a defensible choice. What is not defensible is a clause that names arbitration in one place, courts in another, and a governing law that belongs to neither.
Related: Explore our Joint Venture Agreement Solutions in | Nour Attorneys and Joint Venture Agreement in Abu Dhabi services.
A short checklist before signing
- Confirm the activity is one a wholly foreign-owned mainland company may carry on, or identify the reason it is not.
- Retire legacy nominee and side documents rather than leaving them in the file to be discovered later.
- Match the reserved matters list to the business plan, not to a precedent.
- Write a deadlock mechanism both partners could afford to use.
- Document every non-cash contribution, and say what happens to it on exit.
- Agree the valuation method now, in numbers and formulae, not adjectives.
- Check that the arbitration clause names an institution that still exists.
A joint venture agreement earns its cost in the year it is tested, not the year it is signed. For advice on structuring or repairing one, our Joint Venture Agreement in team works on both new ventures and inherited paperwork.
Related Services: Explore our Joint Venture Agreement Strategy and Joint Venture Agreement Compliance services 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
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