How Proper Partnership Agreement Structuring Saves Millions
A partnership agreement is read for the first time on the worst day, which is why the vehicle, the funding rules, the deadlock route and the exit price have to be fixed while the partners still trust one another.
Costly UAE partnership disputes trace back to four omissions: the wrong vehicle, no rule for what happens when a partner cannot fund, no deadlock route, and no method for pricing an exit. The article works through each, plus separating capital from profit share and drawings, re-papering legacy nominee arrangements, and the arbitration clause older agreements still get wrong.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
Partnership disputes are expensive for a specific reason: by the time they surface, the partners have already built a business together, and the money in dispute is the business itself. The agreement is not read at all while things go well. It is read on the worst day, by people who no longer trust each other, looking for the answer to a question the drafter either addressed or did not.
Almost every costly partnership dispute in the UAE traces back to one of four omissions — the wrong vehicle, no rule for funding failure, no rule for deadlock, or no method for valuing an exit. None of them is difficult to fix in advance.
Related: Our partnership agreement service covers structure, drafting and restructuring of existing arrangements.
Decide what you are actually forming
"Partnership" is a commercial word covering several different legal vehicles in the UAE, and the choice determines who is personally exposed.
- Mainland company forms. Federal Decree-Law No. 32 of 2021 sets out the available forms. In a joint liability company the partners are liable for the company's obligations in their personal wealth. In a simple limited partnership, general partners carry that liability while limited partners are exposed to the extent of their contribution and must stay out of management. Most commercial ventures described as partnerships are in fact limited liability companies with a shareholders' agreement sitting behind the constitutional documents.
- Professional practices. Professional activities are commonly carried on through a civil company licensed for that purpose, which is a different registration route from a commercial licence.
- DIFC and ADGM vehicles. Both centres offer registered general partnerships, limited partnerships and limited liability partnerships under their own legislation, which will be familiar to anyone who has used the equivalent common law structures elsewhere.
- Purely contractual arrangements. Two businesses can agree to share the profits of a venture without forming an entity at all. One party holds the licence and the contract allocates the economics. This is workable, but the unlicensed party's rights are only as good as the contract, and terms that conflict with the licensing rules for the activity are worth checking before they are relied on.
Choosing between these is a question about liability, licensing and who needs to appear on the register — not a formality to be settled after the commercial terms are agreed.
Related: Where the venture is between two corporate groups rather than individuals, our joint venture agreement service is usually the better starting point.
Money: contributions, drawings and what happens when someone cannot fund
Two partners agree to put in equal capital. A year later, one of them cannot. What happens next is the single most common source of partnership litigation, and most agreements are silent on it.
A workable agreement separates three things that are routinely confused. Capital contributions are what each partner puts in. Profit share is what each partner is entitled to. Drawings are what each partner actually takes out, and when. Partners fall out because they assumed these were the same number.
The agreement should then state what happens if further funding is needed: whether a partner can be required to contribute, what happens to their share if they do not, whether shortfalls can be funded by the other partner as a loan or as equity, and on what terms. Dilution is a harsh remedy and needs to be written down before it is needed; a partner asked to accept it for the first time in the middle of a cash crisis will simply refuse.
Where partners also work in the business, salary and benefits should be documented separately from profit share, so that removing someone from a role does not silently remove their economic interest — or fail to.
Related: See our partnership agreement drafting service for capital, profit and drawings mechanics.
Control: reserved matters and deadlock
A fifty-fifty partnership without a deadlock mechanism is a business that can be stopped by either partner at any time. The remedies available then — a court-supervised dissolution, or a claim of oppression — are slow, public and value-destroying compared with any of the mechanisms that could have been written in.
Two provisions do most of the work. The first is a list of reserved matters requiring unanimous or supermajority approval: borrowing, giving security, admitting a new partner, changing the business, related party contracts, large capital commitments. Everything not on the list is decided by the agreed management arrangement, which prevents day-to-day operations being held hostage to a broader disagreement.
The second is an escalation and deadlock route: referral to the partners personally, then to a mediator, and if that fails a defined exit mechanism such as a buy-out at a determined price or a sealed-bid arrangement between the partners. Whichever is chosen, it needs a price mechanism that works without agreement between the parties, since by definition they will not be agreeing.
Legacy structures built around the old ownership rule
A great many UAE partnerships were built when mainland companies required majority UAE-national ownership. The commercial partners documented the real deal in side letters, nominee arrangements, undated share transfer forms and powers of attorney, because the registered position did not reflect the economic one.
Federal Decree-Law No. 26 of 2020 removed that requirement with effect from 1 June 2021, and 100% foreign ownership is now permitted for most mainland activities, subject to a strategic-impact list. Many of these structures can now be regularised so that the register shows the true owners. Note that a local service agent for the branch of a foreign company is a different arrangement, and remains lawful and in use.
Regularising is best done while everybody is content. Side-letter structures depend on the continued cooperation of the registered holder; they become extremely difficult when that person dies, divorces, is declared bankrupt, or simply decides the paperwork favours them.
Related: Our partnership agreement team restructures legacy nominee arrangements and re-papers the ownership position.
Getting out: transfer, valuation and death
The exit provisions decide how much a partnership is worth to the person leaving it, and they should be drafted from the position of not knowing which partner that will be.
The core items are a restriction on transferring an interest to an outsider, pre-emption rights giving the other partners the first opportunity to buy, tag-along protection so a minority is not left with a new and unwanted majority partner, and drag-along rights so one holdout cannot block a sale of the whole business. Each of these needs to be reflected in the constitutional documents as well as in the partnership agreement, because a transfer of shares in a mainland company takes effect through registration, not through a private contract.
Valuation is where most exit clauses fail. "Fair value as agreed between the partners" is not a mechanism. A usable clause names the valuer or the method of appointing one, states the basis of valuation, says whether a minority discount applies, sets out how the price is paid, and provides for what happens if the buying partner cannot pay.
Death and long-term incapacity deserve their own clause. Absent clear provision and a valid will, an interest passes under the succession rules that apply to that partner, and the surviving partners can find themselves in business with heirs who have no involvement in the venture and no wish to be there. A buy-out right triggered on death, funded by insurance where the numbers justify it, avoids that outcome for everyone.
Related: Our partnership agreement lawyers in the UAE draft exit, valuation and succession provisions that work without further agreement between the partners.
Governing law and forum
The agreement should name the governing law and one forum, and that choice should be consistent with the vehicle. A DIFC or ADGM partnership sits naturally with those centres' courts. A mainland company's constitutional documents are governed by UAE law and matters affecting the register will be dealt with onshore, whatever a side agreement says. Where arbitration is chosen, name a functioning institution and check that older agreements do not refer to the DIFC-LCIA Arbitration Centre, which was abolished by Dubai Decree No. 34 of 2021 with its caseload passing to the Dubai International Arbitration Centre.
Related Services: Explore our Partnership Agreements and Franchise Agreement 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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