Resolving Corporate Governance Framework Disputes Effectively

A governance dispute is rarely about governance in the abstract. It is a shareholder who cannot get the accounts, a director being asked to sign something he does not believe, a board that has stopped being able to pass a resolution, or a founder discovering that the person who controls the company seal is not the person who controls the company. What determines how that argument ends is a narrow set of documents and the rules of whichever regime the company was incorporated under.

Those regimes are not the same. Before anyone advises on the merits, the first question is where the company sits.

Three regimes, one country

An onshore company anywhere in the UAE is governed by the Commercial Companies Law, Federal Decree-Law No. 32 of 2021, which replaced Federal Law No. 2 of 2015. That law sets the baseline: how general meetings are called and carried, what a manager or director owes the company, what a shareholder is entitled to see, and what happens on deadlock or dissolution. Public joint stock companies sit under the additional supervision of the Securities and Commodities Authority, which has its own governance rules on board composition, related party transactions and disclosure.

A company in the Dubai International Financial Centre is governed by DIFC company law and, if it carries on a financial service, by the Dubai Financial Services Authority. A company in Abu Dhabi Global Market is governed by ADGM's companies regulations and, where regulated, by the Financial Services Regulatory Authority. Both are common-law jurisdictions with their own courts. The concepts a common-law lawyer expects — directors' duties expressed as duties, derivative claims, unfair prejudice, statutory registers and filing obligations enforced by a registrar — are recognisable in those centres and articulated differently onshore.

The practical point for a group with entities in more than one of these places is that the same shareholder dispute may have three different answers depending on which entity it is fought over. A group governance policy written for the DIFC entity and rolled out to the onshore subsidiary will not survive contact with the onshore registrar. Our corporate governance advisory practice works across all three regimes for exactly that reason.

What governance disputes are usually about

• Access to information. A shareholder asks for management accounts, contracts with related parties or the shareholder register and is refused. This is the most common first move in a governance dispute and often the most productive, because the answer to it is a matter of entitlement rather than judgement.
• Deadlock. Two equal shareholders, or a board that cannot reach a required majority, and no mechanism in the articles for breaking the tie.
• Related party dealings. A contract between the company and an entity owned by a director or a majority shareholder, entered into without disclosure or approval.
• Dilution and issuance. New shares issued in a way that reduces a minority holding, or a capital call structured so that one shareholder cannot meet it.
• Removal and authority. A general manager removed without the formalities being followed, or continuing to bind the company after removal because the licence and the register still name him.
• Distributions. Profits retained indefinitely while the controlling shareholder is remunerated through salary and management fees.

Notice that most of these are disputes about process. That is why they turn on documents rather than on evidence of intent.

The documents that decide the outcome

In our experience the file that determines a governance dispute usually comes down to four things: the constitutional document, whether that is the memorandum and articles of an onshore company or the articles of a DIFC or ADGM company; the shareholders' agreement, if there is one; the board and shareholder minutes; and the powers of attorney and signature authorities that are actually on record with the licensing authority and the bank.

The last of these is the one most often out of date. A company can have an immaculate shareholders' agreement and a general manager whose authority on the trade licence has not been amended in years. Where the constitutional document and the shareholders' agreement conflict, the constitutional document generally governs the company's relationship with the world, while the shareholders' agreement binds only the parties who signed it — which is why a right that matters should be written into both. A periodic corporate governance review that reconciles these four records is considerably cheaper than the dispute that follows when they diverge.

Court or arbitration

Shareholders' agreements very often contain an arbitration clause, and it is worth being clear about what that clause does and does not reach. It binds the shareholders who signed it, in respect of the promises they made to each other. It does not necessarily bind the company itself if the company is not a party, it does not bind a shareholder who acquired shares later without adhering to it, and it may not deliver remedies that only a court can give — an order affecting the register, the removal of a director, or a winding up.

The realistic approach is to expect a governance dispute to run on two tracks: a contractual claim between shareholders, which may be arbitrable, and a company law claim, which will go to the court with jurisdiction over the company. Deciding at the drafting stage which claims go where, and saying so expressly, avoids a jurisdictional argument at the worst possible moment.

Compliance failures that surface as governance disputes

A significant share of governance conflict begins with a filing. Corporate tax under Federal Decree-Law No. 47 of 2022 obliges a group to take positions on transfer pricing, related party dealings and the allocation of profit between its entities that had previously been left informal, and registering and accounting for VAT has a similar effect. Those positions are decisions about how value moves between entities that the shareholders may own in different proportions, which makes them governance decisions whoever signs the return. When one shareholder takes them alone, the objection that follows is a governance objection even though the trigger was a tax filing. Involving corporate tax advisers and the board at the same time avoids that.

What a board should do this quarter

Confirm that the register of shareholders, the trade licence and the bank mandate all name the same people with the same authority. Confirm that board and shareholder decisions taken in the past year were minuted and, where required, filed. Identify any contract between the company and a party connected to a director or controlling shareholder, and check that it was disclosed and approved. Establish whether the articles contain a deadlock mechanism and a mechanism for valuing shares on exit; if not, that is the amendment worth making while relations are good. None of this requires an external adviser to identify, though it is the kind of exercise a governance audit is designed to complete methodically rather than in response to a complaint.

Related Services: Explore our governance framework design and board and shareholder advisory services for practical legal support in this area.

We draft and repair constitutional documents, advise directors on their duties in each of the three regimes, and act in shareholder disputes before the onshore courts and in the DIFC and ADGM. Where a client needs a single framework applied across a mixed group, we build the governance framework to the strictest applicable regime and adjust downward, rather than the reverse. For entities in the financial centres, that usually means starting from DIFC governance requirements.

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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