The Legal Regime of Shareholders’ Agreements

The Legal Regime of Shareholders’ Agreements

1. Executive Summary

The best and most common practice for business partners in recording their rights and obligations on dividing the profits and losses, managing the business and similar issues is to document their understanding in a form of a written agreement called “shareholders’ agreement”.

The present paper approaches the topic of Shareholders’ Agreements along with its legal definition and meaning in general, along with the rationale and explanations regarding the legal regime of the Shareholders’ Agreements.  The paper also explains and clarifies the domain of a certain type of shareholders’ agreement which is very common in United Arab Emirates (UAE) called a “Side Agreement” and discusses the effectiveness and legality of side agreements under UAE Jurisdiction.  As an application of the issues under debate, the paper makes a series of viable recommendations and draws conclusions regarding such agreements, in light of the newest legislative developments and court practice under the UAE jurisdiction.


2. Shareholders’ Agreement

2.1 Definition:

A Shareholders’ Agreement [sometimes referred to in the United States (U.S.) as a stockholders’ agreement] has no crystallized definition.  It has been given different meanings in different legal regimes. However, one can generally define a Shareholders’ Agreement, as its name suggests, as an agreement amongst the shareholders of a company[1].

Hence, a shareholder’s agreement is, generally speaking, a contract between two or more shareholders and is treated as a regular commercial contract.  It is subject to the articles and by-laws of the corporation and the provisions of the relevant corporate laws[2].

2.2 Contents:

A Shareholders’ Agreement provides the exact ownership stake each partner will enjoy within a business set-up, along with incumbent obligations.  Even non-company contents such as management rights, licensing intellectual property, etc. are commonly included in the shareholders’ agreements. Thus the shareholders’ agreements usually include, inter alia, the following:

  • Directors and management structure
  • Buy – sell provisions
  • The agreement may allocate the rights to certain stakeholders to be a director on board as well as decide the composition of the Board.
  • Roles and obligations of each shareholder.
  • Financing requirements, quorum requirements and veto rights.
  • Restrictions on transfer of shares (right of first refusal, right of first offer).
  • Forced transfer of shares and curtailing of further issue of shares.
  • Terms to protect minority shareholders
  • Defining Shareholding Threshold: There can be a minimum shareholding a party must have to enjoy the rights as under the Shareholding Agreement.
  • Determining and allocating special rights to certain shareholders[3]

2.3 Requirements for Registration or Notarization  

Under the U.S. law, the shareholders’ agreement is not required to be registered or notarized. Shareholders need to file the Articles of Incorporation and make regular annual filings, as requested in the applicable corporate laws.  Furthermore and reiterating, a shareholders’ agreement is an agreement between parties just like any other business contract and is used for internal purposes only.  It should be stored in the company’s minute book[4].

By comparison, under the UAE law, although mandatory to notarize and register the Memorandum of Association (MOA) of the company, the latter shall contain all major points such as the shares in the ownership, the distribution of the losses and profits, the responsibilities and liabilities of the manager, etc.; however, it is not prohibited for the shareholders to establish an even more detailed shareholders’ agreement as far as it is not in contradiction with the laws.


3. Purpose of a Shareholders’ Agreement

There are many good reasons for having a shareholders’ agreement despite the fact that the officially registered Articles of Association are, in general, sufficient to prove the general rights and obligations of the partners.  The shareholders’ agreement regulates the internal structure of the company in more details and grants the partners more flexibility and privacy in documenting their understandings.

One can easily highlight three reasons for having a shareholders’ agreement in addition to the Articles of Association of a business set-up.
3.1 Privacy

The understandable logic behind using a shareholders’ agreement in addition to the Articles of Association is the fact that the shareholders’ agreement is a private document between the parties.  It can be made subject to express confidentiality restrictions and tailored to meet the shareholders’ needs.   By contrast, the Articles of Association is a public document available for inspection by members of the public in the Companies Registration Office.  This makes the Articles of Association an unsuitable means for dealing with matters such as the remuneration of directors or other sensitive internal management matters.

3.2 Greater Binding Effect

The Articles of Association can only bind a shareholder in his capacity as shareholder.  By contrast, shareholders’ agreements may be used to give rights and impose obligations on shareholders; e.g., binding a person in his capacity as director or as a creditor or agent.  However, one needs to be very careful in imposing obligations on a party in his capacity as a director in the context of the duties required by a director to the company.

3.3 Flexibility

The Articles of Association can be amended by way of a special resolution.  By contrast, unless a shareholders’ agreement expressly provides for a specific variation mechanism, it can only be varied by unanimous agreement of the parties.
A shareholders’ agreement generally provides more flexibility with respect to changing arrangements between shareholders.  It is, hence, easier to amend the shareholders’ agreement than to change the constitutional documents of a company[5].


4. The Most Common Type of Shareholders’ Agreement in the UAE (the Side Agreement)

In the UAE, the un-registered or unofficial shareholders’ agreements (internal agreement between the partners) sometimes include provisions that contradict with the mandatory laws, as well as contradicting the provisions of the registered memorandum and Articles of Association (the company’s constitution).  This type of hidden and internal agreement is generally called a “side agreement”.  The predominant meaning of the side agreement in the UAE is that in the side agreement document, the real shareholders of a business set-up deal may be in contradiction with the provisions of the Company’s constitution or what is called the Memorandum of Association (MOA). The MOA of the company, which has to be notarized and registered at the Commercial Register, must be in accordance with the Commercial Companies Law that provides for certain restrictions for foreign ownership in companies that are incorporated on the mainland. Foreign investors usually trust a local person to register the majority of the shares (51%) under his name in order to satisfy the minimum quantum that is required to be owned by UAE nationals in a mainland company[6] and at the same time they sign with such UAE citizen what is called a “side agreement” in which they document the real shareholders and their rights and obligations.

Therefore, the side agreements represent the prevailing and most common way-out for many foreign investors operating in the UAE in order to overcome the prohibition of 100% foreign ownership in mainland companies.  In order to surmount a foreign investors’ lack of control over an LLC and protect their investment, a custom has developed pursuant to which foreign investors enter into side agreements with the UAE national that hold the 51% of the LLC’s shares.

The side agreements are drafted in many different ways, either simply stating the actual ownership or more complicated.  Regardless of the way it is drafted, it is in reality a trust and sponsorship arrangement, pursuant to which the UAE national agrees to act as trustee and holds 51% of the shares of the LLC for and on behalf of the foreign investor as the beneficial owner thereof.

The common characteristics and aims of these side agreements are generally as follows:

  1. The UAE national is paid an annual sponsorship fee.
  2. The foreign investor contributes the entire minimum statutory required share capital, but in reality the foreign investor is the one that holds 100% of the share capital.

4.1 Enforceability of Side Agreements in the UAE Jurisdiction

When a dispute arises between a foreign investor and the fictitious UAE partner, the crucial matter of concern is which agreement the court shall recognize.  Is it the MOA officially notarized and registered in the Commercial Register; i.e., “the apparent agreement” or the side agreement?

In order to answer such a question, the relevant laws and legislations must be checked, mainly the UAE Civil Code, the Commercial Company Law (both the old one, Law number 8 of 1984, and the new one, Law number 2 of 2015, the provisions of the new law yet to be tested in the courts), and the Anti-Fronting Law.  Most importantly is to examine the practice of the UAE courts in applying these laws.

Article 22 of the old Commercial companies Law, Law number 8 for the year 1984, which has been recently abolished and replaced by Law number 2 for the year 2015, provided for the UAE nationals’ shares to be at least 51% of the total shares in any LLC established on the mainland.

On the other hand, Article 395, of the UAE Civil Code (Federal Law number 5 for the year 1985) states: 

“If the contracting parties conceal a true contract with an apparent contract, the true contract will be the effective one as between the contracting parties and a special successor.”

The Civil Code, being a general law, refers to the “true contract” that reflects the actual relation as the binding agreement between the contracting parties.

The UAE courts have been countless times seized with actions to recognize the side agreement that contradicts with the registered MOA. The practice of Dubai Court of Cassation and the High Federal Court, except in few occasions, has been to recognize conditionally the true and actual contract between the parties (the side agreement).

In cassation number 211/2009, civil cassation, dated 1st November 2009, the Dubai Court of Cassation confirmed the Courts’ of First Instance and Appeal judgments and rejected the plea raised by the UAE fictitious partner and stated in its ruling:

“…the plea is rejected, because – as it has been established by the practice of this court (the Court of Cassation) – the meaning of fictitious contract is that of an agreement between the contracting parties to conceal the true relation by an apparent contract.  Thus, by applying the provision of article 395 of the Civil Code, the apparent contract has no existence between the parties and the true and hidden contract is the valid contract between them.  And whereas the apparent contract conceals a contract that contradicts the law, such true and concealed contract shall be null and void.

[…] And whereas the lower courts have observed the above  rules and grounded its judgment on: (the documents, particularly the declaration made by the appellant, which was dated later than the date of the MOA of the Company, and in the said declaration the appellant admitted that he had made no contribution to the capital of the company and has no rights in its profits or any of its assets……and the respondents have paid all the capital on behalf of the claimants, hence all the profits and assets of the company shall belong to the claimants….)

[…] For all the above, the cassation is groundless and rejected.”

The Court of Cassation has recognized the side agreement, the true and actual contract, but it has also mentioned two important points.

  1. The apparent contract is to be considered as if it did not exist at all; and
  2. Such side agreement, which provisions are in contradiction with the law, is null and void.

This means that the bogus company has no existence and must be abolished. The Court of Cassation, in Cassation number 7 /2009, Commercial Cassation, dated 11th May 2009, was clearer in regards to considering the bogus or fictitious company as non-existent and treat it as an actual company where the actual partners are jointly and severally liable towards its actions, liabilities and obligations, when it stated in the said cassation:

“….the share of the UAE national must not be less than 51% …and whereas it is proven that what was stated in the MOA is not what is the actual situation, ….which was made in order to have the company established in accordance with the law, …….,  thus the company shall be considered null and void and it is just an actual partnership between the disputants, …, therefore the appellant has the right to claim from the respondent in the latter personal capacity any right he might have…., and whereas the appealed judgment did not consider such fact, such judgment is overruled”.

It also means that the side agreement is null and void, thus the provision of articles 274 and 275 of the Civil Code[7] shall apply; i.e., restore the situation that was existing prior to the two contracting parties have entered into a null contract.

It is worth noting that the practice of the Dubai Court of Cassation in recognizing the concealed contract; i.e., the side agreement and setting aside the apparent contract; i.e., the MOA, has been always conditional to have such side agreement documented in writing.

Albeit the fact that the commercial transactions can be proved by all methods of proof according to Article 35 (1) of the UAE Code of Proof (Law number 10 for the year 1992), the Court of Cassation, relied on Article 10 of the old Commercial Companies Law (Law number 8 for the year 1984) to decline any attempt to prove anything that is contradicting with what it is stated in the MOA, unless it is made in writing.

In Cassation number 77/2010, Commercial Cassation, dated 11th May 2010 the Dubai Court of Cassation stated:

“…- though the general rule is that it is permissible to use unwritten evidences as a method of proof, as per the provision of sub-clause (1) of article 35 of the UAE Code of Proof, however the Commercial Companies Law number 8 for the year 1984  made an exception to that general principal, ….,and stated in article 10 of the said law that (testimonies are not admissible to prove what is contradicting the provisions of the MOA)- …- therefore it is impermissible to any of the partners to prove versus any other partner the fictitiousness of any of the provisions of the MOA, unless made in writing…”  (Emphasis added.)

Hence, we can say that the Dubai Court of Cassation made it clear that as an exception to what is provided for in sub-clause (1) of the Article 35 of the UAE Code of Proof, the only way to prove anything that is in contradiction with the MOA, such as what is usually stated in the side agreements, is to have the side agreement documented in writing.

Having said the above and before quickly concluding that it is still safe to rely on the side agreements as the courts are recognizing them as far as they are in writing, a conscious consideration must be made, particularly in light of the promulgating of the New Commercial Companies Law number 2 for the year 2015 and in the light of the Law on the Combating of Commercial Concealment number 17 for the year 2004, which implementation was adjourned.


4.2 New Law and Possible New Court Approaches

The new Commercial Companies Law, Law number 2 for the year 2015, in contradiction to what was hoped and expected, continues to prohibit the 100% foreign ownership in the mainland companies, and repeated in Article 10 (1) of the new law the same proviso that was stated in Article 22 of the old law.  Both of which provides for a minimum of 51% of the shares to be owned by a UAE citizen.

The new Commercial Companies Law made the stipulation clearer and harsher by:

(a) Adding the new provision in Article 10 that replaced Article 22 of the old law, stating clearly in sub-clause (3) of the former article that any agreement to the contrary shall be considered null and void.

(b) Under the new Law (Article 353) the company shall be fined of minimum AED 20,000 and maximum AED 200,000 if it was agreed between the partners that the UAE nationals’ ownership is in reality less than the minimum quantum of 51%.  In other words, under the new Commercial Companies Law, the side agreement is considered a crime punishable by monetary fine.

One may say that the side agreement was also considered null and void under the old law as it contradicts the mandatory provision of Article 22 of the said old law, and also it was punishable by a fine of minimum AED 10,000 and maximum AED 100,000 as per Article 323 (4) of the old law. Thus, why now an extra consideration must be paid before interring into a side agreement or practicing business in contradiction with the new commercial companies’ law[8]?

In my opinion, what makes the situation now different, are the following facts:

    1. The Law on the Combating of Commercial Concealment number 17 for the year 2004, which was published in November 2004 in Federal Official Gazette, aims to criminalize the practice of enabling a non-UAE entity to conduct an economic or professional activity which is prohibited by UAE law. The main prohibitive provisions of the Anti-Fronting law are outlined as:

      “Article 1:

      Concealment: to enable the foreigner – whether natural or juristic person to practice any economic or professional activity that is not permissible for him/it to be practiced in accordance with the law and decrees of United Arab Emirates, whether for his/its account or in participation with others, or to enable him/it to evade all liabilities entailed on him/it.

      Concealer: any natural or juristic person that enables the foreigner – whether a natural or juristic person – to practice any economic or professional activity which is not permissible for him/it to practice within United Arab Emirates.

      Concealed Person: any foreigner, whether a natural or a juristic person, practicing with the assistance of the concealer any economic or professional activity that is not permissible for him/it to practice within United Arab Emirates. 

      Article 2:
      It shall not be permissible to cover up any foreigner, whether a natural or a juristic person, whether by using the name of the concealer or his permit or his commercial register or through any other method, in light of the definition of concealment stipulated in Article 1.”

      Article 2 of the law specifically prohibits a UAE national from concealing a foreigner or allowing a foreigner to use his or her name or license. A UAE national who contravenes the law faces a fine of up to Dh100,000 (per concealment), for a first offence, and a maximum prison sentence of two years and an additional Dh100,000 fine for each repeated concealment.  The foreigner will be subject to the same penalties and deportation after serving the prison sentence.  In addition, a conviction will result in the revocation of the UAE national’s license and a ban on carrying out the activity listed on the license for a period of two to five years.

Cabinet Resolution 22912/2007 has postponed the implementation of the law until December 31 2009.  The announcement for implementation of the Law has not yet been made.  People at that time concluded that although the Concealment Law was enacted and from a theoretical point of view is enforceable, in practice, its enforcement was adjourned to allow anticipated and hoped for changes in legislation to provide improved protection for both UAE businesses and foreign investors. Such hoped for changes in legislation, in the light of the new commercial company’s law was not introduced so far, hence, it is unpredictable when the anti-fronting law will be implemented.

    1. The new Commercial Companies Law, once issued, continues to ban 100% foreign ownership in the companies that are established on the mainland, and at the same time it is clearly stipulating, without any ambiguity, that certain activities and concealment are criminalized with applicable penalties. The anticipated and hoped for legislative changes were not introduced; however, it is likely to start implementing the Law on the Combating of Commercial Concealment number 17 for the year 2004 as well as for the public prosecutor to start prosecuting the companies with their ownership structure is in contradiction with the law.


  1. Given the fact that the UAE is a civil law legal system and not a common law legal system which is driven by the notion of stare decisis, the UAE Courts are not bound to follow the cassation courts’ decision as precedents; hence, the practice of the courts may change and can lack uniformity.


5. Conclusions and Recommendations

We can recapitulate that the shareholders’ agreement is a very useful and advisable manner, in specifying in more details with more flexibility the rights and obligations of the partners towards each other; however, a careful consideration must be made before entering into the certain type of shareholders’ agreement; i.e., the side agreement which is very common in UAE and which usually documents facts and agreements to the contrary of the requirements of the law.

The practice of the UAE courts till date is to recognize the true contract between the parties with respect to their rights and obligations towards each other even if such true contract, the side agreement, is rendered null and void.  However, the violation of the national ownership requirement which usually is documented in a side agreement could attract fines and penal sanctions under the Anti-Fronting Law and the Commercial Companies Law.  Therefore, if the shareholders’ agreement is intended to be used in the UAE, it must be conducted in a careful manner from the foreign shareholder perspective.  Because the law requires a minimum 51% Local Shareholding, even if there are a number of mechanisms that can apply, there will always be a risk involving a UAE National silent partner’s 51% shareholding.

The foreign investor can enter into alternative common UAE market business set ups, including Foreign Branch, Free Zone Company, and Commercial Agency or practice the professional activities that can be 100% foreign ownership.

On the other hand, in an emerging economy such as the UAE and considering the vast developments achieved in all aspects including the legal system in a very short period of time, there is still strong optimism to have soon further legislative amendments to allow more friendly environment for 100% foreign ownership investment on the mainland in addition to the free zones or at least to restrict the requirement of minimum 51% UAE national ownership to certain number of sensitive economic activities.

[1]’_agreement, last accessed on February 16 2016

[2] Shareholder Agreement FAQ – United States, ttp://, last accessed on February 16 2016

[3] Id.

[4] Id.

[5] O’Driscoll Alan,  Advantages and Disadvantages of putting a shareholders’ agreement in place, p.1,, last accessed on February 16 2016

[6] Art. 22 of the Federal Law no. 8 of 1984- Without prejudice to commercial activities reserved only to nationals, as may be prescribed herein or in any other law, it is a requirement for the establishment of a company to have one or more national partner(s) whose share in the company’s capital is not less than 51%.

Art. 10 of the New Commercial Companies Law, Federal Law no. 2 of 2015: Any company established in the Emirate shall have one or more UAE partners holding at least 51 per cent of the share capital of the company.

Any transfer of the title of any share of a partner that may affect the percentage as set out above shall be invalid.

[7] Article 274. – If the contract is cancelled automatically or by the act of the parties, the two contracting parties shall be restored to the position they were in before the contract was made, and if that is not possible, compensation shall be ordered.

Art. 275. – If the contract is dissolved by reason of being void or cancellation through any other cause and each of the parties is obliged to return that which he has obtained, it shall be permissible for each of them to detain what he has received as long as the other party has not returned what he has received from the former, or provided security for such return.

[8] See note 6. Also, Art. 353 of the New Commercial Companies Law provides that: A fine of at least AED 20,000 (twenty thousand), but not more than AED 200,000 (two hundred thousand) shall be imposed on every company that violates the provisions in connection with the percentage of contribution by the UAE nationals in the capital of the companies or the percentage of UAE Directors in their Boards. By comparison, Art. 323 of the Old Commercial Companies Law provided that: Without prejudice to a more severe punishment prescribed in any other law, he shall be punished with a fine of not less than ten thousand Dirhams and not more than one hundred thousand Dirhams: […] 4) Any company who violates the provisions concerning the established portion of the U.A.E nationals in the company capital share or the manager or Chairman of the board of directors therein.


Although published in 2017, this article has been written in 2015, before the entry into force of the New Commercial Companies Law (CCL). We will post new articles and updates on the relevant applicable legal provisions and their regime, as reflected in the New CCL.

This article, as well as the recommendations and commentaries contained therein, are designated for information purposes only. They are not intended to be and do not constitute legal advice. The reader may bear in mind that the views expressed in the article are proprietary to the author and may differ from the vision of the firm or its strategy in real life litigation or advisory activities.